IRS

The Ongoing Battle Between Intuit and the IRS—And How Taxpayers Are Caught in the Crossfire

Alex Zeng, MJLST Staffer

Every April 15, taxpayers scramble to get their tax documents sorted and figure out what, where, and how to file. This hopeless endeavor is exacerbated by the length and complexity of the tax code making it nigh indecipherable to the average taxpayer, the IRS only answering roughly nine to ten percent of the calls that it receives, and the fact that many IRS processes slog on for months before delivering an output. Consequently, it is almost no surprise that the Treasury Department, which interacts with the public primarily through the IRS, was ranked dead last in a recent customer satisfaction survey analyzing 96,211 US consumers’ perceptions of 221 companies and federal agencies. 

Responding to this crisis, the IRS has decided that it should provide a free, government-backed tax filing system. Under the Inflation Reduction Act, the IRS was given $15 million to study making its own digital tax filing platform. The concept is simple: by developing their own technology to handle tax filings, the IRS would be consolidating tax assessment and tax filings within one entity, thereby increasing customer satisfaction and efficiency within the system. After all, this sort of program already exists in California and its adoption is ostensibly paying dividends. The state’s program, CalFile, is a government-backed tax filing system that is free to single filers making up to $169,730 and married filers making up to $339,464 a year. The California Franchise Tax Board (“CFTB”) reports that CalFile saves taxpayers somewhere between $4 million and $10 million annually in tax preparation fees while the state saves around $500,000 in overhead and administrative costs. 

To many, this change is long overdue. It seemed obvious that the agency that requires tax filings should have its own system to file taxes. The question then becomes: what took so long? 

The History of Free Tax Filing 

To taxpayers that engage with the morass of tax every year, services such as TurboTax and H&R Block seem like godsends as they provide the opportunity to file with ease and near certainty of accuracy for a fee. Beneath this masquerade of doing good, however, lies these services’ sinister secret: they are responsible for the absence of a free government-backed filing service. For decades, companies such as Intuit have been closing the door to more accessible filing through aggressive lobbying and by tapping into taxpayers’ fear, uncertainty, and doubt about the tax filing process as part of their marketing strategy. 

In an effort to suppress government encroachment into the tax filing industry, Intuit and other industry giants formed the Free File Alliance (“FFA”) in the early 2000s and agreed to provide free federal filing to 60 percent of taxpayers at the time of drafting as long as the IRS promised not to compete with the industry. Though the Free File Alliance introduced free filing, fewer than three percent of all taxpayers use these services despite a seventy percent eligibility rate. This discrepancy is due to various barriers of entry, such as intentionally hiding their free tax filing services from search engines, reducing the income cap eligibility, and confusing taxpayers by having two separate services designated as “Free” and “Free File.” After ProPublica published articles investigating the industry’s deceptive tactics, the IRS and the FFA amended their agreement to bar companies from hiding their free products from search engines and struck the provision prohibiting the IRS from competing with the industry by introducing its own tax filing service. 

Potential Pitfalls for the IRS’s Free Filing System 

While the way towards an IRS-backed tax filing system may seem clear now that the provision preventing the IRS from developing one is stricken, there are still some obstacles that the IRS must surmount before its promulgation. One concern is that if the IRS follows through, then the IRS would be both the preparer and the auditor. This conflict of interest may introduce issues regarding whether a taxpayer can reasonably expect that the same agency that computes taxes and collects them is able to fairly consider objections to potential errors and return overpayments. 

Adjacent to this concern is that if the agency consolidates too much power and discretion within itself, private companies would languish under the regime of Big Brother as private interests and services are replaced by the government. Proponents of private companies dictating the boundaries of free tax filing services contend that if the government steps in, private companies, and thus consumer autonomy, would be squeezed out of the equation as private firms would exit the industry due to the government outcompeting them. In other words, taxpayers would lose out on having other options to file their taxes. If this happens, there is a fear that companies might retaliate. Industry giants would “have every reason to run an ad that says Big Brother is going to be watching your keystrokes,” as Steve Ryan, then general counsel of the Free File Alliance stated on National Public Radio. He continued by asking if “we really believe that that sort of advertising or program would actually be beneficial to electronic filing? In this instance, not only would the tax filing industry face the danger of collapsing, but taxpayers would also suffer by not having the freedom to choose the service they want. 

It is unknown how well-founded these fears are, however. Although reported in 2011, data collected from the CFTB states that 97 percent respondents stated that filing is the type of service the government should provide and 98 percent stated that they would use this service again. Providing a free online tax filing system is also recognized as public service at its best and provides efficiency and convenience to the tax filer. Finally, a working paper for the National Bureau of Economic Research found that autofilling tax returns could be straightforward for many filers, with 41 to 48 percent of returns able to accurately be pre-populated using information from the previous year’s tax returns, and 43 to 44 percent of filers who would see their returns automatically filled are unnecessarily paying someone else to handle their filings. 

Another concern is more logistical. Both the IRS’s budget and staffing have shrunk over the past decades even as filings increased. This lack of personnel and increase in responsibility is also intensified by pandemic-era responsibilities, such as distributing stimulus checks and child tax credits. Consequently, there is a massive backlog of unprocessed tax returns and refunds—not insignificantly due to decades-old technology and the IRS’s insistence on using paper files. To create such an overarching system and then subsequently maintain it would require massive technological and organizational overhauls—overhauls that, given the IRS’s archaic technology and restricted funding and workforce, may overwhelm the IRS and create an even more catastrophic backlog in the short-term. The Inflation Reduction Act seeks to partially alleviate some of these pains by directing $80 billion toward the IRS, but it is unclear whether and how much these concerns will be addressed by this increase in funds. What is clear at this point, however, is that the IRS will start taking serious steps towards allowing taxpayers to file with the IRS. Hopefully, in the near future, taxpayers around the nation will be able to simply file their taxes every year, for free, within minutes.