Would You Let the I.R.S. Prepare Your Taxes?
5th July 2015
Around this time every year, Joseph Bankman, a professor of tax law at Stanford Law School and a longtime advocate of using technology to simplify tax filing, gets on the phone with reporters to explain what is wrong with how we do our taxes in the United States. Every year he says pretty much the same thing: No other industrialized country asks its citizens to jump through as many hoops to calculate their taxes as ours.
It isn’t just lawmakers or the hapless-seeming Internal Revenue Service that is perpetuating the annoyance of tax time, he adds. Instead it is the private sector — specifically, the software company Intuit, which makes TurboTax, the most popular tax program in the country.
Whenever there are burdensome regulations, there always arises an ‘industry’ to help people comply with those regulations — often built by people who were responsible for creating them (or administering them) in the first place. This ‘industry’ then becomes a powerful lobby against any attempts to break their rice bowl by simplifying the system. For example, in a world in which the wife of a Senator (and future First Lady) can get a bespoke job as ‘diversity officer’ at a public institution (which is then allowed to lapse when she moves on), ‘diversity’ is going to be hard to get rid of.
The reform plan would work like this: Today, employers, banks, brokerage firms and pretty much every other financial organization in the country send the federal government detailed records about our economic activity every year. These organizations also send you, the taxpayer, a similar set of documents, which are forms with names like W-2 and 1098. After you file your taxes, the government matches its two sets of documents to make sure you have filed correctly.
To Mr. Bankman, this double documentation doesn’t make much sense. If the government is already collecting financial data from employers and banks, why can’t the I.R.S. use that information to precalculate our tax returns for us? At the very least, why can’t tax software just connect to the government’s database to download all the information that the government has collected, saving us all that record-keeping and data entry?
I like it, although I also like the fact that it costs people time and money to do their taxes, thus creating a potential constituency for tax reform. (Just think of how people would scream if the withholding regime didn’t make the paying of taxes more painless than the filing of tax returns.)
But Intuit’s opposition to return-free filing has been ferocious. In the last five years, according to disclosure documents, Intuit spent nearly $13 million on federal lobbying. That is about the same amount that companies many times its size have spent on lobbying. Apple, which has an annual income about 40 times that of Intuit, also spent about $13 million on lobbying in the same period. While documents show that Intuit lobbies on several issues, including immigration, cybersecurity and intellectual property law, the company’s largest lobbying contracts all involve the issue of tax administration.
My, what a surprise! Aren’t you surprised? I’m sure surprised.
Intuit is far from the only opponent of return-free filing. Groups that call for lower taxes, like Grover Norquist’s Americans for Tax Reform, say it is a “conflict of interest” for the government to both collect taxes and calculate how much people owe.
Bullshit. The IRS already calculates what people owe, and if that disagrees with the return, the IRS will send you a letter telling you that they are changing it, which taxpayers can challenge. Why not eliminate the burdensome front end? My wife and I both have MBAs and we have yet to see a year where the IRS doesn’t find something they think we did wrong, mostly in the application of some pissant rule that their software is built to catch. We’ve gotten to the point where we just fill in the information that we have and let them calculate the tax; this has the added advantage that if they think we owe something they send us a bill, which typically gives us a couple of penalty-free months after April 15 to come up with the money.