The tax season is over unless you filed an extension. If you had angst in filing your taxes you are not alone. ProPublica published this report about a month ago blaming it in part on the tax software companies: Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It.
It said Intuit and H&R Block spent millions on lobbying against the IRS offering a direct filing option to the taxpayers. My question is:
If the IRS offers free direct filing to everyone, how many people will use it?
The IRS already offers free filing indirectly through a number of tax software companies. 70% of all taxpayers qualify for the free filing but only 2-3% of people actually use it. The cost of buying software isn’t even the issue. Some of those who qualify but don’t use the free filing offered choose to buy software on their own. The vast majority though don’t even bother with software. They don’t do it themselves, period. They pay someone else to do it, at a cost sometimes 10 times the cost of buying software.
People buy software or pay someone because they want to minimize the amount of taxes they pay, not to minimize the cost of tax preparation. Therefore “free filing” isn’t as appealing as lowest taxes or maximum refund. After reading Stop Wasting Money On Doing Your Taxes several readers emailed me saying their tax professionals always find things they miss and save them many times more than the cost of the service. As long as taxes are perceived to have many things that can be missed, they don’t think they can do as well if they do it themselves.
I imagine if the IRS offers free direct filing, those who use a tax professional today will continue using their tax professional because they don’t want to miss things. That counts for nearly 60% of all taxpayers. Some who buy software today may try the free direct filing to see if it’s as thorough or as user-friendly as the software. If it’s perceived as not as good, they will still buy software. The cost of the software after all isn’t a big deal. My cost for both federal and state has been less than $20 total in recent years.
We already see this happening in state income tax filing. Many states already offer free direct filing. At least in my state (California) very few people use it. From the state agency’s 2016 filing season updates:
Annually, over 6 million taxpayers qualify to use CalFile. So far this year, more than 157,000 CalFile returns have been received compared to almost 246,000 CalFile returns last year.
CalFile is the name of the state’s free direct filing system. Less than 3% of taxpayers who qualified actually used it. 97% didn’t bother. The number of users also went down 36% from the previous year. In other words many who used it the previous year stopped using it.
Whether it’s free or not free or whether it’s direct or indirect, how you file your taxes doesn’t change the complexity or the perceived complexity of your taxes. As long as taxes are perceived to be complex, just offering free direct filing doesn’t give what people really want. People actually aren’t looking for the least expensive filing option. Counting everything as income and claiming no deductions or credits would be the easiest. It can be done easily today. People don’t want that. They are looking for the option that makes them pay the least amount. That’s why they pay someone else or buy software and shun the free filing options from the government.
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Waldemar Traczyk says
The reason I buy the software is because I want my tax return to be on my computer, and not with an online company. I could save money doing my taxes online, but I prefer the perceived security.
Paul says
I use Illinois’ free file site to do returns for myself (out of state) and my father (in-state). I use TaxAct for my federal. I would use a federal filing site if it offered enough forms. I started using TurboTax for my father’s federal only to discover that the free version did not allow itemizing. I started over with TaxAct and paid the duty. I do not like that it’s hard to tell which version of an on-line filing system meets your needs without charging for features you don’t need.
FinancialDave says
The AARP and VITA in conjuction with the IRS already offer free tax filing in every state of the US. Trust me when I say we have volunteers who on more than one occasion have found the professionals got it wrong, so getting it right or wrong is not a function of how much you pay for the service.
I agree probably only 3% of the people that could use a free service do use it.
Ray says
I think the idea is not to have just a free filing website. Instead, have something like ReadyReturn described in this story http://www.npr.org/2017/03/29/521954033/stanford-professor-loses-political-battle-to-simplify-tax-filing-process After all IRS has your W2, 1099, etc. and can and can do most of the work for you. You just need to make the changes specific to your situation. In fact, IRS already does most of the calculations anyway.
If instead of starting from zero every year, people will start from a pre-filled form, they might just take the form instead of having to deal with a tax professional. This is why Intuit and H&R Block are worried.
TJ says
I wasn’t able to use CalFile after I started having investment income. Or California adjustments to federal income. One or the other.
msf says
In NY, as the saying goes, free filing isn’t just a good idea, it’s the law. So long as you prepare your taxes using software, you’re required to file electronically, and no one can charge you for it – not Intuit, not H&R, nobody.
Guess what? All those software companies are still selling in NY, and their programs submit your taxes same as in every other state, except they don’t ask you for a credit card number.
Doug Miller says
Intuit (and possibly others) have already largely achieved the goal of the ReadyReturn plan. When I do my taxes with TurboTax each year, the software starts off loading information from last year’s return. After that, it connects out to obtain my W-2 and then to each financial institution I use and downloads 1099’s, consolidated broker statements, etc. There are a few oddball places it can’t contact (for example, some transfer agents for DRIP accounts), but each year, more and more of these are available. And, with the fairly recent rules requiring financial institutions to keep track of cost basis almost all the information needed is available. Still have to enter charitable donations (but they actually have a program to help track that through the year) and mortgage information. If you don’t own a business or don’t have some really unusual financial situation, Turbotax will walk you through every possible deduction you may be eligible for. They perform a valuable service for a reasonable price. I’m surprised folks believe the government could do this less expensively. If the government provided this, it might seem “free”, but you would be paying.
msf says
The IRS already assembles the information needed for a tax return, so that it can validate the information you provide as well as detect omissions. So the IRS has zero incremental cost in aggregating and formatting your personal tax info. The biggest expenditure it would likely have is in printing and mailing the pre-filled form.
For people who wanted to do file electronically, it could provide electronic versions at minimal cost. It could also provide access to pre-filled pdfs, so that people could just print, sign and mail, without having to pay a ransom for TT.
So while it might not be technically “free” (i.e. zero cost to produce), a government-provided prefilled return could be generated for next to nothing. In addition, unlike Intuit and others, the IRS does have the complete data – your mortgage info, your 1098s, your 1095s, all your 1099s (many banks don’t work with TT), the amount of estimates you’ve made, etc.
Gina Campbell says
I took a tax class with H & R Block about 25 years ago. I had an excellent teacher, and I’ve been comfortable ever since filing our taxes on my own. I have filed using the IRS site’s form, which I just fill in like a paper form. As the years go by, my husband and I have needed more forms, but I have found that it’s easy to keep up with changes in law and our personal needs to file with confidence. If you aren’t allergic to detail work, tax filing is not rocket science.
jmc says
I used Calfile for the first time this year. Mine is very simple. I am on paycheck with no children, no side business, with home…as simple as it can be. I’ve always used Turbo Tax and have gotton lowest risks. It would only take a couple of weeks to get refund with Turbo Tax. It’s been a month since I efiled on Calfile but I have not received my refund. When I called State, customer service was horrible. The lady was very mean with heavy south Asian accents and said now it would take up to 12 weeks. She seemed irritated that I called. Was she imposing punishment for bothering her??? Why takes so long. It’s my hard earned money.