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.