Few clichés are as well-worn, and grounded in reality, as the dread many Americans feel towards doing their taxes and the loathing they have for the IRS. But as much as the process is despised, relatively little is known about how it could be improved. Pro Publica's Jessica Huseman says that's largely because tax prep companies keep it that way. Brooke talks to Huseman about what an improved system might look like and how tax prep companies work to thwart any such changes.
One of the primary roadblocks to change, says Huseman, is an organization called the Free File Alliance, a public-private partnership whereby private tax companies agree to provide a free service for most Americans in exchange for the IRS not offering any such service itself. Brooke speaks with Tim Hugo, Executive Director of the Free File Alliance, about whether it is really the best way to help American taxpayers.
BROOKE GLADSTONE: This is On the Media. I’m Brooke Gladstone. And, as if things couldn't get much worse, it’s tax time! Thank goodness there are companies like H&R Block who can at least help us shoulder that burden, right?
[CLIP/WHISTLING UP & UNDER]:
ANNOUNCER: Your life is busy, growing. Well, you might say it has layers. That means tax complexity. We get it and we’re on it.
JESSICA HUSEMAN: [LAUGHS] They do get how complex the tax system is because their business model is based on it staying that way.
BROOKE GLADSTONE: That’s ProPublica Reporting Fellow Jessica Huseman. She says that what’s left out of the cheery marketing is the fact that when tax prep companies are not helping you through our overwhelming tax system, firms like Intuit, which makes TurboTax, spend heaps of cash to ensure that it stays somewhat overwhelming.
JESSICA HUSEMAN: Last year, Intuit spent almost $2-1/2 million lobbying. H&R Block spent more than $3 million, and they're also spending money giving direct donations.
BROOKE GLADSTONE: So what is it like doing taxes right now?
JESSICA HUSEMAN: I’ll just tell you how I do my taxes.
BROOKE GLADSTONE: Mm-hmm.
JESSICA HUSEMAN: And maybe that will be representative –
- because I don't think that I'm very good at it. So I keep all of my documents in a pink shoebox and I stuff them in there all year long. [LAUGHS] A couple of weeks before April 15th, I sign up for one of these paid tax services and I meticulously go through all of my returns from the company that I work for, from any freelance work that I might have done, and I take all of the receipts that I've also saved. I spread them all out over the floor and I add those up and I try to figure out which box I should type these numbers into. And it takes hours. And then the entire time I have this sick feeling in my stomach that I've lost a return or maybe I'm being too generous with how much I've spent on my business all year long, and then I hit Send and hope for the best. It could be so much easier than that.
BROOKE GLADSTONE: How could it be better?
JESSICA HUSEMAN: Well, you know, think about all the things that the IRS already knows about you. Your bank is already giving them information as to how much money you have and where that money is coming from. Your employer is also giving them information as to how much they are paying you. So in a lot of European countries, tax authorities use that information that they already have and send you a slip saying, this is how much we think that you owe. And you can either say, yes, that's correct, sign it off, send a check back with it or you can use your own tax preparation service to do your taxes yourself.
BROOKE GLADSTONE: So if they say, you owe us $3,000 and you say, wait a minute, I have spent more on my business beyond the standard deduction, so you can just add that additional information to their pre-filled-out return.
JESSICA HUSEMAN: Right. The only thing that this return-free system would do would be the IRS telling you everything it already knows about you and making a best estimate as to how much it thinks that you owe. So it would be great if I knew what the IRS knew about me. There's a lot of power in that. And a lot of people might, in fact, be able to take advantage of such a system, right?
If the IRS isn't aware of some income that you might have, maybe you just don't say anything, right?
BROOKE GLADSTONE: Not that you're advocating this.
JESSICA HUSEMAN: Not that I’m advocating this.
Everybody should file their taxes.
BROOKE GLADSTONE: So if it’s so simple for most of us, why do we turn to companies like H&R Block?
JESSICA HUSEMAN: Because the federal government is presently barred from offering its own system like that. They have signed a contract with the Free File Alliance. The Free File Alliance is a group of 13 private for-profit tax preparation companies, to provide the majority of Americans with a free system of doing their taxes. Free filing is supposed to be available to 70% of the taxpaying public. So in exchange for these companies offering a free product, the government says, all right, we will not offer a free product ourselves.
The problem is that nobody knows that this system exists because the IRS’s budget for marketing this system is zero dollars, and the tax preparation companies have no incentive for you to use their free product, instead of their paid-for product. So last year, less than 2% of the people who paid taxes did so through the free file system, even though it’s supposed to be available to 70% of the taxpaying public.
BROOKE GLADSTONE: Intuit has been quite frank in its quarterly statements by saying, we don't want this pre-fill system because it’ll hurt our bottom line. That's not in their commercials.
JESSICA HUSEMAN: No, it’s not in their commercials. And they, in fact, are for things that would make the existing system easier for you, less boxes for you to fill out. And so, they do lobby for bills that would simplify the tax system in that way. But the ultimate way that they could make the tax system easy is if the government were to offer a system of return-free filing, which they are inherently opposed to.
BROOKE GLADSTONE: There have been bills on both sides of this issue. Where do they stand now and, and what you think is likely to happen?
JESSICA HUSEMAN: So last year, in April, there were two bills that were proposed within days of each other, one in the Senate. Some Democrats sponsored a bill that would have created the system of return-free filing to simplify your taxes. In the House, a bipartisan bill would make permanent the system of Free File Alliance. Both of those bills died in committee.
The Free File Alliance agreement expires in 2020, and so, before then we would either have to renew that agreement, make it permanent or replace it entirely with the system of return-free filing.
BROOKE GLADSTONE: You've mentioned that anti-tax libertarians like Grover Norquist side with the tax prep companies. It would seem to me that simplifying filling out your taxes would be, at least theoretically, more up his alley.
JESSICA HUSEMAN: Right. You know, when folks like Grover Norquist talk about this system, their talking point and the talking point that the Free File Alliance uses is that it is an inherent conflict of interest for the person you are paying your taxes to, to also tell you how much you owe and that it wouldn't be in the IRS's interest to offer up all of the deductions that you might qualify for. They might exaggerate how much you owe.
BROOKE GLADSTONE: I think part of the problem is that most people think you can't fight the IRS.
JESSICA HUSEMAN: Right, but there are a couple of problems with that argument. First and most obviously, they leave out the fact that it is an entirely voluntary system. You get to tell them if you disagree with that number. And then also I think something that gets left out of this conversation is that there are hundreds of thousands of people every year that don't file their taxes at all, and thus, don't qualify to get a return. And so, the IRS has hundreds of millions of dollars that are unclaimed from people who didn't file their taxes and thus paid too much. And they could get money back but they just never filed their taxes, to begin with.
BROOKE GLADSTONE: When you hear of ads from tax prep companies, like the one we played at the top of the interview, can you imagine sort of an alternate text that would be closer to the truth?
JESSICA HUSEMAN: It would be great if their commercial said something like, we are for making your taxes easier, as long as we have to do them for you.
It kind of boggles the mind. Like, what they’re actually advocating is that they want to make their software simpler to use, right? They want you to be less annoyed when you're using their software. But what they don't want to happen is a system that's so simple that you don't need their tax software at all. So they want to simplify it but not too much. Your taxes could take minutes to do, instead of days or hours, and they want to keep it at hours instead of minutes.
BROOKE GLADSTONE: Thank you so much, Jessica.
JESSICA HUSEMAN: Yeah, no problem.
BROOKE GLADSTONE: Jessica Huseman is a reporting fellow at ProPublica.
[ezTAX AD CLIP/CHEERY WHISTLING UP & UNDER]:
ANNOUNCER: You’re busy, friends, family, kids. No wonder you don’t have time to do your taxes. That’s why we at ezTax are committed to making your filing experience easier, not very much easier, just a little bit easier, like still bad but maybe 10% less bad. Imagine if the government just told you how much they thought you owed, as a starting point. Imagine if the government even told if they owed you money, without you even having to file. Or, better still, imagine the exact same system we already have but with a new app, so you can take your stress anywhere. At ezTax, we offer the best service possible, while also ensuring that you remain entirely dependent upon us and our product. Is it the best system? [LAUGHS] Of course not, but it could be worse. You could be dead. ezTax, making your life slightly better, within limits.
BROOKE GLADSTONE: Tim Hugo is a Virginia state legislator and executive director of the Free File Alliance. Welcome.
TIM HUGO: Thanks for having me today.
BROOKE GLADSTONE: The Free File Alliance is a public-private partnership, whereby tax prep companies offer a free filing system for low and middle income Americans in exchange for a promise that the government will not provide such a service itself, right?
TIM HUGO: Right. Anybody making under $64,000 a year adjusted gross income can go to irs.gov and get a free federal tax return. We’ve done over 50 million free returns for Americans. That’s about $1.6 billion worth of free products that we’ve saved taxpayers money. We also save the IRS money too. They don’t have to do the servers, they don’t have to provide help lines.
BROOKE GLADSTONE: Now, in theory, 70% of Americans are eligible to use the free service, so only about 2% used the free service last year. How do you account for that?
TIM HUGO: Well, 10 years ago the IRS had about $20 million for an advertising budget, this year it’s zero. I’m hoping a lot of people listening to your program go to irs.gov/freefile and get a free federal return. I just wish more people knew about it.
BROOKE GLADSTONE: Why don’t the tax companies advertise that free service themselves, so that the prep companies that are now benefiting from the current cumbersome process actually have the opportunity to live up to their part of the bargain?
TIM HUGO: Well, I don’t think it’s cumbersome. It’s pretty easy.
BROOKE GLADSTONE: The reason why these companies exist is because it is hard now to fill out one’s taxes. Why don't the tax companies advertise this free service themselves, I mean, invest a little money in it?
TIM HUGO: Why does – why doesn’t – no, why doesn’t the IRS? That’s what I keep saying. They did $20 million a decade ago when I first started doing this. It’s literally gone down to zero. And I think we need to talk to some of our friends in Washington, DC to get the IRS a little more money for advertising. Make people aware.
BROOKE GLADSTONE: Maybe Congress ought to allot that money but Congress –
TIM HUGO: Absolutely.
BROOKE GLADSTONE: - isn’t going to because it isn't in the interest of the many lobbyists who spend millions of dollars on this issue. So I ask again: Why don't companies invest a little money in advertising this, so that you can get that usage number above 2%?
TIM HUGO: We do ads all over the country.
BROOKE GLADSTONE: You do spend money on ads for this process?
TIM HUGO: We do, we do – we do some good – we do some Facebook ads. I do interviews. I’ve set up interviews all over the country, literally, and we send out press releases, Twitter.
BROOKE GLADSTONE: How much money?
TIM HUGO: Well, that’s proprietary, but January 15th we send things out, out all day.
BROOKE GLADSTONE: How is this a better alternative than having the government provide people with what it knows, cutting out the middleman?
TIM HUGO: Well, one, it’s free so I don’t see why a free service to the government is a bad thing. Actually, it’s a good thing. Two, I would be a little concerned, if I was the American taxpayer, having the IRS being the tax preparer and the tax collector. That’s like having the fox guarding the henhouse. I think you’ve got to be very wary about that because who’s going to find every one of your deductions, who’s going to find every one of your exemptions? Is the IRS going to do it? And that’s what these companies, that’s what they do.
BROOKE GLADSTONE: So you’re suggesting there's a, conflict of interest here, but that would be true if this process weren't transparent and voluntary. What the government simply does is reveal what it knows. It does that heavy lifting up front and you wouldn’t be –
TIM HUGO: Why, why would you want the government to pay for something they already get for free?
BROOKE GLADSTONE: Because they aren’t getting it for free.
TIM HUGO: The IRS –
BROOKE GLADSTONE: People aren’t using it.
TIM HUGO: Why would you ask the IRS to spend hundreds of millions of dollars hiring employees, computers and stuff to do what we do for free?
BROOKE GLADSTONE: The IRS knows what it knows. H&R Block doesn't know what the IRS knows. Also, everyone would receive these pre-filled returns, including the millions of Americans who are due tax refunds but don't get them because they don't file. I think in 2012 the IRS said more than a million Americans didn't receive their refunds amounting to something like $950 million because they didn't file. Now, they will get the chance to actually get refunds.
TIM HUGO: What you're suggesting is that what we give IRS for free they should pay for. I just don’t think that’s – I don’t think that’s a good proposition for the taxpayer. I don’t think it’s a good proposition for the IRS.
BROOKE GLADSTONE: The tax prep companies like to talk about the conflict of interest.
TIM HUGO: It is a conflict of interest, fox guarding the henhouse.
BROOKE GLADSTONE: But Intuit, which produces TurboTax, every quarterly report includes the line, “Our consumer tax business faces significant competition from the public sector –
TIM HUGO: Let me, let talk about this.
BROOKE GLADSTONE: - at no cost to taxpayers, which may cause us to lose customers and revenue.”
TIM HUGO: Let me throw a proposition out to you. You see more and more states that had their government-run program now moving back to the free file model, including New York State, including Massachusetts. They had their own government-run program and, you know what, they figured out it didn't work. They said, you guys are, are giving it to us for free, why don’t we do it? So you’re seeing state after state –
BROOKE GLADSTONE: How does this address the issue that I’m raising? What about the fact that Intuit –
TIM HUGO: That, that’s a question right there, why are these states-
BROOKE GLADSTONE: I’ll ask you that question once you answer mine, okay?
TIM HUGO: Why, why are these states moving back? And it’s because they see the value proposition in getting the product for free and all the work is all forwarded onto somebody else.
BROOKE GLADSTONE: And, relatively speaking, only a tiny fraction of the people who could use it do use it, and it strikes me that given that Intuit has said that it fears competition from federal and state taxing authorities is what is behind the big push here? I mean, obviously, right?
TIM HUGO: I just think – I’m just excited more people are going to listen to your program and I think a lot of people are going to use free file this year –
BROOKE GLADSTONE: Mm-hmm.
TIM HUGO: - in the last two weeks of the filing season. So I’m excited about that.
BROOKE GLADSTONE: Okay. Thank you very much for pulling off the road and talking to me.
TIM HUGO: [LAUGHS] Well, thank you for having me. I appreciate it, and I hope everybody goes to irs.gov/freefile.
BROOKE GLADSTONE: Bye-bye, Tim.
TIM HUGO: Thanks, bye-bye.
[MUSIC UP & UNDER]
BROOKE GLADSTONE: Tim Hugo is a Virginia state legislator and executive director of the Free File Alliance.
Coming up, what do we call the epoch we live in? I mean, “Holocene” is so 5,000 years ago. This is On the Media.