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America Almost Made Filing Taxes Easy, Then Lobbyists Showed Up

A 1998 law ordered the IRS to allow people to pay their taxes without filing a return. Why hasn’t it happened?

Here's how you'd do your taxes this year if you lived in Sweden. By now, the Swedish Tax Agency has likely mailed you a return preprinted with all the information that employers, banks, and public agencies have sent to it—salary, pension, interest income, and the like. The return also shows what you owe, because the government has done the math for you. You check the return for accuracy, then can use the tax agency's app on your phone to approve it.

All of that takes 53-year-old Stockholm resident Magnus Alvesson perhaps two hours. He's got a more complicated financial situation than most, involving interest deductions and stock transactions. He also spends time looking for errors. "I usually try to find mistakes that work in my favor but so far to no success," he told me by email. His daughter filed for the first time this year. It took her half an hour, but 20 minutes of that was her father explaining how taxes work.

You, however, are in America. That means you have to enter all of your financial information—likely distributed over several documents from every job you had in 2016, your student loan company, and probably a few other places. You then enter those numbers into confusing forms or pony up for software or a tax preparer to make it easier. On average, taxpayers spend 13 hours and more than $210 to tell the government what they owe, the IRS says. Even those with the simplest returns— those who filled out the 1040EZ—spend five hours and $40.

For many critics of this system, it's not just the time and money involved that maddens—it's the illogic. The US government, like Sweden's, already has statements from employers and banks. Yet we have to pull together our copies of those same statements, transfer the data to the tax forms, and send it all back to the IRS, which then compares what we've sent against what it already knows.

A 1998 reform was supposed to change all that. The IRS Restructuring and Reform Act, passed by a Republican Congress and signed into law by Bill Clinton, included a section requiring the IRS by 2007 to institute a "return-free" system under which some or all taxpayers would get pre-filled returns that they could simply approve. The law didn't specify how many people this streamlined process would apply to, but the agency was to report to Congress every year on its progress toward the new system and the additional money it would need to implement it. The idea had bipartisan support—Ronald Reagan had touted it as part of his tax overhaul plan in a 1985 radio address.

But the companies that make tax software—H&R Block, Intuit, and others—would have none of it. Return-free filing threatened to shrink their customer base. So starting in 1998, they began making campaign donations and lobbying Congress in earnest to block return-free filing. By 2013, Intuit had spent more than $15 million on lobbying; H&R Block had spent $9 million. Dozens of their disclosure forms list the purpose of their spending as "oppose IRS government tax preparation," according to the Sunlight Foundation.

Those efforts bore fruit. In 2002, under the second Bush administration, the IRS signed an agreement with a consortium of tax software companies that included both Intuit and H&R Block. The group agreed to create an online "free file" system that would give lower income taxpayers access to some of their software at no cost. But there was an important catch: In return, the IRS promised not to "compete with the Consortium in providing free, online tax return preparation and filing services to taxpayers" by creating a return-free system.

That's the last we've seen of pre-completed tax forms that taxpayers can simply check and approve, which 36 other countries, like Sweden, already have.

The IRS's sleight-of-hand—substituting "free filing" for "return-free filing" as required by the law—hasn't gone unnoticed. In 2012, the National Taxpayer Advocate, an independent office inside the IRS, criticized the agency for being five years overdue in implementing the system. Now it's ten years late.

No one has challenged the IRS over the issue in court. That's likely because the language of the 1998 law may be "precatory," says Joseph Bankman, a leading scholar on tax law at Stanford—it expresses a wish or advice, not a demand. Still, "I don't think [the free file system] is compliant with the spirit of the law," he told me.

Taxpayers aren't exactly going wild for the free-file option. Fewer than 3 percent of eligible taxpayers used the IRS's Free File Program in 2014. The 12 software packages available on the program website have a maze of eligibility requirements. As Forbes noted last year, only people in 18 states can use ezTaxReturn.com's free product. H&R Block lets you use its free software only if you're younger than 50. TurboTax requires an adjusted gross under $31,000 unless you're active-duty military. And so forth. The IRS has to provide an online navigator just to help people sort it all out.

The program is purposely complex, Bankman told me. If your situation changes year to year, you might have to buy the same software you used for free the previous April. The year you turn 51, H&R Block may send you an email pointing out that your information is loaded into their software, but to use it this time you have to pay, Bankman said.

Beyond blocking the IRS from developing return-free filing, critics charge that Free File's secondary purpose is to upsell customers into fee-based products. "It is a free-to-fee-based model," Dennis Ventry, a member of the IRS Advisory Council and tax policy expert at UC-Davis, told me. "It's really a bundled marketing package."

That's not a new charge. At a 2006 hearing, Republican Senator Chuck Grassley said that "the industry appears to be using the Free File program as an opportunity to bolster its revenue through the sale of ancillary products at taxpayer expense."

But Free File continues to block the possibility of return-free filing. Tax software companies argue that the government's conflict of interest—serving as tax preparer and tax enforcer—is reason enough to oppose allowing the IRS to send out pre-completed forms. "The IRS's inherent interest is to get as much tax possible. Are they going to find every deduction?" Tim Hugo, executive director of the Free File Alliance, said in March.

"Total baloney," replies Ventry. Under return-free filing, the government "is just giving you all the tax information they have about you based on information you provided last year, that employers and others provided, and plugging it into your tax form. It's transparency of the best kind." Plus taxpayers can check the numbers just as they'd do if they paid a preparer, he adds.

Hugo's hypothesis hasn't worked out back in Sweden. There's as yet no evidence that return-free filing has made Swedes question their government's motives: A 2015 survey found that the Swedish Tax Agency is the country's third-most-popular department.

Steven Yoder writes about criminal justice and domestic policy issues. His work has appeared in Salon, Al Jazeera America, the American Prospect, and elsewhere. Follow him on Twitter.