November 03, 2006

Tax Preparers and Buggy Whip Makers

If you're reaching retirement age, you can apply online for Social Security. You can also apply for unemployment benefits or renew your driver's license online in some (maybe most) states. We live in a technological golden age for people who want their interactions with the government to cost little in terms of time, money and inconvenience.

So, you say to yourself, I think I'll file my taxes online now and be done with paper forms and the mailing. Surely the government can set up some online forms that I can use easily, especially since my taxes are relatively simple - it's not like I've got trust funds, stock options or a tax shelter in Bermuda or anything that would make my taxes complicated.

So why is it that when you try to use Free File, instead of just getting one simple online form you're presented with a long complicated list of online tax services provided by private companies with complicated fees and endless advertisements for things that have nothing to do with getting your taxes done?

It appears that a small group of people who are paid to prepare people's tax forms don't want to lose any of their business. Even though the most straight-forward and obvious answer would be for the government to provide a single online portal where you could do all your taxes, these private companies have clearly lobbied to get in on the action and blocked the government from doing that.

At issue is a question that reaches the core of our politics: Which goods and services can be most efficiently provided by government and which can be most efficiently provided by the private sector? There are those on the right who would say almost everything is best provided by the private sector but that claim doesn't withstand the facts. For example, it has been noted that while the cost of healthcare is rising, expenditures on Medicaid and the traditional Medicare program have risen more slowly than those of HMOs, partly because there is less administration and billing in a single-provider program.

Arguably, online tax services are another area where the government could more efficiently provide a service. New technology, provided by or at least sponsored by the federal government could create a new advance for taxpayers - a simple, online portal where most everyone can get their taxes done for free and without hassle. The problem is that we have a political system that allows special interests - in this case tax preparation companies - to block this advance for their own gain, resulting in a less efficient outcome for our society as a whole.

Now it's probably the case that the rich will always need tax preparers in some manner - and that the extremely rich will need the best tax attorneys money can buy. When you have a lot of income from a lot of different sources, you can't just file the 1040 and forget about it. But for the rest of us, technology ought to do away with the need for any written forms and any adding and subtracting of figures - either by the taxpayer or by a paid tax preparer. It may be unfortunate for the tax preparers that serve middle-class clients. But frankly, we can't protect the jobs of people working for tax preparation companies any more than we protected the jobs of buggy whip makers.

Conservatives might be quick to point out that buggy whip makers lost their jobs because of advances made in the private sector whereas what's proposed here threatens to use the government to push out private sector companies. So what? That only is of concern if you assume that the only legitimate advances in efficiency are those made solely in the private sector, and that government is incapable of providing the most efficient outcome.

In comparison to the free market rhetoric of today's politics, it may sound radical to say the government can do anything more efficiently than the private sector, but this proposal is not radical. The idea originated with the Republican Chairman of the Senate Finance Committee, Charles Grassley (R-IA), hardly an economic radical. Grassley is becoming unhappy with the IRS's Free File Program and has asked to GAO to determine whether it would be feasible for the IRS to provide free online tax preparation.

He has also written a letter to the IRS Commissioner in light of a report from the Treasury Inspector General for Tax Administration (TIGTA). The report finds, among other things, that 39 million taxpayers became ineligible for free online tax filing after the consortium of companies providing the online services renegotiated their contract with the IRS last year and included an income limit (AGI no greater than $50,000) for free service. (Grassley points out that this occurred the same year the IRS ended its TeleFile program which allowed some taxpayers to file over the phone for free.)

The TIGTA report also finds that the income limits caused many people to eschew online filing (participation dropped by 23 percent in 2006) even though most people sending in paper returns actually prepared them on a computer. If those people had just filed online, TIGTA says the IRS would have saved over $100 million in processing costs. The Taxpayer Advocate Nina Olson (who supports the idea of the IRS providing a portal for free online filing) says the fees that now apply to some people aren't unaffordable, but it just "rankles them" that they would have to pay in order to pay their taxes.

Grassley has also complained that those who are able to use the service are assaulted with advertisements for all sorts of products that are not needed to get your taxes done, ranging from high-interest refund anticipation loans to one offer of a tax preparation franchise for $15,000. Some of the companies charge fees for things like resetting a password or obtaining additional forms needed to complete taxes.

When the new Congress meets for the first time next year, they might be looking for something they could accomplish that would be relatively simple and that would win praise of ordinary Americans everywhere. They should consider making hassle-free online tax filing available for all.


At 4:43 PM, Blogger taxxcpa said...

I agree with most of what you say.
Anyone capable of filing their own return should be able to do so online thru the IRS.
However, if the return involves alternative minimum tax, passive gains and losses, self employment and a lot of other complications, many people could NOT prepare their own taxes even if they had the program I use which costs over $1,000.
The real thing keeping people in the tax preparation business is that the government keeps "simplifying" taxes by adding a ton of new rules and interpretations.

At 4:45 PM, Blogger taxxcpa said...

Some of my tax comments can be read by logging into

At 4:51 PM, Blogger taxxcpa said...



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