Every year, Americans dread the first 3.5 months of the year as they navigate the complexities of filing a tax return or opt to pay a professional to do it for them. The Internal Revenue Service expects 146 million tax filings for the 2023 earning year. With so many people affected, one would think there is an incentive to simplify.
But in fact, there are incentives to keep the U.S. tax code complicated. Taxpayers benefit through credits and deductions, while the $13.9 billion tax preparation industry has a few obvious perks.
This year, the IRS launched a website to make free tax filing directly through the government available. However, few qualify for the pilot program that requires only the simplest tax returns from limited states.
The tax prep industry, notably TurboTax-owner Intuit and H&R Block, spent millions in lobbying efforts this past year to fight against a government-based free tax filing system, according to OpenSecrets. But elsewhere in the world, governments send citizens exactly what they owe in taxes and the free tax filing process can take as little as three minutes. In this article, Straight Arrow News speaks with the tax director of the country that has won the Tax Foundation’s “best tax code” 10 years in a row.
No wonder filing taxes in the US is so complicated
The Internal Revenue Code contains 9,834 sections accompanied by a six-volume set of corresponding regulations, according to the National Taxpayer Advocate’s annual report to Congress.
“Our U.S. tax code is quite complex and unique in that we of course use it to collect taxes and fund the federal government, but we also use it to administer a variety of social subsidies,” Andy Phillips, the director of the Tax Institute at H&R Block, said.
The U.S. employs provisions that are intended to help American taxpayers. The child tax credit offers a benefit to those raising children, the mortgage interest deduction promotes home ownership and the earned income tax credit rewards the taxpayer for working.
“That does create complexity,” Phillips told Straight Arrow News. “It also creates opportunities for taxpayers to use their tax return to their financial betterment.”
Phillips said one of the biggest mistakes taxpayers make when filing a return is not accounting for a major change.
“They get married, they have a kid, they start a business,” Phillips said. “And they don’t account for those tax changes when they file their tax return. Sometimes that’s a mistake that may subject them to an audit. More often than not, what it means is they’re leaving valuable tax benefits on the table.”
During a presidential debate in 2016, former President Donald Trump said he understood the tax code better than anyone who’s ever run for the office. He confidently disclosed taking advantage of a provision that allowed him to avoid paying future taxes by logging a $916 million loss.
While Trump has the means to and needs to employ high-powered tax attorneys and accountants to sort through his return each year, it takes the average American taxpayer roughly 13 hours and $240 to file each year.
Customer service representatives with the IRS spent 3.7 million hours answering questions from Americans during the 2022 tax season, according to the National Taxpayer Advocate.
What is the government’s new, free direct file program?
To ease some of the stress and difficulty in filing taxes, the federal government rolled out a pilot program this year that offers some Americans the opportunity to file directly with the IRS for free.
“There’s only a small number of taxpayers that are actually able to use the in-house government services at this point,” Anna Massoglia, editorial and investigations manager at OpenSecrets, said.
Our U.S. tax code is quite complex and unique in that we of course use it to collect taxes and fund the federal government, but we also use it to administer a variety of social subsidies.
Andy Phillips, director of the Tax Institute at H&R Block
The 12 states in the program either have no state income tax or have their own electronic filing system. However, the federal government has a rocky past with web development.
In 2013, when healthcare.gov launched as part of the Affordable Care Act, millions of Americans rushed to the website to shop for plans. Instead, the site was filled with bugs as users experienced crashes and other messages preventing them from checking out. In the aftermath, the White House said it never anticipated such heavy traffic on the first day.
While the IRS is taking smaller steps to mitigate problems with a website rollout, the program still faces opposition from some who think the government should stay out of their business.
“When it runs out on a much wider scale, it could potentially pose a threat to Intuit’s businesses every year,” Massoglia says.
Intuit — the parent company of tax prep giant TurboTax — called the program “a solution in search of a problem.“
Meanwhile, Phillips told Straight Arrow News there are dozens of other places that already provide free tax preparation services, including his company, H&R Block.
“We have a free product that offers support for more than 40 forms,” he said. “That’s more than what’s offered in the direct file program. That’s more than what’s offered by some of our biggest competitors, including TurboTax. And so while yes, that program is free, at H&R Block, we also have a free DIY product and we’re pretty confident that we’re doing free better.”
How the tax prep industry fought government’s free file
The U.S. tax prep services industry is worth roughly $14 billion, according to estimates. Tens of millions of Americans use the two biggest names in the space, H&R Block and TurboTax, each year. The two companies account for billions in revenue and around 42% of electronically-prepared tax returns during the lucrative tax season, Gitnux reports.
The federal government played a role in the creation of these tax prep giants, and not just by making the tax code complicated. In 2003, it launched the Free File program, a public-private partnership between the IRS and tax prep companies to give low-income taxpayers access to free tax prep software.
They may invest time and energy into preparing their tax filing only at the very end to say, ‘Okay, actually, this is going to cost money.’
Anna Massoglia, editorial and investigations manager at OpenSecrets
Since then, the tax prep industry has spent $93 million on lobbying efforts, according to an analysis from OpenSecrets. Twenty years later, the spending has yet to slow down. Intuit set a company record in 2023, spending $3.8 million, while H&R Block added another $3 million.
“Much of that is targeted on fighting the IRS development of a competitor to the tax prep industry that would allow people to file for free,” Massoglia said.
The Direct File pilot program, which cuts out the private sector, is just one reason for the rift between tax prep companies and the federal government.
A 2019 ProPublica investigation accused Intuit’s TurboTax of using lobbying and “dark pattern” customer tricks to fight off the government’s attempts to make filing taxes free and easy. The investigation reports Intuit used code to make the free version of the government’s program harder to find while it promoted its own “Free Edition,” which often pushed customers into the paid product.
“In many cases, taxpayers may not know what they’re getting into from the start,” Massoglia said. “They may invest time and energy into preparing their tax filing only at the very end to say, ‘Okay, actually, this is going to cost money.’”
Attorneys general from all 50 states sued over the issue and reached a $141 million settlement with TurboTax. Then, the Federal Trade Commission ruled the company engaged in deceptive advertising practices and restricted how it advertises free products moving forward.
This year, the FTC levied similar allegations against TurboTax competitor H&R Block. The regulator said the company deceptively advertises free products and unfairly deletes customer data when users attempt to downgrade to cheaper options.
H&R Block denied the claims and sued the FTC in return. The company’s lawsuit claims the government’s use of internal judges to decide these cases violates the Constitution. The Supreme Court is currently considering the issue of internal judges in a separate case that could influence H&R Block’s lawsuit.
H&R Block told Straight Arrow News the company could not publicly share how many customers file for free with their software. Meanwhile, TurboTax claimed more than 11 million customers file 100% free each year. But that is advertising the company’s “Free Edition,” not the federal government’s existing “Free File.”
Intuit stopped offering the Free File program in 2021 after nearly two decades, declaring that the program was limiting and that exiting it allowed the company to focus more on its own offerings.
“We’re seeing the tax prep industry investing into making their services more enhanced,” Massoglia said. “Intuit recently launched an integration with Credit Karma. And so we’re seeing them make their services more appealing to taxpayers, trying to make them easier and have more available, in addition to spending to fight against that government program.”
The tax struggle is real. Here’s where it’s no struggle at all.
Massoglia said U.S. tax code complexity is at the heart of why companies like TurboTax exist in the first place.
“The commercial tax prep industry has really developed because people struggle to file their taxes because there really isn’t an easier way,” she said.
“So many different types of income are taxed differently,” said Alex Muresianu, senior policy analyst with the Tax Foundation. “Thinking big here, how do we simplify the tax code? It would be something that looks more like Estonia.”
Ninety-seven percent of people filed taxes electronically. And 92% found the process really easy.
Erle Kõomets, director of Tax and Customs Policy Department at the Estonian Ministry of Finance
The Tax Foundation rated Estonia — a country with a population the size of Maine — as the land with the best tax code on the planet.
Estonia has a flat tax of 20% on individual income. Every Estonian taxpayer has an account with the Ministry of Finance and when tax season comes around, residents can log in and their tax information is already filled out.
“You already see what is the salary that you have earned during the year and how much your employer has withheld,” said Erle Kõomets, director of the Tax and Customs Policy Department with the Estonian Ministry of Finance. “And the system automatically already applies allowances if you’re entitled to them.”
“The system calculates everything for you,” Kõomets continued. “So you don’t need to do really anything yourself except input a few numbers that the government does not have.”
Some consider a flat tax rate to be regressive, meaning it takes a larger percentage of income from lower-income people. Estonia’s flat tax was introduced 30 years ago after the country declared independence from the Soviet Union. At the time, Kõomets said there wasn’t much wealth disparity. She said she wouldn’t be surprised if the nation moved toward a more progressive tax system in the future.
Tax reform efforts in the U.S.
When it comes to making the tax code in the U.S. more palatable, it’s been a long time since there have been significant changes. The Tax Policy Center said the last time there was comprehensive tax reform was in 1986. That’s when President Ronald Reagan signed the Tax Reform Act, which dropped the top income tax rate while raising the lowest rate by four points.
That doesn’t mean there haven’t been attempts. In 2017, Republicans pitched a simple tax return that could fit on a postcard. Steve Forbes floated the same idea in 2005 when he published “Flat Tax Revolution: Using a Postcard to Abolish the IRS.” Neither of the proposals got any traction.
Don’t tax you, don’t tax me, tax that man behind the tree.
Sen. Russell Long, D-La.
There was also former Godfather’s Pizza executive Herman Cain’s 9-9-9 plan during his run for the Republican presidential nomination in 2012. Cain’s proposal would have replaced the current tax system with a 9% personal income tax, 9% federal sales tax and 9% corporate tax.
But politicians have an uphill battle adjusting the tax code. As the late Sen. Russell Long, D-La., famously said, “Don’t tax you, don’t tax me, tax that man behind the tree.”
“Which is to say that we promise to not touch your provisions, the provisions that you benefit from” Muresianu explained. “The other special benefits that other people benefit from, we’ll get rid of those.”
Tax returns must be filed by April 15 this year without an extension. As tax season comes to a close, the IRS says 43 million people, or roughly 29% of tax returns, are received in the final three weeks before tax day.