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Tax-prep software vendors look for a lock-in

It is no exaggeration to say that I hate the tax code with the fire of a thousand suns.

Its complexity imposes hours of unpaid work on any citizen with a moderately complex financial situation. Its varying treatment of different kinds of income distorts the economy -- except when small-bore credits and deductions, like the "Making Work Pay" credit I didn't know I was getting until a few days ago, go unnoticed by people they're supposed to motivate. Documenting and processing these fine-grained provisions monopolizes the time of Internal Revenue Service employees who might prefer directing their talents elsewhere. And the opportunity to persuade Congress to make further tweaks keeps armies of lobbyists employed on K Street.


Regular readers should be familiar with this airing of grievances. See, for instance, my rant of last year, which wasn't too different from the 2008 version, which itself owed much to the 2007 edition.

This year's review of H&R Block's H&R Block At Home Online and Intuit's TurboTax Online follows that pattern. (I passed on a third site, 2nd Story Software's TaxAct, after getting bogged down in its fussy interface -- it took six pages to collect the information on a W-2 -- and becoming enraged by its inability to accept numbers pasted into its forms, a "feature" that ranks somewhere between illogical and sadistic.)

But today's column also features a new complaint: lobbying by tax-prep software developers -- in particular, Intuit -- to stop governments from offering their own, free tax-prep services. For example, that Mountain View, Calif., company has spent years pushing California to scrap its ReadyReturn system.

Intuit argues that government-run tax-prep represents a conflict of interest and will lead citizens to pay more than required. Spokeswoman Julie Miller wrote that "a system where the gov't sends you a bill -- no matter how simple your tax return is -- isn't going to be accurate. ... What about the everyday things in your life that the government doesn't know that determine the size of your refund?"

To me, that argues for letting the marketplace settle things. If TurboTax works so well, it should easily win business from customers dissatisfied with government-run services. Instead, Intuit wants to sweep the market of competition.

At the federal level, you can expect vigorous opposition from Intuit and its ilk to proposals like the Wyden-Gregg tax-reform bill my colleague Ezra Klein outlined earlier this week. That bill would prune the tax code of numerous deductions and credits, then give taxpayers the option of having the IRS send completed forms for them to review.

(You may recall that President Obama included that last item among his campaign pledges. It's since been ignored left out of the administration's talking points; a Treasury Department spokeswoman would write only that the administration "supports the principle of tax code simplification" and that pre-completed tax returns were "a potentially valuable idea." Update: The Treasury rep called back to say the White House isn't ignoring this idea and is considering ways to make it happen. I can only hope so.)

At the state level, watch for more efforts to roll back direct filing systems. One such campaign in Virginia seems on the verge of victory. HB 1349, a bill proposed by Del. Kathy J. Byron (R-Lynchburg), would direct the state to run a "free file" system akin to the one supported by the IRS, in which companies offer free tax-prep services to people who don't make too much money.

The text of Byron's bill doesn't spell this out, but a fiscal-impact statement (PDF) states that it would end Virginia's free iFile service. But iFile costs the state almost nothing to run -- if every single iFile user filed electronically through other means, the Department of Taxation would save all of $49,200 in the 2011 fiscal year. But if some switched to paper (the 760 form isn't that hard to fill out), those would cost $1 each to process and could make this a money-losing proposition for the state.

That logic seems to have escaped the House of Delegates, which approved this bill in February, and the Senate, which passed it -- after an earlier rejection -- on Monday. (At least my representatives didn't vote for this nonsense.) Gov. Robert F. McDonnell can now sign the bill if he chooses. I suggest that he not. If you're a Virginia taxpayer, you might want to make the same point.

Enough of my rants. Now it's your turn: Tell me what you think of the tax code, tax-prep software, and attempts by tax-prep vendors to lock in their business.

By Rob Pegoraro  |  March 12, 2010; 12:06 PM ET
Categories:  Gripes , Policy and politics  
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Well the tax code sucks. It makes April 15 seem like a national day of dread and sorrow.

I used to do my taxes manually, then I tried the Maryland state online tax system. That wasn't so bad (horrible interface even in those days). But as my situation changed (got married, wife started a business, have 2 kids), I have been using Turbotax and I find it pretty good. In fact, the process of gathering my wife's business expenses and expenditure is more painful than actually using the software.

It just sucks that I have to pay full price each and every year. Why can't intuit offer discount for existing customers? I guess there's no incentive to cut their revenue :)

Posted by: tundey | March 12, 2010 1:16 PM | Report abuse

Our situation is difficult, and filling in tax forms, with or without software, is not my idea of fun. I'd rather be doing other things. So we have an accountant, who likes our account, because it's NOT run of the mill-regular. It actually makes him think! He LIKES that!. And the best part of all...he's not expensive.

Posted by: henwin | March 12, 2010 1:49 PM | Report abuse

Never had to use tax prep software. My income is W-2, and I use the standard deduction. I'm in the process of buying a condo, so there's a couple more big deductions coming, but I don't expect that to make it much more difficult. Be using the 1040A instead of the EZ. But it shouldn't take more than a couple hours.

Gonna miss iFile in VA. Guess it's back to the paper form.

I suppose, if the software cost under $50 and took less than an hour to use, and did both state and federal, and ran on a Mac, it would be worthwhile.

Evil (but SFW) website to hide in links:

Posted by: wiredog | March 12, 2010 2:21 PM | Report abuse

I wasn't aware of the Making Work Pay tax credit until the I.R.S. added $400 to my refund. As the Brits would say, I was gobsmacked that the government made the effort to send more money my way. I guess TurboTax would have given me the deduction up-front. Maybe I'll try it next year.

Posted by: Miles_Standish_Proud | March 12, 2010 2:39 PM | Report abuse

Making Work Pay...arghhh. The paycheck was adjusted but you have to fill out the form to "claim" it. Jeeze-Louise, another form. I use IRS freefile fillable form feature. I know where everything goes, plug it in and zip...file electronically. Va free file pales in comparison...I do paper first but...the free ifile has a different format from the paper 760 so I have to plug and double check every entry. The spousal adjustment requires three cups of coffee before I tackle it. I stopped using tax software when I found several "made" me do a form I don't need due to my fabulous $12.00 in foreign income.

Posted by: tbva | March 12, 2010 3:22 PM | Report abuse

Rob's comment about TaxAct not excepting pasted in numbers raised my blood pressure 50 points. Is there a site where we can list programs for boycotting software that has this extremely annoying limitation? My 2006 version of Microsoft Streets and Trips has this same annoying feature if you want to paste an address into the address line to search the map for the location. Why would any developer ever write software with such a stupid limitation?

Posted by: EEDave | March 12, 2010 6:08 PM | Report abuse

I'm still trying to figure out why private-equity partners think they deserve to pay only the 15% marginal rate on their hundred-million-dollar incomes, and why estates worth tens of millions of dollars should not be taxed. Most of that worth has never been taxed; it is due to asset appreciation, not double taxation of income.

As Will Rogers once put it, "America has the best politicians money can buy."

Posted by: 54Stratocaster | March 12, 2010 7:44 PM | Report abuse

Every once in a while, I encounter an application or web page that will not produce a context menu from right-clicking the mouse. If you are trying to paste from the clipboard in this situation, frequently Ctrl-V will do the job on a PC. A Mac probably has its own similar keyboard combo.

Posted by: Tyelctu | March 12, 2010 8:46 PM | Report abuse

BRAVO to Rob Pegoraro for focusing attention on the attempts of the tax preparation industry to end free e-filing for all taxpayers at the state level. Pegoraro reports that a bill in Virginia, HB1349, is on Gov. McDonnell's desk waiting for his signature. The bill would end the state's iFile system, which allows all taxpayers to file their Virginia tax return for free, with an oxymoranic "free file" system akin to the one supported by the IRS, in which companies offer free tax-prep services only to people who don't make too much money.

As a taxpayer who's been following for years the attempts of the tax-preparation industry to defeat free e-filing of taxes at the federal and state level, I know the industry is relentless in seeking to limit free e-filing of taxes. Ordinary taxpayers have few allies in their struggle to keep e-filing free for all. One of them is Nina Olsen, the IRS Taxpayer Advocate, who championed a simple electronic template for federal returns in a Senate Finance Committee hearing in 2005. That hearing led directly to the IRS adopting such a template four years later (although over the resistance of Bush administration IRS officials and a number of members of Congress in bed with the tax preparation industry).

I wish the Washington Post news department would pick up this story!

Thomas Reich
Arlington, VA

Posted by: BeechF33A | March 14, 2010 12:01 PM | Report abuse

turbotax for some that might not know is a complete scumbag outfit. used the free ez for several years then suddenly they decide in 2007 that i rode the free too long and without so much as a screw you, would not let me complete my return without both a 39.00 fee and another 39.00 fee to efile. went to taxbrain and at least the small amount they want is not extortion. please please let the irs follow in california footsteps and put the hoard of online tax specialist out of business.

Posted by: trjohnson8890122 | March 14, 2010 1:43 PM | Report abuse

Don't lump in Block with Intuit. Intuit's greed is notorious. They bought up all the professional tax software programs in the 90s (which are 90% identical to what's sold in the stores but go for hundreds more) and then tried to lockdown their software so you can't use it to do multiple returns -- they even altered your PC to support this. No surprise they want to rubout state govt. competition. Their problem is, they can't sustain their old growth rates so they can't make $$ on their stock options and they're trying to goose that growth rate by any means necessary.

Posted by: gbooksdc | March 17, 2010 3:29 PM | Report abuse

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