Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Lauren Dalbert is the
Speaker 1: type of guy who does not put off filing his taxes.
Speaker 2: Getting it in as soon as I got my W two's,
Speaker 2: so did that I could get that refund as soon
Speaker 2: as possible.
Speaker 1: In the past, he's tried pretty much every strategy in
Speaker 1: the book to prep for them, hiring a professional, using
Speaker 1: websites like TurboTax, even doing the math himself.
Speaker 2: When I was an Army I would do other guys
Speaker 2: taxes for them, and this was just paper and pencil
Speaker 2: back in the eighties and stuff like that.
Speaker 1: This year, the Economic Security Project, an advocacy group that
Speaker 1: sometimes partners with the Community Organizing Foundation where he works,
Speaker 1: told him he was eligible for another option. As a
Speaker 1: California resident with just one income source plus disability from
Speaker 1: the VA, he could file his taxes directly through the
Speaker 1: IRS website for free for the first time this year.
Speaker 2: I didn't have to pay somebody. It could be over
Speaker 2: one hundred dollars by the time you're finish using those
Speaker 2: online tax preparing services.
Speaker 1: He says. It was pretty user friendly, no extra bells
Speaker 1: and whistles. He did run into some trouble verifying his identity,
Speaker 1: but says it didn't take long to connect with a
Speaker 1: real person who could help him. All in all, he
Speaker 1: says the whole process took less than an hour. Easy free,
Speaker 1: done in an hour? Are we still talking about filing taxes? Today?
Speaker 1: On the show? The IRS is piloting a new online
Speaker 1: tool this year that's supposed to make tax season easier
Speaker 1: for thousands of taxpayers in a dozen states. We'll dig
Speaker 1: into how this came, about how well it's working, who
Speaker 1: can use it, and whether this government pilot program could
Speaker 1: ever compete with a powerful private tax filing industry. This
Speaker 1: is the Big Take DC podcast from Bloomberg News. Filling
Speaker 1: in for Salaamosen, I'm Sarah Holder. We're going to get
Speaker 1: into that new IRS program. But to understand why it's
Speaker 1: such a big deal and why it took so long
Speaker 1: for the government to offer it, you need to understand
Speaker 1: the rise of TurboTax. So I sat down with my
Speaker 1: colleague Brody Ford.
Speaker 3: I write about the tech industry here, especially software companies
Speaker 3: that we don't often think about but end up running
Speaker 3: much of our life, like in this case taxes.
Speaker 1: So it's April. Many Americans have just filed their taxes
Speaker 1: or will have to in the next week or so.
Speaker 1: How did it become so complicated for Americans to file
Speaker 1: their taxes?
Speaker 3: Since the dawn of time? It's been hard to do
Speaker 3: your taxes. Everyone's been mad at it. The IRS estimates
Speaker 3: that last year people spend an average of one hundred
Speaker 3: and fifty dollars and nine hours doing their taxes. It's
Speaker 3: a funny way we do it in the US. Right
Speaker 3: we have to write what we think we owe the
Speaker 3: government and send it to them, and then they say
Speaker 3: yes or no. Have that information somewhere, right, The thought
Speaker 3: being that, especially if you just have W two and come,
Speaker 3: this is a very simple calculation on how much money
Speaker 3: you owe. They can just spit out that number.
Speaker 1: And nearly half of the country's taxpayers file using a
Speaker 1: do it yourself site like TurboTax. How did turbotox promise
Speaker 1: to revolutionize the process of filing one's taxes?
Speaker 3: So their promise was a simple one that this was
Speaker 3: kind of the late eighties. There was this notion of like, hey,
Speaker 3: everything could be done better digitally. To some extent that
Speaker 3: was probably true, and that it would be a lot
Speaker 3: easier and even more fun to do it. You know,
Speaker 3: your taxes on the computer. Over time, what became interesting
Speaker 3: there is their promise went from.
Speaker 4: It would be easy to it would be free.
Speaker 3: I don't know if you remember on Super Bowl commercials
Speaker 3: or you know YouTube targeted ads, you'll see people throwing
Speaker 3: the world free around the lot as it really to
Speaker 3: do in your taxes and TurboTax. That's the talking point
Speaker 3: they settled on, and that is I became so contentious
Speaker 3: because it's only if you have simple taxes.
Speaker 4: Think about just W two.
Speaker 3: Income, not too many assets. You probably didn't sell any stock.
Speaker 3: Is it that it's available for free?
Speaker 1: What's it like to use turbo tax? Can you walk
Speaker 1: us through? You open up the site, you start putting
Speaker 1: in your information.
Speaker 3: I did some gonzo journalism last week and I did
Speaker 3: my taxes. I am a TurboTax user, you know. I
Speaker 3: just put on my W two from Bloomberg and they
Speaker 3: scan it and they say, okay, here's the deductions you
Speaker 3: should do. It's a very fast, streamlined process, and it's
Speaker 3: very gamified.
Speaker 4: You know. Think about like if.
Speaker 3: You've shopped on Timu or scrolled on TikTok with all
Speaker 3: these little like counters going like congrats, you're finishing your
Speaker 3: taxes so quickly. You did such a good job. What's
Speaker 3: funky about it is they just try to upsell you
Speaker 3: like crazy. Right. There are many many screens that will
Speaker 3: say things like, wait a second, do you want a
Speaker 3: second pair of eyes on this?
Speaker 4: Do you want an expert to take a look? Did
Speaker 4: you do this in the year? Oh? Do you want
Speaker 4: audit protection?
Speaker 1: Right?
Speaker 4: These things that you.
Speaker 1: Don't even know to want that. No, until they suggest.
Speaker 4: That, I'm like, dog, do I need audit protection? Right?
Speaker 4: You have this sense of wait a second, I probably
Speaker 4: need this thing.
Speaker 3: That's a way that you end up paying when maybe
Speaker 3: you actually didn't have to.
Speaker 1: This all raises a question, how did we end up
Speaker 1: in a situation where the government knows what you owe,
Speaker 1: but you might have to use a service like TurboTax
Speaker 1: to figure it out. Brody says the government made a
Speaker 1: conscious choice not to provide the service when it struck
Speaker 1: up an agreement with private tax filing companies, a.
Speaker 3: Kind of non aggression pact between private industry and the government.
Speaker 3: Was this thing called the Free File Alliance, where essentially
Speaker 3: the government will not create a direct filing service as
Speaker 3: long as these private tax companies think TurboTax, HNR, Block
Speaker 3: tax Layer offer tax preparation for free to middle and
Speaker 3: low income Americans, and they agreed that if you are
Speaker 3: below this certain income threshold, you can get your taxes
Speaker 3: for free. At the time, it was maybe seventy thousand,
Speaker 3: you know, like a relatively kind of middle of the
Speaker 3: road income, so a lot of people were included in
Speaker 3: this makes sense fair enough that you know, okay, you
Speaker 3: can have a functional monopoly in this as long as
Speaker 3: you use the profits you get from the higher income
Speaker 3: earners to subsidize the system for free for the middle
Speaker 3: and low income lo and behold, only about four percent
Speaker 3: of people ended up using the free service. And you
Speaker 3: can debate why that is. The companies will say, because well,
Speaker 3: they ended up wanting some of the more bells and
Speaker 3: whistles on the paid version. What a horde of regulators
Speaker 3: will say is because you designed the product in a
Speaker 3: way that funneled people away from the free version to
Speaker 3: the paid version, right, and regulators would say that they
Speaker 3: would do things that really do not pass the smell test,
Speaker 3: you know, like taking out advertisements that if you google
Speaker 3: free taxes, the first result would be the pay aid version.
Speaker 3: Rather than the actual free version you're looking for. Comedian
Speaker 3: Hassama naj has a whole episode about this of just
Speaker 3: trying to get the actual free version of turbo tax,
Speaker 3: but it's just like felt nearly impossible.
Speaker 1: In Boom, we hit a paywall. We reached out into it.
Speaker 1: The company that owns TurboTax. In response to the allegations
Speaker 1: of upselling, they told us, quote, IRS Direct File is
Speaker 1: a solution in search of a non existent problem. Today,
Speaker 1: one hundred percent of Americans, regardless of income level or
Speaker 1: how complex their taxes are, can file their federal and
Speaker 1: state taxes completely free of charge. We are proud that
Speaker 1: over the last decade, we've helped more than one hundred
Speaker 1: and twenty four million Americans file their taxes completely free
Speaker 1: of charge.
Speaker 3: I think it's a very interesting talking point they use
Speaker 3: that essentially taxes are already free through our service, which
Speaker 3: is only true if you didn't have certain complicated situations
Speaker 3: like unemployment, income, student loan payments, owning a home. These
Speaker 3: very common situations that make it that taxes are not free.
Speaker 1: And so they're saying tax preparation is free. We're offering
Speaker 1: a better service for people that have these complicated needs.
Speaker 3: I think in a broader sense too, they just use
Speaker 3: that kind of classic talking point of government is inefficient.
Speaker 3: Government isn't going to be able to build this. Well,
Speaker 3: we've spent X number of years building this software that
Speaker 3: people by and large do find pretty streamlined and easy
Speaker 3: to use. The government's going to end up spending all
Speaker 3: this tax payer money to build something that already exists.
Speaker 4: You know, they're a prolific lobby year.
Speaker 3: They've spent almost fifty million over the last two and
Speaker 3: a half decades.
Speaker 1: Critics of that lobbying include Senator Elizabeth Warren, who, in
Speaker 1: a statement to Bloomberg earlier this year, called into its
Speaker 1: actions an effort to quote try and stop free online
Speaker 1: tax filing because they're terrified that the billions in profits
Speaker 1: they make by scamming taxpayers are at risk. In response,
Speaker 1: and into It spokesperson told Bloomberg that the IRS E
Speaker 1: filing tool will quote cost taxpayers billions of dollars for
Speaker 1: something already free of charge, and with potentially disastrous effects
Speaker 1: on the finances of millions of Americans. It's worth noting
Speaker 1: last spring, the IRS estimated that the pilot would cost
Speaker 1: between around sixty four and two hundred and fifty million dollars,
Speaker 1: depending on how many taxpayers use it at the end
Speaker 1: of the day, whether it's due to lobbying or a
Speaker 1: lack of political will to fund an IRS e filing
Speaker 1: effort sooner. It's taken a really long time to get
Speaker 1: any kind of alternative up and running.
Speaker 3: There was a conversation twenty years ago but whether the
Speaker 3: government should build what is effectively a TurboTax competitor, And
Speaker 3: now twenty five years later, we are just starting.
Speaker 4: To do that.
Speaker 1: So that brings us to today and this new pilot program.
Speaker 1: How the government finally launched this free filing tool, and
Speaker 1: how it's going after the break, we're back. After decades
Speaker 1: of talk about the US government creating its own alternative
Speaker 1: to private e filing services, it's finally happening, at least
Speaker 1: for some Americans. How did the idea of a government
Speaker 1: run direct file option get off the ground.
Speaker 3: There was a couple of large regulatory actions against TurboTax
Speaker 3: that led them to pull out of this non aggression treaty,
Speaker 3: this free file Alliance, this jargony thing that meant that
Speaker 3: the private industry would agree to give taxes for free
Speaker 3: to low income people, but in practice never really worked
Speaker 3: and so eventually TurboTax pulled out of this system. They
Speaker 3: just said, we're not doing this anymore. Same for H
Speaker 3: and R Block and these are really the anchors of
Speaker 3: that system. So the collapse of this is really what
Speaker 3: led the government to say, hey, this program is not working.
Speaker 3: We have some fresh funding from Congress towards the IRS.
Speaker 3: Remember the Inflation Reduction Act. There was a large number
Speaker 3: of funds that went there. They said, this is a
Speaker 3: good moment to push forward and try to build this demo,
Speaker 3: and it's actually come together quicker than many expected. They
Speaker 3: expect that it could cover nineteen million taxpayers eventually.
Speaker 4: Right.
Speaker 3: They hope one hundred thousand people participate this season, which
Speaker 3: is no small undertaking.
Speaker 1: To get a closer look at the new pilot tool,
Speaker 1: I reached out to Aaron Slowey, who covers the IRS
Speaker 1: for Bloomberg Industry Group.
Speaker 5: So it's only in twelve states. Most of those states
Speaker 5: are states with no income tax. There's four that are
Speaker 5: partnering with the IRS. I do have an income tax.
Speaker 5: It's New York, Massachusetts, California, and Arizona. So that's like
Speaker 5: location wise. The first requirement and then it's like low
Speaker 5: and moderate income type of returns, So the simplest type
Speaker 5: of returns, those are the people that are going to
Speaker 5: be able to qualify. And the IRS said that on
Speaker 5: purpose because it is in its pilot phase, so they
Speaker 5: just want to test it out to see if this
Speaker 5: is really going to work for people.
Speaker 1: So erin how does it work?
Speaker 5: So they actually did a demo with some reporters and
Speaker 5: I was really surprised about how like the clean layout,
Speaker 5: the way that it looked. You go on and they
Speaker 5: actually first vet to see if your situation qualifies before
Speaker 5: you even get started to use the pilot and then
Speaker 5: after that you have to do a verification process and
Speaker 5: after that is when you could start your direct file return.
Speaker 5: And I heard it has taken as short as fifteen
Speaker 5: minutes to file your returns through direct file. Wow, so yes,
Speaker 5: it is a lot shorter than the average. Granted that
Speaker 5: was one person filing a return. I think depending on
Speaker 5: how prepared you are with your paperwork, it will just vary.
Speaker 5: But so far the RS has said they've had a
Speaker 5: lot of success with direct file.
Speaker 1: How is the IRS measuring the program success?
Speaker 5: As of mid March, they've had about fifty one thousand
Speaker 5: people sign up to use direct file. Now, the caveat
Speaker 5: with that is that not all those people have filed
Speaker 5: their returns yet, so we'll see. I guess once tax
Speaker 5: filing is using closes how many people actually file their
Speaker 5: returns using direct file. But part of the battle that
Speaker 5: the IRS is going to have is because they're keeping
Speaker 5: it in such a limited size, both just limiting the
Speaker 5: number of states and the type of tax situations that
Speaker 5: can use direct file, Like, they aren't going to be
Speaker 5: like look at the sheer number of people that used
Speaker 5: this pilot. So I think the bottom line for the IRS,
Speaker 5: I think they're going to wonder do people like it
Speaker 5: and did it work? It seems like very fundamental questions,
Speaker 5: but the like with the way that government run websites
Speaker 5: have gone before, that's what they need to get answered.
Speaker 1: What do this program? Skeptics say?
Speaker 5: The two big skeptics are the Republicans and the tax
Speaker 5: prep companies. People are really concerned about the cost. I
Speaker 5: think there's a lot of fear just surrounding the IRS's reputation.
Speaker 5: They don't want it to be an enforcer collector and prepare.
Speaker 1: The possible cost and the IRS's reputation aren't the only
Speaker 1: challenges for the program. The pilot didn't launch until March,
Speaker 1: which critics say was too late to capture many taxpayers
Speaker 1: filing the season. Plus, as Brody points out, it's limited
Speaker 1: in scope.
Speaker 3: Keep in mind it is only for federal returns, so
Speaker 3: your state return you'll still have to do somewhere else.
Speaker 3: Maybe you'll have to go crawling back to turbo tax.
Speaker 3: So I mean the headline that into it would be
Speaker 3: having their fingers crossed for is that nobody ends up
Speaker 3: using it right right, And I mean that's a total possibility,
Speaker 3: because at the end of the day, a big rule
Speaker 3: in software is that people stick to what they know.
Speaker 3: I think, if you've been filing your taxes a certain
Speaker 3: way for a number of years, the odds of you
Speaker 3: trying the experimental new method is pretty low. So I'm
Speaker 3: really watching for adoption. I mean, do people actually use
Speaker 3: this thing? Do we see some crazy complaints around, like, hey,
Speaker 3: this messed up my taxes. I think a really famous
Speaker 3: kind of government failure with technology was the Healthcare dot gov.
Speaker 1: Yeah, the Obamacare role. Yeah.
Speaker 3: I mean that is like one of those moments where
Speaker 3: you know, people walked away and said Wow, maybe the
Speaker 3: government can't build technology. And I think, you know, I've
Speaker 3: seen some articles where people seem pretty rosy on the
Speaker 3: new system, but if we have some situations like that,
Speaker 3: it could really dent it in the future.
Speaker 4: Yeah.
Speaker 1: And since the government has promised and finally offered this
Speaker 1: free tax filing service, how has TurboTax reacted?
Speaker 3: You know, so they say that, hey, this is a
Speaker 3: non event to us, This is a very small shred
Speaker 3: of you know, our user base.
Speaker 1: To that point into it told us, quote, IRS direct
Speaker 1: file will not offer any improvement over filing options currently
Speaker 1: available to and used by taxpayers, nor do we believe
Speaker 1: it will have a material impact on the industry or
Speaker 1: our financial results.
Speaker 3: But what it is to them is a long term risk, right,
Speaker 3: because they rely on TurboTax as a kind of new
Speaker 3: user pipeline and as a way to get data about
Speaker 3: the way that taxes look and improve their product for others.
Speaker 4: The idea that.
Speaker 3: Nineteen million of that group are going to go over
Speaker 3: to a free federal service, that is so and leah
Speaker 3: risk to.
Speaker 1: Turbo tax and to its bottom line. Absolutely Thanks for
Speaker 1: listening to the Big Take DC podcast from Bloomberg News.
Speaker 1: I'm Sarah Holder. This episode was produced by Julia Press.
Speaker 1: It was edited by Aaron Edwards and Laura Davison. It
Speaker 1: was mixed by Ben O'Brien. It was fact checked by
Speaker 1: Alex Sugia. Naomi Shaven is our senior producer. Michael Shepherd,
Speaker 1: Wendy Benjaminson and Elizabeth Ponso provide editorial direction. Nicole beamsterbor
Speaker 1: is our executive producer. Sage Bauman is Bloomberg's head of podcasts.
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