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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Lauren Dalbert is the

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Speaker 1: type of guy who does not put off filing his taxes.

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Speaker 2: Getting it in as soon as I got my W two's,

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Speaker 2: so did that I could get that refund as soon

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Speaker 2: as possible.

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Speaker 1: In the past, he's tried pretty much every strategy in

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Speaker 1: the book to prep for them, hiring a professional, using

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Speaker 1: websites like TurboTax, even doing the math himself.

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Speaker 2: When I was an Army I would do other guys

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Speaker 2: taxes for them, and this was just paper and pencil

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Speaker 2: back in the eighties and stuff like that.

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Speaker 1: This year, the Economic Security Project, an advocacy group that

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Speaker 1: sometimes partners with the Community Organizing Foundation where he works,

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Speaker 1: told him he was eligible for another option. As a

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Speaker 1: California resident with just one income source plus disability from

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Speaker 1: the VA, he could file his taxes directly through the

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Speaker 1: IRS website for free for the first time this year.

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Speaker 2: I didn't have to pay somebody. It could be over

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Speaker 2: one hundred dollars by the time you're finish, you know,

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Speaker 2: using those online tax preparing services.

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Speaker 1: He says. It was pretty user friendly, no extra bells

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Speaker 1: and whistles. He did run into some trouble verifying his identity,

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Speaker 1: but says it didn't take long to connect with a

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Speaker 1: real person who could help him. All in all, he

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Speaker 1: says the whole process took less than an hour. Easy free,

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Speaker 1: done in an hour? Are we still talking about filing taxes? Today?

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Speaker 1: On the show? The IRS is piloting a new online

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Speaker 1: tool this year that's supposed to make tax season easier

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Speaker 1: for thousands of taxpayers in a dozen states. We'll dig

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Speaker 1: into how this came, about, how well it's working, who

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Speaker 1: can use it, and whether this government pilot program could

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Speaker 1: ever compete with a powerful private tax filing industry. This

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Speaker 1: is the big take from Bloomberg News. I'm Sarah Holder.

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Speaker 1: We're going to get into that new IRS program. But

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Speaker 1: to understand why it's such a big deal and why

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Speaker 1: it took so long for the government to offer it,

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Speaker 1: you need to understand the rise of TurboTax. So I

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Speaker 1: sat down with my colleague Brody Ford.

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Speaker 3: I write about the tech industry here, especially software companies

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Speaker 3: that we don't often think about but end up running

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Speaker 3: much of our life, like in this case, taxes.

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Speaker 1: So it's April. Many Americans have just filed their taxes

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Speaker 1: or will have to in the next week or so.

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Speaker 1: How did it become so complicated for Americans to file

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Speaker 1: their taxes?

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Speaker 3: Since the dawn of time? It's been hard to do

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Speaker 3: your taxes. Everyone's been mad at it. The IRS estimates

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Speaker 3: that last year people spend an average of one hundred

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Speaker 3: and fifty dollars and nine hours doing their taxes. It's

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Speaker 3: a funny way we do it in the US. Right,

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Speaker 3: we have to write what we think we owe the

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Speaker 3: government and send it to them, and then they say

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Speaker 3: yes or no. They have that information somewhere right. The

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Speaker 3: thought being that, especially if you just have W two

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Speaker 3: and come, this is a very simple calculation on how

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Speaker 3: much money you owe. They can just spit out that number.

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Speaker 1: And nearly half of the country's taxpayers file using a

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Speaker 1: do it yourself site like TurboTax. How did turbotox promise

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Speaker 1: to revolutionize the process of filing one's taxes?

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Speaker 3: So their promise was a simple one that this was

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Speaker 3: kind of the late eighties. There was this notion of

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Speaker 3: like everything could be done better digitally. To some extent

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Speaker 3: that was probably true, and that it would be a

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Speaker 3: lot easier and even more fun to do it. You know,

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Speaker 3: your taxes on the computer, over time. What became interesting

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Speaker 3: there is their promise went from it would be easy

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Speaker 3: to it would be free. I don't know if you

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Speaker 3: remember on Super Bowl commercials or you know, YouTube targeted ads,

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Speaker 3: you'll see people throwing the word free around the lot

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Speaker 3: as it reallys to do in your taxes and TurboTax.

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Speaker 3: That's the talking point they settled on, and that is

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Speaker 3: what became so contentious because it's only if you have

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Speaker 3: s simple taxes. Think about just W two income, not

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Speaker 3: too many assets. You probably didn't sell any stock. Is

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Speaker 3: it that it's available for free?

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Speaker 1: What's it like to use turbo tax? Can you walk

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Speaker 1: us through? You open up the site, you start putting

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Speaker 1: in your information.

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Speaker 3: I did some gonzo journalism last week and I did

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Speaker 3: my taxes. I am a TurboTax user, you know. I

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Speaker 3: just put on my W two from Bloomberg and they

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Speaker 3: scan it and they say, okay, here's the deductions you

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Speaker 3: should do. It's a very fast, streamlined process, and it's

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Speaker 3: very gamified. You know. Think about like if you've shopped

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Speaker 3: on Timu or scrolled on TikTok with all these little

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Speaker 3: like counters going like congrats, you're finishing your taxes so quickly,

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Speaker 3: you did such a good job. What's funky about it

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Speaker 3: is they just try to upsell you like crazy. Right.

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Speaker 3: There are many many screens that will say things like,

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Speaker 3: wait a second, do you want a second pair of

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Speaker 3: eyes on this? Do you want an expert to take

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Speaker 3: a look? Did you do this in the year?

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Speaker 2: Oh?

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Speaker 3: Do you want audit protection?

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Speaker 1: Right? These things that you don't even know to want

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Speaker 1: that suggest.

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Speaker 3: That I'm like dog dof I need audit protection.

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Speaker 2: Right.

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Speaker 3: You have this sense of, wait a second, I probably

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Speaker 3: need this thing. That's a way that you end up

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Speaker 3: paying when maybe you actually didn't have to.

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Speaker 1: This all raises a question, how did we end up

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Speaker 1: in a situation where the government knows what you owe,

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Speaker 1: but you might have to use a service like TurboTax

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Speaker 1: to figure it out. Rody says the government made a

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Speaker 1: conscious choice not to provide the service when it struck

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Speaker 1: up an agreement with private tax filing companies.

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Speaker 3: A kind of non aggression pact between private industry and

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Speaker 3: the government. Was this thing called the Free File Alliance,

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Speaker 3: where essentially the government will not create a direct filing

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Speaker 3: service as long as these private tax companies. I think

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Speaker 3: TurboTax HNR block tax layer offer tax preparation for free

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Speaker 3: to middle and low income Americans, and they agreed that

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Speaker 3: if you are below this certain income threshold, you can

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Speaker 3: get your taxes for free. At the time, it was

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Speaker 3: maybe seventy thousand, you know, like a relatively kind of

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Speaker 3: middle of the road income, so a lot of people

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Speaker 3: were included in this makes sense fair enough that you know, okay,

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Speaker 3: you can have a functional monopoly in this as long

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Speaker 3: as you use the profits you get from the higher

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Speaker 3: income earners to subsidize the system for free for the

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Speaker 3: middle and low income lo and behold, only about four

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Speaker 3: percent of people ended up using the free service. And

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Speaker 3: you can debate why that is. The companies will say,

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Speaker 3: because well, they ended up wanting some of the more

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Speaker 3: bells and whistles on the paid version. What a horde

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Speaker 3: of regulators will say is because you designed the product

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Speaker 3: in a way that funneled people away from the free

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Speaker 3: version to the paid version, right, and regulators would say

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Speaker 3: that they would do things that really do not pass

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Speaker 3: the smell test, you know, like taking out advertisements that

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Speaker 3: if you google free taxes, the first result would be

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Speaker 3: the paid version rather than the actual free version you're

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Speaker 3: looking for. Hassama naj has a whole episode about this

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Speaker 3: of just trying to get the actual free version of

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Speaker 3: turbo tax. But it's just like felt nearly impossible.

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Speaker 1: In Boom, we hit a paywall. We reached out into it.

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Speaker 1: The company that owns TurboTax. In response to the allegations

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Speaker 1: of upselling, they told us, quote, IRS Direct File is

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Speaker 1: a solution in search of a non existent problem. Today,

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Speaker 1: one hundred percent of Americans, regardless of income level or

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Speaker 1: how complex their taxes are, can file their federal and

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Speaker 1: state taxes completely free of charge. We are proud that

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Speaker 1: over the last decade we've helped more than one hundred

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Speaker 1: and twenty four million Americans file their taxes completely free

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Speaker 1: of charge.

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Speaker 3: I think it's a very interesting talking point they use

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Speaker 3: that essentially taxes are already free through our service, which

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Speaker 3: is only true if you didn't have certain complicated situations

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Speaker 3: like unemployment, income right, student loan payments, owning a home.

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Speaker 3: These very common situations that make it that taxes are

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Speaker 3: not free.

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Speaker 1: And so they're saying tax preparation is free. We're offering

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Speaker 1: a better service for people that have these complicated needs.

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Speaker 3: I think in a broader sense too, they just use

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Speaker 3: that kind of classic talking point of government is inefficient.

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Speaker 3: Government isn't going to be able to build this. Well,

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Speaker 3: we've spent X number of years building this software that

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Speaker 3: people by and large do find pretty streamlined and easy

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Speaker 3: to use. The government's going to end up spending all

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Speaker 3: this tax payer money to build something that already exists.

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Speaker 3: You know, they're a prolific lobby year. They've spent almost

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Speaker 3: fifty million over the last two and a half decades.

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Speaker 1: Critics of that lobbying include Senator Elizabeth Warren, who, in

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Speaker 1: a statement to Bloomberg earlier this year, called into Its

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Speaker 1: actions an effort to quote try and stop free online

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Speaker 1: tax filing because they're terrified that the billions in profits

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Speaker 1: they make by scamming taxpayers are at risk. In response,

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Speaker 1: an into IT spokesperson told Bloomberg that the IRS filing

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Speaker 1: tool will quote cost taxpayers billions of dollars for something

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Speaker 1: already free of charge and with potentially disastrous effects on

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Speaker 1: the finances of millions of Americans. It's worth noting last spring,

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Speaker 1: the IRS estimated that the pilot would cost between around

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Speaker 1: sixty four and two hundred and fifty million dollars, depending

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Speaker 1: on how many taxpayers use it at the end of

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Speaker 1: the day, whether it's due to lobbying or a lack

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Speaker 1: of political will to fund an IRS e filing effort sooner,

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Speaker 1: It's taken a really long time to get any kind

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Speaker 1: of alternative up and running.

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Speaker 3: There was a conversation twenty years ago about whether the

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Speaker 3: government should build what is effectively a TurboTax competitor, and

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Speaker 3: now twenty five years later, we are just starting to

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Speaker 3: do that.

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Speaker 1: So that brings us to today and this new pilot program.

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Speaker 1: How the government finally launched this free filing tool, and

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Speaker 1: how it's going after the break, we're back. After decades

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Speaker 1: of talk about the US government creating its own alternative

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Speaker 1: to private e filing services, it's finally happening, at least

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Speaker 1: for some Americans. How did the idea of a government

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Speaker 1: run direct file option get off the ground.

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Speaker 3: There was a couple of large regulatory actions against TurboTax

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Speaker 3: that led them to pull out of this non aggression treaty,

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Speaker 3: this free file Alliance, this jargony thing that meant that

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Speaker 3: the private industry would agree to give taxes for free

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Speaker 3: to low income people, but in practice never really worked,

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Speaker 3: and so eventually TurboTax pulled out of this system. They

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Speaker 3: just said, we're not doing this anymore. Same for H

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Speaker 3: and R Block and these are really the anchors of

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Speaker 3: that system. So the collapse of this is really what

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Speaker 3: led the government to say, hey, this program is not working.

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Speaker 3: We have some fresh funding from Congress towards the IRS.

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Speaker 3: Remember the Inflation Reduction Act. There was a large number

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Speaker 3: of funds that went there. They said, this is a

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Speaker 3: good moment to push forward and try to build this demo,

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Speaker 3: and it's actually come together quicker than many expected. They

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Speaker 3: expect that it could cover nineteen million taxpayers eventually. Right.

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Speaker 3: They hope one hundred thousand people participate this season, which

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Speaker 3: is no small undertaking.

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Speaker 1: To get a closer look at the new pilot tool,

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Speaker 1: I reached out to Aaron Slowly, who covers the IRS

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Speaker 1: for Bloomberg Industry Group.

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Speaker 4: So it's only in twelve states. Most of those states

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Speaker 4: are states with no income tax. There's four that are

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Speaker 4: partnering with the IRS. I do have an income tax.

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Speaker 4: It's New York, Massachusetts, California, and Arizona. So that's like

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Speaker 4: location wise the first requirement, and then it's like low

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Speaker 4: and moderate income type of returns, So the simplest type

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Speaker 4: of returns, those are the people that are going to

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Speaker 4: be able to qualify. And the IRS did that on

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Speaker 4: purpose because it is in its pilot phase, so they

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Speaker 4: just want to test it out to see if this

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Speaker 4: is really going to work for people.

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Speaker 1: So erin how does it work?

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Speaker 4: So they actually did a demo with some reporters and

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Speaker 4: I was really surprised about how like the clean layout,

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Speaker 4: the way that it looked. You go on and they

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Speaker 4: actually first vet to see if your situation qualifies before

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Speaker 4: you even get started to use the pilot and then

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Speaker 4: after that you have to do a verification process and

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Speaker 4: after that is when you could start your direct file return.

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Speaker 4: And I heard it has taken as short as fifteen

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Speaker 4: minutes to file your returns through direct file.

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Speaker 1: Wow.

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Speaker 4: So yes, it is a lot shorter than the average.

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Speaker 4: Granted that was one person filing a return. I think

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Speaker 4: depending on how prepared you are with your paperwork, it

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Speaker 4: will just vary. But so far, the RS has said

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Speaker 4: they've had a lot of success with direct file.

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Speaker 1: How is the IRS measuring the program's success?

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Speaker 4: As of mid March, they've had about fifty one thousand

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Speaker 4: people sign up to use direct file. Now, the caveat

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Speaker 4: with that is that not all those people have filed

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Speaker 4: their returns yet, so we'll see. I guess once tax

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Speaker 4: filing is using closes, how many people actually file their

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Speaker 4: returns using direct file. But part of the battle that

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Speaker 4: the IRS is going to have is because they're keeping

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Speaker 4: it in such a limited size, both just limiting the

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Speaker 4: number of states and the type of tax situations that

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Speaker 4: can use direct file, like, they aren't going to be

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Speaker 4: like look at the sheer number of people that used

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Speaker 4: this pilot. So I think the bottom line for the IRS,

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Speaker 4: I think they're going to wonder do people like it

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Speaker 4: and did it work? It seems like very fundamental questions,

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Speaker 4: but the like with the way that government run websites

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Speaker 4: have gone before, that's what they need to get answered.

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Speaker 1: What do this program? Skeptics say?

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Speaker 4: The two big skeptics are the Republicans and the tax Preppaneese.

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Speaker 4: People are really concerned about the cost. I think there's

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Speaker 4: a lot of fear just surrounding the IRS's reputation. They

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Speaker 4: don't want it to be an enforcer collector and prepare.

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Speaker 1: The possible cost and the IRS's reputation aren't the only

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Speaker 1: challenges for the program. The pilot didn't launch until March,

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Speaker 1: which critics say was too late to capture many taxpayers

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Speaker 1: filing the season. Plus, as Brody points out, it's limited

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Speaker 1: in scope.

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Speaker 3: Keep in mind it is only for federal returns, so

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Speaker 3: your state return you'll still have to do somewhere else.

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Speaker 3: Maybe you'll have to go crawling back to TurboTax. So

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Speaker 3: I mean the headline that into it would be having

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Speaker 3: their fingers crossed for is that nobody ends up using

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Speaker 3: it right right, And I mean that's a total possibilitycause

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Speaker 3: at the end of the day, a big rule in

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Speaker 3: software is that people stick to what they know. I

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Speaker 3: think if you've been filing your taxes a certain way

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Speaker 3: for a number of years, the odds of you trying

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Speaker 3: the experimental new method is pretty low. So I'm really

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Speaker 3: watching for adoption. I mean, do people actually use this thing?

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Speaker 3: Do we see some crazy complaints around, like, hey, this

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Speaker 3: messed up my taxes. I think a really famous kind

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Speaker 3: of government failure with technology was the Healthcare dot gov.

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Speaker 1: Yeah, the Obamacare role.

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Speaker 3: Yeah. I mean that is like one of those moments

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Speaker 3: where you know, people walked away and said, Wow, maybe

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Speaker 3: the government can't build technology. And I think, you know,

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Speaker 3: I've seen I've seen some articles where people seem pretty

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Speaker 3: rosy on the new system, but if we have some

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Speaker 3: situations like that, it could really dent it in the future.

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Speaker 1: Yeah, And since the government has promised and finally offered

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Speaker 1: this free tax filing service, how has TurboTax reacted.

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Speaker 3: You know, so they say that, hey, this is a

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Speaker 3: non event to us, This is a very small shred

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Speaker 3: of you know, our user base to.

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Speaker 1: That point, and to it told us, quote, IRS direct

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Speaker 1: File will not offer any improvement over filing options currently

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Speaker 1: available to and used by taxpayers, nor do we believe

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Speaker 1: it will have a material impact on the industry or

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Speaker 1: our financial results.

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Speaker 3: But what it is to them is a long term risk,

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Speaker 3: right because they rely on TurboTax as a kind of

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Speaker 3: new user pipeline and as a way to get data

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Speaker 3: about the way that taxes look and improve their product

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Speaker 3: for others. The idea that nineteen million of that group

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Speaker 3: are going to go over to a free federal service,

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Speaker 3: that is certainly a risk to TurboTax and.

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Speaker 1: To its bottom line. Absolutely thanks for listening to the

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Speaker 1: Big Take from Bloomberg News. I'm Sarah Holder. This episode

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Speaker 1: was produced by Julia Press. It was edited by Aaron

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Speaker 1: Edwards and Laura Davison. It was mixed by Ben O'Brien.

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Speaker 1: It was fact checked by Alex Sugia. Naomi Shaven is

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Speaker 1: our senior producer. Michael Shepherd, Wendy Benjaminson and Elizabeth Ponso

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Speaker 1: provide editorial direction. Nicole beamsterbor is our executive producer. Sage

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Speaker 1: Bauman is Bloomberg's head of podcasts. Thanks for listening. We'll

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Speaker 1: be back next week.