Don't use TurboTax (I have reasons)
Hi there,
Welcome to The Internet is Cool, a newsletter about the invariably strange, infuriating, uplifting, and cool information I find on the Internet.
Today we’re talking about doing your taxes in the US, and a brief history of the software that exists to file.
The Internal Revenue Service (IRS) started accepting 2020 tax return filings as of Friday, February 12. Like clockwork, I started getting marketing emails from the self-prepared tax companies I’d tried in the past:
“Users can often file at no cost”
Let’s see how. E-file.com tells me I can file for free if my situation is “basic”—which to them means I must meet all the following criteria:
No dependents
No mortgage interest to deduct
Income less than $100,000
No retirement income to report
Those few requirements count a significant chunk of the US population out of the “basic” tier, for traits we see as regular, if not hallmark, parts of American life: having kids, owning a home, being able to retire.
As of 2020, 40% of American households have children under 18. This percentage grows when you consider that dependents aren’t just kids under 18, they can be college-aged kids and elderly parents too.
To estimate how many taxpayers might have a mortgage, we can look at the homeownership rate for the US: it’s right around 65%, which measures the share of occupied homes that are occupied by the owner. This one’s a bit harder to compare, because it doesn’t account for adults who live in the same home but aren’t the owner, or for homeowners who have paid off mortgages. The statistic for “adults who have a mortgage” is likely significantly lower than 65%.
And finally, according to the Center on Budget and Policy Priorities, over 17% of Americans received a Social Security payment in June 2020. That isn’t a perfect representation of every person who might have retirement income to report, but since the percentage of US adults over 65 was 16.9% last year, I’m comfortable with it.
When your average American couldn’t even qualify as basic, I’m skeptical of your marketing copy claiming “users can often file at no cost”—because it’s often not true.
The same day, FreeTaxUSA also emailed me... including a coupon for my purchase with their (apparently) incorrectly-named company.
The pattern FreeTaxUSA uses is common, just like E-file.com: rope in customers with the simplest of federal returns for free, then charge for “complex” returns or to add on a state return. But advertising 10% off my order when your company has “free” in its name is comical.
As cereal is a made-up food (I’ll fight you on this one), self-prepared tax software is largely a made-up industry, made successful by its own efforts to kneecap the development of more user-friendly solutions. Since it already exists (and is wildly profitable) you better be damn sure the players involved are willing to go to bat to protect its dominance.
You’re likely overpaying for tax prep
Around 70% of the country is eligible to file their taxes for free—it’s based on your income, and for 2020 the limit is $72,000. This is available through the Free File Alliance, a group of companies that provide tax preparation software at no cost. Participants include TurboTax, TaxAct, FreeTaxUSA and TaxSlayer. But don’t give them too much credit.
The program started because the IRS was looking for a way to get the critical mass of paper filers to start filing electronically—thus the tax prep companies swooped in. No need to make your own software when theirs already exists!
In exchange for the companies offering Free File software starting in 2003, the IRS vowed not to create a competitor in the form of a “government-run system” for filing taxes. But “since Free File’s launch, Intuit has done everything it could to limit the program’s reach while making sure the government stuck to its end of the deal” (source).
The company behind the most popular tax software in the US, Intuit’s TurboTax, stays in the IRS’s good graces by complying: they offer the free product to anyone who qualifies. They then actively hide it from potential users, in the past adding code to their pages that hides it from Google’s “crawlers” that find new web pages to add to the search engine’s directory.
To clarify, adding “noindex, nofollow” tags to a page is a relatively common strategy, especially on promotional pages (it’s why you can’t find those landing pages offering 50% off a subscription just through a Google search) but this isn’t really a promotion.
According to the Free File website, the software is offered by a “nonprofit coalition of industry-leading tax software companies partnered with the IRS”: a clear example of a public-private partnership. But if the company’s flagship product’s success is existentially threatened by the “nonprofit” partnership in place, it sets the stage for conflicts of interest on the part of TurboTax.
Per year, on average only 3% of eligible taxpayers use a free offering from Free File partner software. TurboTax has been investigated previously for making it exceedingly difficult to find their free offering, and not disclosing to users who weren’t in the “free” path when they ended up qualifying for it. It’s no surprise that TurboTax isn’t eager to market this program: it makes significantly less money for them than their regular products (although they can still profit off free filers through state returns and other products, like “audit defense” in case the IRS audits you).
The willingness to tout the benefits of the Free File program while not actually optimizing the funnel for people to use it reminds me of the “breakage” model that gyms use. Sure, in theory 100% of a gym’s customers have access to their facilities. But the business model is based on a pittance of them actually using it, or it’ll be overcrowded, with broken equipment and no clean towels.
Hilariously, in a recent press release, the company states that “TurboTax makes its Free File program offering available to the maximum number of eligible taxpayers allowed by the IRS,” using income or residence criteria to limit availability. What TurboTax excludes is that their lobbying was the main reason the IRS created limits on the number of taxpayers eligible for the program in the first place.
Avoiding a free-for-all
The origin of these limits dates back to 2004, when TaxAct, a newcomer in the tax prep space, decided to offer their Free File product to everyone—“all taxpayers. No restrictions. Everyone qualifies.”
That sent Intuit scrambling:
Alarmed, Intuit tried to get the other companies not to offer their products for free to too many potential customers, according to Dunn [TaxAct’s CEO]. Such a request could be collusion, a violation of antitrust law, Dunn said. “Intuit asked the Free File Alliance members that we should restrict offers, which I believe is probably not legal for that group to restrain trade,” he said.
Intuit petitioned the Justice Department about the request, who had this to say:
Clearly, wrote Renata Hesse, an antitrust section chief at the department, “any agreement among Alliance members to restrict such free service is likely a form of price fixing” and thus illegal. But there was still a way for Intuit to get what it wanted. She wrote that if the IRS itself were to impose such a restriction, it would be legal.
The solution was clear—the IRS would have to be the body to institute the limits. And because the success of Free File “represented a threat to future revenues and profits of the publicly traded company participants,” Intuit got its wishes and “the IRS decided to remove this threat.”
With the IRS’s action, the public-private partnership model touted by Free File Alliance members starts to feel more like “let’s save Intuit’s business from going under”:
The new agreement, struck between the IRS and the alliance in 2005, gave Intuit what it had sought. Companies were now expressly barred from offering free tax prep to everyone through the program. Instead, only taxpayers under an income cap, then $50,000 a year, would be eligible.
Intuit was hesitant about the progress, as shown by the below slide obtained by ProPublica that notes “repeated challenges have been successfully met in the past; latest challenge is direct e-file portal.”
Let’s be clear that the repeated “challenges” they mention to their investors have been attempts to make filing taxes easier, simpler or cheaper for US taxpayers.
The argument whether giving the government control over something stymies innovation and efficiency is for another day—and from where I sit, I don’t actually want much more innovation to do my taxes on the technology front. The Free File Fillable Forms, available to taxpayers making incomes higher than the Free File software limit, do exactly what they need to. (We’ll talk about those in a few days.)
Now, innovation in the tax code? Gladly.
The emotional side of taxes
A few days ago on the New York City subway, I saw an ad for Picnic Tax, a new-ish tech company where you’re matched with an accountant—and there’s a connotation in the name: “Doing your taxes with us will be a picnic.”
I don’t blame them for making that connection, because anyone who’s dealt with tax time in the United States knows the thundercloud of anxiety that can hang over your head until April 15th. TurboTax explicitly uses that anxious feeling to their advantage.
From ProPublica’s comprehensive reporting on the topic:
A marketing concept frequently invoked at Intuit, which goes by the acronym “FUD,” seeks to tap into Americans’ fear, uncertainty and doubt about the tax filing process. (emphasis mine)
Here’s the concept straight from the marketer’s mouth, in a blurb from Veracity Colab, the agency Intuit partnered with to create a 2018 commercial:
The biggest challenge this video needed to overcome was FUD (fear, uncertainty, & doubt). We were told that on average, most people trust TurboTax, but the instant something feels even remotely complex, FUD sets in, and they bounce. We needed to fix that.
Make no mistake—“fix” is, of course, bent toward what TurboTax can solve, because the company is not looking to make taxes less complicated. As mentioned above, they’ve actively lobbied against the federal government creating its own free tax filing system, because they make the most money when I’m confused, frustrated, and willing to throw money at someone to do my taxes just so I don’t have to figure it out.
Picnic Tax, the company from the subway ad, includes a customer testimonial on their homepage that encapsulates FUD well:
I am never attempting to do my own taxes again. Ever. Thank you for saving me from myself, Picnic Tax.
- Mark S.
While it’s a meaningful endorsement for the service, it elucidates how definitive the fear of taxes (and lack of trust in our own abilities) can be. The fact that we need someone to “save us from ourselves” to complete what should be a routine civic process is alarming.
To be clear, the fact that for-profit companies attempt to capitalize on your fear, uncertainty, and doubt about something doesn’t make it a greedy goblin. I’d be shocked if any company trying to sell you something didn’t capitalize on the F, the U or the D at some point in the customer journey.
Here’s the difference: Filing your taxes is a manufactured “problem” that could be handled by the government (as it is in many other countries, not all of which are “socialist”). It’s also one that TurboTax and the other software companies have spent significant time and money to make sure is still a problem—that only they have the silver bullet to solve.
The need for fear, uncertainty or doubt in preparing taxes should be practically nonexistent (unless you’re committing tax fraud). Here are a couple (user-reported) examples of how other countries run tax season:
Norway
The Philippines
Singapore
With a user-friendly experience design and memorable, funky commercials, TurboTax wants you to think they’re on your side, as your advocate against the evil and bureaucratic IRS.
But they’re not: how these companies stay in business is by generating fear, uncertainty, and doubt every year around tax time (or making sure the IRS doesn’t make taxes simple enough that FUD drops off) while ensuring they place the blame on the IRS, thus seen as the removers of that same FUD.
My request to you is this: resist the manufactured FUD and try preparing your taxes yourself this year.
Later this week, I’ll share how I stumbled into doing my own taxes last year, without paying TurboTax (or being sued by the IRS!). Doing your taxes yourself is educational and, for me, fun to realize that my FUD was mostly unwarranted.
If you’re interested in more information about the Free File Alliance, TurboTax or the timeline of this story:
Hasan Minhaj’s Patriot Act on Netflix has an episode called Why Doing Taxes is So Hard (interestingly, near the end of the episode he alludes to Netflix avoiding all income tax in 2019, even after making $1.9 billion in profit—and this was the last episode aired before Netflix cancelled his show)
ProPublica has done extensive reporting on this topic, dating back to 2013—their dozens of articles are housed in a series called The TurboTax Trap
Intuit’s petition to quash a 2020 investigation into whether they engaged in “deceptive or unfair acts or practices” in marketing their products
The Federal Trade Commission’s order to deny the petition to quash the above (you also think it’s hilarious that we use the word “quash” in formal government proceedings, right?)