House Committee on Ways and Means


Statement of Brad Smith Senior Vice President, Consumer Tax Group, Intuit Corporation

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

April 13, 2005

Chairman Ramstad and Members of the Subcommittee, I am Brad Smith, Senior Vice President of Intuit, responsible for our Consumer Tax Group.  Thank you for the opportunity to present Intuit’s views on this year’s tax filing season, the IRS budget, and other issues facing our tax system.   

Our mission at Intuit is to make complex financial functions and activities easy for consumers, small businesses, and accountants helping them to simplify and take control of their financial lives and better manage the financial lives of their clients.  A 21 year-old company, Intuit’s market-leading products include Quicken, QuickBooks, the ProSeries and Lacerte suites of tax and accounting software for accountants, and, of course, the leading consumer tax software, TurboTax. 

The private sector invention of tax software has reduced much of the pain and complexity of tax compliance for average Americans, while bringing accurate preparation and speedy filing of returns within the economic reach of all.  In addition, Intuit is proud to have originated a national program of voluntary donation of free online tax preparation and e-filing services for lower income, disadvantaged and underserved taxpayers across the country, as well as for our active duty military.  The Intuit Tax Freedom Project, begun in 1998, became the model for today’s industry-wide Free File Alliance initiative, a national public-private partnership between the private sector and the IRS that was created in 2002 and has donated millions of tax returns to the needy.  And likewise, a Free File Alliance has now been created in almost 20 States, once again providing free services for those who need them most, at no cost to either the government or the individual.

Let me begin my testimony today by addressing the current income tax filing season.

Filing Season 2005 Success

The 2005 filing season has gone very smoothly with few exceptions.  The working relationship between the IRS and the tax software industry continues to improve each year.   As the IRS now describes it, there is an eco-system of support for the American taxpayer that involves the cooperative and complementary roles of the IRS and the private sector, working together to serve our citizens.

The IRS has reported that electronic filing is up over 7% year-to-date, with a total of over 50 million returns accepted so far.  At this rate, it is likely that over 50% of individual American taxpayers will fulfill their obligation this year via electronic filing.  This represents a tremendous milestone for the IRS and industry along the road to achieving the 80% goal set by Congress in 1998. 

Just this year, e-file growth at Intuit has been dramatic.  Intuit has produced over one quarter of the e-filed returns received by the IRS, having electronically filed over 28 million returns through the end of March -- a growth rate in excess of 21% over last year. 

We congratulate the new Director of the Electronic Tax Administration, Bert DuMars, for his leadership in ensuring the success of the electronic filing season.  We would also like to recognize the former Director of ETA, Terry Lutes, for his many years of exceptional leadership, which continue in his new role as Associate Chief Information Officer at the IRS.

As we cross the 50% e-filing threshold in the United States, the significance of this progress cannot be understated, and it can be directly attributed to the productivity of the partnership between government and industry to drive toward this national objective for our American citizen-centric tax system. 

In comparison, tax systems elsewhere around the world have not fared as well nor achieved as much in this same period of time.  One often-cited example is the United Kingdom, where the government set a 50% e-filing objective at the same time we set ours at 80%.  However, the UK chose to build and deploy a government-provided tax software system rather than unleashing the private sector in the competitive consumer marketplace.  As a result, today only about 3% of British taxpayers are willing to use that government’s online tax system, and as a result, just last summer the British tax agency, Inland Revenue, quietly lowered their national long-term e-filing objective down to only 25%.  The sharp contrast between the failure of that government-centric solution, and the success of the American citizen-centric solution, is dramatic, and we’re very proud to be part of the remarkable success story here in the United States.

Ways to Improve and Accomplish More

Although much has been accomplished in the drive toward electronic filing as the preferred method of tax compliance in the United States, we still have further to go. 

Today, it is still easier to mail a tax return than to electronically file one.  But this is not a matter of cost.  The filing of paper returns still requires the cost of either postage, special delivery, registered mail or express services.  In contrast, there are free electronic tax preparation and e-filing alternatives widely and readily available.  And so our focus must be on continued affirmative efforts to identify and remove the remaining barriers to electronic filing, and we should do so as expeditiously as possible.

If cost is not the issue, then what are the real impediments to electronic filing?  One of the obstacles is time and effort.  As modern software tools have reduced the time it takes to self-prepare a simple return down to a half hour, the process of electronic filing commonly takes another 50% of that time, or an additional fifteen minutes, just to transmit the return.  Here are some of the reasons why electronic filing is still unnecessarily difficult:

In addition to these obstacles that can be removed to facilitate greater taxpayer reliance on e-filing, there are important barriers which must also be removed to encourage greater e-filing by the professional tax preparer and accountant community.  Major expansion of e-filing by professional tax practitioners must take place in order to substantially improve today’s e-filing numbers; in order to do this, the government must:

All of these obstacles must be addressed and removed, effectively and expeditiously, if we are to accelerate the national transition to electronic filing as the predominant method of Voluntary Compliance in the American tax system. 

Beyond barrier removal, there are also affirmative steps that can be taken which could contribute in significant ways to the growth and acceptance of e-filing.  Primary examples would include: 

In addition, expanded public-private partnership between government and industry will be an essential element of taking e-filing to the next level.  Congress and the IRS should look to existing vehicles such as a well-focused “free file” program and the Electronic Tax Administration Advisory Committee (ETAAC) to drive a collaboration strategy:

If an updated national e-filing strategy is approached with a new sense of commitment and innovation, substantial additional growth in e-filing is still possible and could be achieved in a foreseeable timeframe, just as the first 50% milestone was reached in a relatively short period of time.  The only question is how serious we are about driving e-filing even further as the preferred method of Voluntary Compliance in this country.  Substantially greater growth is achievable if there is a genuine commitment to making it happen.

Tax Services to Assist those in Need

The Free File Alliance program began as an innovative solution to the public interest objective of providing ready access to electronic tax preparation and e-filing for lower income individuals and families, the working poor, disadvantaged, underprivileged, and underserved taxpayer populations at no cost to either the taxpayer or the public treasury.  A voluntary public-private partnership between the IRS and the software industry, the current Free File Alliance program had the objective of making free electronic tax preparation and filing available to 60% of American taxpayers.  The ability to assist the needy and underserved would be made possible by commercial sales of online tax preparation and e-filing to the rest of the taxpaying public.  And at typical costs of $20 per tax return, web-based tax software and e-filing had already driven the costs of tax compliance down to very low levels, within the reach of almost everyone. 

The commitment of the private sector to donate electronic returns and filing to those in need enabled government to completely avoid the potential cost of trying to build and provide its own tax software products, which countries like the United Kingdom have discovered to be a failed and expensive strategy.  After spending hundreds of millions of Pounds Sterling building, deploying, operating and advertising the Inland Revenue’s Self-Assessment OnLine tax software service, UK taxpayer adoption has not exceeded 3%, and the Chancellor of the Exchequer has reported to the House of Commons that the cost of the system still exceeded $ 50 per return after several years of operation.  This government-centric solution stands in sharp contrast to the U.S. estimated cost of .75 cents a return for our government receiving and processing a privately prepared and electronically filed return in this country, employing our citizen-centric system to get the job done efficiently and inexpensively.  

The adoption of the private-sector-provided Free File solution in the United States allowed the IRS to instead focus its investment on critical infrastructure modernization, enabling those unique and specialized operations and services that only government can provide.  As then-IRS Commissioner Charles Rossotti said in Congressional testimony:

“I don’t think there is any gray area about what the IRS role is in terms of providing services, because I don’t believe we should provide tax preparation services or tax software.”

Agreement was reached between industry and government in July 2002, through the auspices of the Electronic Tax Federal Advisory Committee (ETAAC):  the industry would provide free access to consumer electronic tax services to segments of the population underserved and under-represented among electronic tax filers, and those with the greatest financial need.  As a part of the agreement, the government would not seek to duplicate private sector investments or services.  The agreement was published in the Federal Register in August 2002, and received more than 700 public comments, which ran 6-to-1 in favor of the innovative proposal.

In the three years since the Free File Alliance project was launched, millions of taxpayers have received free electronic tax returns and free electronic filing.  The IRS has reported that the Free File Alliance program has significantly contributed to the growth in e-filing over that time period.  Unfortunately, something else has happened.  The current Free File Alliance program has drifted very far from its original public service purpose and objective. 

Rather than being dedicated to assisting the working poor, disadvantaged, and underserved, the Free File Alliance has now become a “universal-free” program, operating off a national marketing and sales platform hosted by the IRS, where participating companies depend on the sales of other products and services to the free return recipients in order to make it possible to provide the federal returns for free, such as sales of a basic staple like state tax returns.  This kind of economic interdependency was never supposed to be the business model for free file.  The original idea, of great merit, was for industry to have the ability to donate services to those in need as a result of their ongoing competitive commercial sales to the vast bulk of customers in the regular marketplace, where companies would normally be selling their services in substantial quantities to the general public.  That original free file business model, enabling public service donation to the truly needy through a philanthropic model, was in the public interest and must be restored.

After several years of this new universal-free trend developing unfettered within Free File Alliance program, others, including Intuit, have individually found it necessary to join the fray in competitive response.  However, we and others have expressed a range of concerns about the interests of low income consumers in this kind of free-for-all environment, and concerns as well about the government serving as either the market-maker for commercial business in this country, or permitting public assets and endorsement to be used for commercial marketing and sales purposes.  Finally, the absence of the states from a place at the table for discussion with the Federal Government and industry in the Free File Alliance program limits the potential public benefits from the program since state tax filers, including low income participants, are being charged for tax preparation under the current model.

The original public service concept of a free file initiative had great merit.  It was an unprecedented public service initiative to help those least able to enjoy the benefits of modern electronic commerce in this country.  We believe a private-sector-provided free file program can still have great merit, but any public-private partnership must focus on helping the underserved and underprivileged, with appropriate and sensible rules, governance and accountability, in which the IRS must play a key, active, and engaged program management role in cooperation with the private sector.  

Indeed, recent budgetary decisions by government underscore the need for an improved and refocused free file program to be successful and stable for years to come.  The inordinate costs of government providing TeleFile have long been a practical concern, and more recent decisions to cut back significantly on traditional bricks-and-mortar IRS Walk-In assistance centers, underscores the crucial role a well-focused free file program can play in providing assistance to the working poor, to those in need, to the disadvantaged, to the elderly on fixed incomes, and to various other underserved taxpayer populations. This dedicated purpose of voluntary public service to assist those in need must be restored as the purpose and mission of free file, and should be accomplished well before the beginning of the next tax season.

The current Free File program agreement between IRS and industry is up for renegotiation this year, and that milestone represents the opportunity to establish an improved program for the purpose of providing a philanthropic tax preparation and e-filing service program for those in our society who need it most, harnessing the investments, innovations and capabilities of the private sector to achieve important public service objectives.  A midcourse correction in this program is urgently needed, indeed overdue, to restore this founding and defining purpose.  We pledge ourselves to actively support that important objective, and strongly urge Congress and the IRS to do the same, restoring this valuable initiative to its original purpose and promise, so it can serve the public interest for years to come.

Looking Ahead

The Congressional policy decision to move the United States toward an electronic-filing tax culture was not only the right direction, but as we look ahead should be thought of in much broader terms about the whole process of taxation in the American economy:

If part of future federal taxation were to eventually include either some form of a Value-Added or Sales Tax, the process of compliance could be greatly simplified through software and electronic filing that would be available through the competitive commercial marketplace.  Indeed, all of these tools are well-within industry’s capability to provide to American taxpayers.  Whatever the future tax compliance needs of consumers and small businesses may be, the software industry can make them simple, fast, and inexpensive.

At the same time, the ability of industry to invent and bring to market easy software tools for tax compliance should never be an excuse for building excessive complexity into the U.S. tax code.  Tax simplification benefits everyone and is the right policy direction.

There are a couple of key barriers to small businesses adopting e-filing.

We recommend several steps to increase small business employment tax e-filing and payment, including the development of the following:

  1. A joint Federal/State gateway for employment taxes and forms.
  2. Completely automated enrollment for federal and state employment taxes e-filing.
  3. Completely automated filings.  (For example, the SSA requires W-2s to be manually uploaded to a web site by payroll operators, and there is no automated server-to-server (computer-to-computer) connection.)

E-Filing can be a win-win for small business and government, helping everybody save time and money.  Industry can enable efficient and accurate e-filing for almost a million small businesses.  Taking steps such as the joint Federal/State gateway, and completely automating enrollment and filings, will help us all realize this vision faster.

Summary Thoughts

The fact is that the technology industry that invented income tax software can also greatly simplify and facilitate whatever tax system needs we may have in the future, for both consumers and small business, where the vast bulk of compliance burdens would otherwise lie.  Having said this, it is also clear from our experience with millions of taxpayer customers that there is extensive complexity in the tax system that would plainly benefit from simplification and clarification in the best interest of the nation, our citizens, and the government itself. 

Some of the most common difficulty today comes from the use of what may seem to be basic concepts in the current tax code, but which actually represent great confusion for taxpayers, such as “Adjusted Gross Income”, a term which many find inexplicable.  Similarly, the multiplicity of current retirement and other specialized savings vehicles are likely underutilized today due to practical confusion and uncertainty as to the tax status, treatment, rules and differences of the various alternatives.  Likewise, the multiplicity of current tax credits leaves many taxpayers mystified, uncertain which may really apply to them or what the rules may be, which may result in under-claiming of credits for which the taxpayer may be eligible.  We in the tax software and electronic financial services industry significantly help taxpayers sift through the complexity of the current tax code, and minimize their tax liability to only that which they truly owe, but confusion and uncertainty remains. 

Other examples include the Earned Income Tax Credit, and non-cash charitable deductions, which are each becoming more difficult for eligible citizens to claim as these shift to more paper intensive processes.  These are areas of the code that would benefit a great deal from fresh thinking that would bring them into fuller conformity with the nation’s statutory policy preference for electronic tax administration -- that is, to fully apply electronic filing to the process of claiming these credits and deductions, rather continuing a growing presumption that they must be claimed via paper, which can substantially raise costs and difficulty for citizens.  The bottom line is that real movement toward statutory and regulatory reduction of complexity is in everyone’s interest, but broader eligibility for all elements of the code to be available for electronic filing can be an important part of that practical simplification for everyone.

Notwithstanding these opportunities for improvement, easy-to-use software and e-filing has already enabled millions of individuals, families, and small businesses to deal with taxes with a much greater degree of simplicity, at much lower cost, as a central part of taking personal control of their finances.  And looking ahead, the next generation of highly computer-literate young men and women entering the workforce will be the first generation in history to never file a paper tax return.  In fact, the tech-savvy generation is already using the fast and inexpensive electronic tools of web-based tax preparation and e-filing to meet their obligation, viewing this as an integrated part of how they manage and control their personal finances.  They are the future of tax compliance in this country, and the leading edge of a generational change that will help the nation not only meet but exceed the original 80% e-filing objective. 

It has always been said that voting and paying your fair share of taxes are two of the most basic obligations of citizenship.  These really are two of the essential ways we directly participate in our democracy, the ways by which we touch our government and hold it accountable -- even to understand the costs of our government. 

Just this week, in remarks delivered before a tax policy conference at Urban Institute, the IRS Taxpayer Advocate Nina Olson said how important it is to retain the role of an active, engaged citizenry in the process of annual tax compliance in the culture of the United States.  Some others have tried to suggest that the ultimate answer for the United States tax structure is to put the government in charge, from cradle to grave, not only collecting taxes, enforcing compliance, auditing returns, and writing and administering tax regulations, but also acting as the citizen’s tax preparer at the outset of the process, effectively removing the taxpayer from the equation altogether through a Return-Free Tax System. 

Some have estimated a revenue boon, as is being experimented by the California Franchise Tax Board in that state right now, pursuing a strategy that assumes putting government in charge of both ends of the tax process – automatic return preparation at the front end, and revenue collection and enforcement at the back end -- will produce significantly higher revenue receipts from taxpayers overall.  Some have suggested that the tax collector might have little motivation to point out all the deductions, exemptions and credits a citizen might be entitled to, resulting in an unfair individual tax burden.  But the removal of the citizen from the process would have other downsides beyond the obvious risk of paying higher taxes.  As Nina Olson observed: 

“I don’t think the IRS and the government really give credence to that ritual act. For many, many individuals it’s the only time they sit down and look at what happened to them financially over the last year, and I wouldn’t want to lose that in a Return-Free System, because for the broader financial health of the country, that’s an important ritual.”

At this same tax policy conference this week, Eric Toder of the Urban Institute echoed the Taxpayer Advocate’s advice and conclusions:  

“There’s something healthy about that.  I don’t think it should be complicated, but I think there’s something positive about the citizenship ( seeing what they pay annually).”

We agree.  Managing your taxes is an integral element of managing your personal finances, part of both financial literacy and achieving financial self-reliance.  Indeed, in whatever tax policies are adopted over the years in this country, it will be vitally important to retain the citizen-centric character of American Voluntary Compliance that is so unique to our national history and culture, preserving the personal participation of our people in these most basic processes and obligations of individual citizenship.  It helps keep our government accountable and on its toes, and our citizens in charge.