COMMENTARY: The complexity of tax filing is harming Oregonians, but a solution is coming

By JUAN CARLOS ORDÓÑEZ  June 4 || OREGON CAPITAL CHRONICLE

Barely had tax season come to a close when we were reminded — in case anyone could forget — of how absurdly complex tax filing has become.

First came the news that some 12,000 Oregonians who paid TurboTax to file their tax returns overpaid in state taxes because of an error in the software. Next, we learned that some 93,000 Oregon families eligible for the Earned Income Tax Credit — a key anti-poverty strategy — did not claim it, many of them deterred by the complexity and cost of filing a tax return.

But there’s also good news: A new system is coming that will allow people to easily file their tax returns at no cost. Such a system is long overdue.

Most people know first-hand the headaches that come with tax filing. It takes on average about 13 hours and $270 to complete a federal tax return, according to the Internal Revenue Service. That’s not even counting the added time and cost of filing a state tax return.

As often happens, the problem weighs most heavily on those with the fewest resources, like families eligible for the Earned Income Tax Credit. An anti-poverty program that has long enjoyed bipartisan support, the EITC can be worth thousands of dollars for low-income families scraping by on low wages. But to get the credit, they must file a tax return. And that’s the rub.

About one-third of Oregon families eligible for the credit did not claim it in 2020, the year with the most recently available data. That was the worst showing among all states. But the national figure isn’t great either, with about one-quarter of eligible families leaving money on the table that could make life a bit easier.

The problem of eligible families not claiming the credit is directly tied to the complexity of tax filing. Research shows complexity leads eligible families to avoid the hassles of filing taxes, creates confusion about eligibility, imposes transaction costs and creates fear of errors and potential penalties resulting from those errors.

The woeful state of our current tax filing system, however, is unnecessary. A better system begins with having the Internal Revenue Service and Oregon Department of Revenue provide an online tool for people to prepare and file their taxes directly with the agency — the same type of service TurboTax offers, only free.

To make life even easier, tax agencies could also provide pre-filled tax returns, basically eliminating all the work involved in tax filing for many people. The IRS and Department of Revenue already have your W-2s, 1099s and other information used to fill out your return. Researchers estimate that the IRS can produce accurate returns for nearly half of all filers. For most of the rest, the IRS can produce a draft return requiring only one change, such as updating the address or completing an additional schedule.

Oregonians receiving a pre-filled return would be able to accept it, amend it or reject it and prepare a tax return from scratch. For many people, the introduction of pre-filled returns would make tax filing a cinch.

If it’s possible to have a simple and free tax filing system, why doesn’t it exist? Because a few corporations, and one above all, have fought tooth and nail to prevent that from happening.

Intuit, the maker of TurboTax, rakes in billions from tax filers every year. Thanks to reporting from ProPublica, it’s now clear the extent of the company’s lobbying and dirty tricks to derail the creation of a simple and free tax filing system.

In a hopeful development, the just-completed tax filing season saw initial steps toward a simple and free tax filing system. Both the IRS and Department of Revenue launched online tools allowing people to prepare and file returns directly with the agencies. Known as direct File, the public option guides users by asking a series of questions. Customer-friendly features such as live chat ease people through the filing process.

More than 140,000 filers used IRS Direct File, collectively saving themselves $5.6 million in tax preparation fees. As for its quality, the vast majority of users gave IRS Direct File high marks. The tool created by the Oregon Department of revenue also received positive reviews by thousands of users.

In its first year, IRS Direct File was available only in a dozen states. But in what may prove to be a watershed moment, the IRS recently announced that the program is going nationwide next tax season and will be permanent, meaning that Oregonians too will have access to this free tax preparation and tax filing tool going forward.

Achieving a simple and free tax filing system ultimately requires integrating the federal and state filing tools, so that tax filers need only input their information once. It requires pre-filled tax returns. And it requires greater investments in tax assistance programs for working families with more complicated returns.

Tax filing is our civic duty, but fulfilling that obligation should not come with unnecessary costs and headaches. The people of this nation and state deserve a simple and free tax filing system.

  Juan Carlos Ordóñez is the communications director of the Oregon Center for Public Policy, as well as the host of the podcast Policy for the People. Outside of work, Juan Carlos likes to spend time tending to his garden.