The idea that the more you have, the more you’re expected to contribute in taxes, is a foundation of our income tax system. And there is one government agency that oversees it all: the Internal Revenue Service.
However, the tax code itself, and the IRS, are subject to the will of politicians - who might have special interests of their own. We talk about how politics, wealth, and power influence how people file for their taxes in the first place, how some of the wealthiest Americans have the lowest income tax rate, and who is held accountable for paying their "fair share."
We talk to Eric Toder, Institute fellow in the Urban-Brookings Tax Policy Center at the Urban Institute; Beverly Moran, Professor of Law at Vanderbilt University, where she focuses on federal income taxation, including individuals, partnerships, tax-exempt organizations and corporate; and Joe Thorndike, Director of the Tax History Project at Tax Analysts.
Curious about the history of the income tax? Check out our companion episode, Why Do We Have An Income Tax?
Also, check out The Secret IRS Files, ProPublica’s investigation into the tax records of the .001%.
Transcript
Filing Taxes_HMPass.mp3
Hannah McCarthy: Hi, Nick.
Nick Capodice: Hey, Hannah.
Hannah McCarthy: Nick, Why do we pay income taxes? Why are we expected to give some of the money we earn to the government?
Nick Capodice: Whew. Well, I'm not a big time city lawyer, Hannah, but I feel like it's like the government is expected to do something for us in return for those taxes. Right. By making and enforcing laws, providing security and protection, [00:00:30] giving us ways to live and work and travel safely, and to help us access basic things like food or shelter.
Hannah McCarthy: Yeah, that's the idea. But there's also something really important about our tax system. We put a lot of emphasis on fairness.
Archival: How can you judge if a tax is fair to the taxpayer? Well, most people today accept the principle that a person should be taxed according to his ability to pay. As a result, we have a graduate [00:01:00] or progressive income tax.
Joe Thorndike: Look, I mean, no one likes paying taxes, right? We all have to do it because somebody has to pay the bills.
Hannah McCarthy: This is Joe Thorndike. He's the director of the Tax History Project. Civics 101 talked to him back in 2017.
Joe Thorndike: But that means that we want to make sure that everyone else is paying their fair share. Right? I mean, that's the that's the central trope of tax paying in America, their fair share.
Hannah McCarthy: The idea that the more you have, the more you are expected to contribute has been built into our income [00:01:30] taxes from the beginning. And there's supposed to be one government agency that oversees it all, the IRS.
Archival: The Internal Revenue Service, maintains a streamlined operating organization which handles yours.
Hannah McCarthy: And this idea might make sense on paper, but in practice.
Archival: It is tax season, a dreaded time for some Americans feeling burdened as they complete forms that many argue have become [00:02:00] too complicated.
Archival: The IRS kicked off this tax filing season with approximately 6 million unprocessed returns from last year.
Archival: This morning, an investigation reveals just how little some of the richest Americans pay in taxes. It's wealthy taxpayers with less transparent sources of income who are less likely to pay. They can hire lawyers and accountants to help sidestep the tax collector.
Archival: Many lower income people paid for tax filing when their returns should have been free.
Hannah McCarthy: This is Civics 101. [00:02:30] I'm Hannah McCarthy.
Nick Capodice: I'm Nick Capodice.
Hannah McCarthy: And today we're talking about paying income taxes and how the system we designed built around everyone paying their fair share actually works when politics, wealth and power get involved. By the way, if you're curious about why we have an income tax in the first place, we have got a whole episode on that. You can find it at our website, [00:03:00] civics101podcast.org.
Nick Capodice: Yeah, Hannah, I'd love to actually start with the IRS itself. I feel like they kind of get the fuzzy end of the lollipop. They're the one government agency that everyone loves to hate.
Joe Thorndike: Well, you know, officially it's part of the Treasury Department. It is not the largest federal agency, but one of the largest. And more to the point, it's probably the most important for most regular Americans. This is the the main point of contact between Americans and the federal government. [00:03:30] I mean, if you think about it, what other agency touches your life so directly, you know, and threatens to put you in jail regularly? I mean, it's it's unusual, right?
Hannah McCarthy: And the Internal Revenue Service actually used to be called the Bureau of Internal Revenue.
Nick Capodice: Huh. So why did they change their name?
Joe Thorndike: It was renamed in the 50 seconds, partly to just because they were in the middle of a big reorganization and wanted to communicate that, but also to try to say, hey, we're about service. You know, we're not all about putting people in jail. We're also about taxpayer service. And that is actually a big part of the agency's [00:04:00] job because you'll hear this sometimes we have a voluntary tax system that means that our compliance is done by us, not by the agency. So they've got to be they've got to be helpful to us.
Archival: It is only through your willingness to voluntarily fill out your personal and business returns and pay your taxes, that the job of collecting and processing is accomplished as quickly as it is.
Joe Thorndike: I call it, you know, like fiscal citizenship is a way to think about it. And the [00:04:30] IRS is the agency that that makes that real. It makes sure that we are all doing what we're supposed to do and that none of us are shirking our responsibilities.
Nick Capodice: Okay. Joe says voluntary, but that implies that you can choose not to do it. And yeah, sure, you can choose not to pay your taxes, but that is against the law.
Hannah McCarthy: It is.
Hannah McCarthy: Think of it this way Some of our taxes are compulsory. They are taken automatically out of a paycheck like the payroll tax, for example, or added to the price of something like a sales tax. [00:05:00] But our income tax is a little more complicated. You do have to pay it, but you have some freedom and responsibility about how much you pay and when you pay. All right.
Nick Capodice: So is this why our income taxes aren't just automatic like we actually have to fill out a tax return?
Hannah McCarthy: Tax returns are not exclusive to the United States, but they are unique here because of how complex they are. In some countries, income tax [00:05:30] is a simple compulsory tax, and most people do not have to think much about it at all. Employers and financial institutions automatically deduct taxes from people's income and send it directly to the government.
Nick Capodice: And that is withholding, right?
Hannah McCarthy: That's what it's called. And the taxpayer might get a receipt at the end of the year, but there's not much else they need to worry about.
Nick Capodice: But we have withholding here in the US.
Hannah McCarthy: We do. The IRS does have a lot of information already about how much money you earn and [00:06:00] how much you're paying in taxes right out of those earnings throughout the year.
Eric Toder: Now, they know a lot about what our income is because they get reports from our employers.
Hannah McCarthy: This is Eric Toder. He's an institute fellow at the Urban-Brookings Tax Policy Center. He worked in tax policy for the Treasury Department, at the IRS and in the Congressional Budget Office.
Eric Toder: They get reports from our financial institutions about the interest and dividends we receive. We get reports about the retirement [00:06:30] pensions we get. So those numbers go to the government as well as to the taxpayer.
Nick Capodice: And then around tax season, we get a receipt for that.
Hannah McCarthy: Yeah, like the W-2, which comes from your employer and says, Hey, here's how much you made and here's how much you already paid in taxes.
Nick Capodice: Okay, So part of filing your tax return is confirming those numbers. And then if you owe more to the government, you pay it or sometimes sometimes you get money back.
Eric Toder: But there are a lot of pieces of information. [00:07:00] The government doesn't know if you're self-employed, if you run your own business, they don't know how much income you make. You get various deductions. Our tax system is very complicated. There's a lot of allowances. They don't know how much we gave to charity unless we tell them. So you can't claim that deduction. So there's a whole bunch of information that you need to supply.
Hannah McCarthy: And that gets us to the two other steps of the tax return. The first is incentives. Like if you donate it to charity or [00:07:30] bought an electric car, incentives usually make your tax bill go down and a lot of times they show up as a refund or a check straight from the government. You may also get a refund if you paid too much in taxes during the year.
Nick Capodice: All right. What's the second step?
Hannah McCarthy: The second step is to report any additional income you earned that should be taxed. This usually makes your tax bill go up.
Nick Capodice: All right. So when it comes to a voluntary tax, you don't have to apply for incentives, [00:08:00] but you can You do, though, have to report all of your taxable income, even if it doesn't show up on your W-2.
Hannah McCarthy: You do. And the IRS is supposed to help you do that correctly.
Beverly Moran: So the Internal Revenue Service really is tasked with three different things.
Hannah McCarthy: This is Beverly Moran. She's a professor of law and sociology at Vanderbilt University, where she focuses on federal income taxation.
Beverly Moran: One thing is to get you those returns, get you to fill out those returns, [00:08:30] process those returns, get you your money, get the money from you. And about a third of its budget goes to that. Another is be a friend, a helper and a support to all the taxpayers who just want to comply. So be there to answer questions, provide lots of educational materials, and about a third of its budget goes to that. And then the other third is enforcement. Okay.
Nick Capodice: I want [00:09:00] to talk about enforcement for a little bit. Are Americans generally good about paying their taxes? Because I feel like the looming threat of an audit has been part of our pop culture. As long as I've been alive. And we hear all the time about people getting in trouble for not paying their taxes.
Joe Thorndike: You know, Americans are really remarkably good about paying their taxes. We have very high compliance rates relative to other countries. But that doesn't mean we would if no one was looking over our shoulder.
Hannah McCarthy: This is Joe Thorndike [00:09:30] again.
Joe Thorndike: It's a it's a delicate balance between enforcement and voluntary compliance, supported by the agency with help, you know, and information. The agency has to do both. It has to make sure that we understand the rules and that we, you know, are trying to comply with them as best we can. They also have to do, you know, the other side of that is the stick where they say, and if you don't do it, we're going to come for you.
Hannah McCarthy: And here's Eric Toder.
Eric Toder: As far as the compliance issues, our tax gap, according to IRS estimates, are roughly 15% [00:10:00] of of taxes owed are not paid in a timely manner. Some of that money is recovered later by enforcement.
Nick Capodice: So the tax gap just means the percentage of taxes that aren't actually paid. And how much money is that for 2021?
Hannah McCarthy: The estimate was about $600 billion. Put another way, this is 3% of the GDP, the gross domestic product.
Nick Capodice: That is not an insignificant amount, especially when entire government agencies are funded by [00:10:30] a lot less than that. So what does this look like?
Eric Toder: There are three components of the tax gap. There's people who have a responsibility to file but don't file in taxes and owe money. There's people who file their taxes or report their income or their tax liability incorrectly underreport how much they owe. And there's people who might report how much they owe but just don't pay.
Nick Capodice: Which one of these is the most common?
Eric Toder: Of those three components, about 80% is underreporting. [00:11:00] So that's the biggest component. The biggest source of underreporting is in the individual income tax system and the self-employment part of payroll taxes. And the biggest group of people who underreport are small business people. Why is that? Well, if you're a wage earner, the government withholds wages from your paycheck. And your employer sends a W-2 to the IRS. So the IRS knows what your wages [00:11:30] are. So the areas in which people can most easily avoid income is if they operate an independent business. They have self-employment income and don't get a 1099. And that's where, you know, especially if you're operating in cash, it's easy to hide your income.
Nick Capodice: What does he mean by hiding your income?
Hannah McCarthy: There are a lot of ways to hide your income. The most obvious example is simply not putting it into a financial institution [00:12:00] like a bank that will send that information to the IRS.
Nick Capodice: So like, instead of putting it in your bank account, you just keep it in a safe in the basement?
Hannah McCarthy: Sure. Or a metaphorical safe, like a trust or a company you set up that may provide goods or services, but its real business is holding your wealth or opening an offshore account in another country that does not report to the IRS.
Nick Capodice: Yeah, but the IRS still has ways of investigating that, right?
Hannah McCarthy: They do. And that's where enforcement [00:12:30] comes in. Checking in on how much people or corporations claimed they earned an income and how much they paid in income taxes and whether there is any discrepancy in between.
Nick Capodice: Like, hypothetically, if someone said they only made 50 grand a year, but they just bought a $5 million house and a new car.
Hannah McCarthy: That might be something to look into. Or if someone just does not fill out their taxes at all.
Eric Toder: You know exactly how much you owe. And those sources of income, how much you have to report. And [00:13:00] if you're at all savvy, you know, the government knows that, too. And they have computer matching programs that can check on you.
Nick Capodice: So an audit.
Hannah McCarthy: Sometimes it's not even officially called an audit. I think a lot of us have this idea in our minds that if there's an issue with our tax return, an IRS agent is going to show up at our door. But that's not the reality for a lot of people, especially when the issue is easy to fix. The IRS has ways of investigating your finances and then follows up if something does not seem right. [00:13:30]
Eric Toder: They don't have to send an IRS agent. They just can send you a letter. You reported this. Our records show you owe this. Please explain why you didn't pay. That's not even counted as an audit.
Hannah McCarthy: A tax return might require a lot of information. Meaning there are a lot of ways people can mess up their tax returns, intentionally or not. And the tax gap isn't just because of income taxes. There are other taxes like estate or gift taxes that contribute to that gap.
Nick Capodice: Okay, [00:14:00] So most of the tax gap is because of underreporting. And for someone like you or me, Hannah, this might not mean a full scale audit, but what about for like a corporation or someone who has millions or billions of dollars in income?
Hannah McCarthy: Okay. So you are touching on an important distinction here, how tax enforcement like an audit, looks for the majority of Americans versus how tax enforcement looks for extremely wealthy people and corporations. About 28% [00:14:30] of the tax gap comes from the top 1% of taxpayers. So wealthy individuals and corporations contribute to the tax gap in slightly different ways. But they both have one advantage that I want you to keep in mind that we, the average taxpayer, do not political clout and influence.
Nick Capodice: All right. So how do the wealthiest Americans like Jeff Bezos, for example, the CEO of Amazon, one of the richest men in the world, [00:15:00] somehow end up paying basically nothing in income taxes? How does that happen?
Hannah McCarthy: They're really good at making their taxable income look smaller than it is.
Archival: Newsflash, John, the super rich, they're not like us. The tax code is designed to favor the investment income of the mega wealthy over the regular earnings of everyone else.
Hannah McCarthy: These individuals are more likely to have the type of wealth that is not subject to income tax in the first place, like stock and [00:15:30] property.
Nick Capodice: So they're making their billions in various ways that most of us aren't making money.
Hannah McCarthy: And on top of that, they can afford to hire teams of tax experts that help them maximize the benefits of all of those incentives that lower their tax burden. These are incentives that we have to donating to charity or putting money in a retirement account like an IRA.
Nick Capodice: Alright, so if one of us had an IRA, we might put 4% of our income into it every year, and that's probably a few thousands of dollars a year, if you're [00:16:00] lucky.
Hannah McCarthy: Yeah, but if you're someone like Peter Thiel, the founder of PayPal, you might put millions of dollars into that IRA.
Archival: Tech mogul Peter Thiel turned a Roth IRA account into a $5 Billion tax free piggy bank and not.
Hannah McCarthy: Pay income taxes on it. And then you can withdraw that money later on. You may pay some fees for doing so, but it is exponentially cheaper than paying income taxes in the first place.
Nick Capodice: And this is [00:16:30] something that's come up in Congress. I remember there was legislation about capping these IRAs back in 2022.
Hannah McCarthy: And that is the thing about taxes, right? They're political. Our tax policy is determined by elected officials. So when we find out that certain people might be exploiting tax policies in ways that go far beyond their intended purpose, it's up to politicians to patch the holes if they want to.
Beverly Moran: And there's a big incentive [00:17:00] for those people, the very wealthy people, not to have a strong IRS, because a third of what the IRS is supposed to do is let Congress know when this, you know, stuff is going on so that if it's legal, the law will be changed, pursue it. If it's not legal, Right. Expose it to punish it. So the fewer lawmen there are out there. Right. The [00:17:30] better for the gangsters to do what they want to do.
Eric Toder: Now, there's also an issue with corporations, with large corporations, but that's a completely different problem. Large corporations generally do not hide their income, but they do engage in transactions to avoid tax, many of which are legal, but some of which cross the line and some of which are arguably on one side of the line or the other side of the line. So [00:18:00] in some sense, audits of large corporations are kind of like a bargaining game that the return the corporation submits as an opening bid. The IRS agent comes in and says, No, no, you owe this. And often this stays in the courts for years.
Hannah McCarthy: So the IRS budget was a little less than $14 billion in 2022. But that money has to be split between collecting [00:18:30] taxes, helping people file their tax returns and enforcement. So only a fraction of that money can be spent investigating any one case. Now, put that up against an individual or corporation that has billions or even trillions of dollars.
Archival: When a formula or a computer code is registered abroad, say in Zug, a US company is allowed to claim that a lot of its taxable profits are there, even if most of its sales are in the US.
Hannah McCarthy: For [00:19:00] example, take a company like Microsoft. The IRS investigated Microsoft in 2012 for avoiding US taxes on $39 billion of profit that it had moved to Puerto Rico. And Microsoft was like, this was a business decision, not a tax evasion scheme. But the IRS wanted to prove that it was done to avoid taxes. So they launched the most expensive IRS investigation to date.
Nick Capodice: How'd it go?
Hannah McCarthy: Well, Microsoft suddenly [00:19:30] had IRS agents digging through their financials, but also emails the behavior of the executives.
Archival: Microsoft products are primarily developed in the United States. They benefit from US research and development tax credits. Every time, though, a microsoft product is sold, 47% of the sales price is sent to Puerto Rico.
Hannah McCarthy: The IRS was being aggressive. It knew that it had the power to investigate, and it put as many resources as it could into doing that. And [00:20:00] that scared Microsoft and other corporations like it that had not experienced the IRS investigating this aggressively.
Nick Capodice: So what did Microsoft do?
Hannah McCarthy: So Microsoft started lobbying Congress to remove some of the IRS investigative powers, and other corporations joined in.
Nick Capodice: And I got to just say, this is in 2012, just two years after the ruling in Citizens United, which gave corporations and wealthy individuals the ability to spend unlimited money on elections. [00:20:30]
Hannah McCarthy: Yep. And eight years later, while the IRS was still investigating Microsoft, Congress passed legislation that limited the IRS ability to conduct these investigations. And by the way, ProPublica has done some amazing reporting on this. And more broadly, how corporate and private interests impact our tax laws. You can find a link to that in our show notes at Civics101podcast.org.
Nick Capodice: And just going back to wealthy individuals for a minute, they also have the ability to put their hands on the legislative process. [00:21:00] Yes.
Hannah McCarthy: And indeed they do.
Archival: A new report finds the IRS is auditing people making more than $200,000 less than others.
Eric Toder: But the IRS is doing less audits of corporations than they used to. They're doing less audits of high income taxpayers. They're doing less audits of partnerships.
Nick Capodice: But what does that mean for you and me, the everyday people who just don't have a ton of wealth, who are just trying to follow the law, pay our taxes on time, and maybe, just [00:21:30] maybe get some of those incentives that we're entitled to.
Hannah McCarthy: We'll get to that right after the break. But before we do, you hear the term tax deductible donation quite a bit. And we're even talking about it on this particular episode. And I'm just here to remind you that you can make just that two Civics 101 anytime you want. You can go to our website, click the donate button, and you can skim a little bit off the top of your taxes at the end of the year. And you know, you'll be supporting [00:22:00] a show about democracy and American government that truly believes that people should know the truth about the place where they live. So what's wrong with that?
Nick Capodice: Nothing at all. You do it at Civics101podcast.org. All right, Hannah, so far we've talked about how the IRS is supposed to make sure everyone pays their taxes and help people do it, and that this idea of paying our fair share isn't quite as fair as it sounds, because wealthy individuals and corporations have been able to both [00:22:30] weaken the IRS and influence tax policies that benefit them. So what effect has that had on the IRS and us?
Hannah McCarthy: This is Eric Toder again.
Eric Toder: Over the last ten years, there's been a substantial reduction in the funding of the IRS and in the resources available to the IRS.
Hannah McCarthy: And funding cuts haven't just affected investigations. They've affected that other thing the IRS is supposed to do help people pay their taxes.
Archival: Fewer [00:23:00] than 15,000 employees handled over 240 million calls in the first half of last year. That's just one person. For every 16,000 calls.
Eric Toder: Taxpayers get much worse service when they try to call call the IRS for questioning and get the full answer.
Hannah McCarthy: Nearly everyone pays taxes, so our tax base is huge. That's a lot of people to worry about and a lot of complicated taxes. This is Beverly Moran.
Beverly Moran: You [00:23:30] know, you want to talk about stories. I used to do my taxes by an and I would do a lot of people's taxes by hand. And the reason why I would do it is because my job was to teach people about taxes. Right? So I felt like every year I should like, do my taxes, do some other people's taxes who are different situations, not rely on an accountant or software like actually [00:24:00] deal with the paperwork. This is how long ago it was in 1990. I lived and worked in three different states. I sold a house and I bought a house and my tax return was 58 pages long. And doing it by hand, I had to make sure that every time a transfer like a number from page five to page 32 or whatever, it had to be. Right. And and I just knew [00:24:30] and I'm proud of my ability to do like math in my head was like, no, I have to use software. And I felt defeated. Right now, if I have to use software. Why are you asking people who may not have access to computers, may not have access to a desk or a place where they can keep a whole bunch of paperwork, may be working 2 or 3 jobs. Why [00:25:00] does a person like that have to make a decision in their life? Am I going to do my own taxes or am I going to go to somebody else?
Nick Capodice: And the IRS is trying to oversee all of this while also dealing with political pressure and ups and downs in funding and resources.
Hannah McCarthy: And the millions of us who are just trying to file a tax return to comply with the law and get the deductions and tax credits we're entitled to. Those of us who don't necessarily have a tax expert on speed dial, [00:25:30] we feel the effects.
Beverly Moran: There's something called the Taxpayer's Advocate. And one of the things that they do is they produce a report. I think it's every six months sort of on what's the state of what's going on in terms of relationship between taxpayers and the IRS. Right. And they've reported that 90% of the phone calls that go into [00:26:00] the IRS are never answered. And then the 10% that are answered, that doesn't mean that you necessarily got the right department or you're not cut off in the middle of the phone call or you get the wrong answer. And on top of it, the IRS just recorded that they're looking into software because what they discovered was that tax preparers have been buying software that allows them to jump to the head of the line. [00:26:30] Like, you know, when you call at seven 35in the morning and you get told that, you know, there's a 30 minute wait and four hours later, you're still on the phone. It's because these tax affairs have paid for software and they jump to the front of the line. So if you're just sitting there, a taxpayer, you don't know what benefits. You have to you don't know if you've made a mistake. You can't get anybody on the phone.
Nick Capodice: So you could spend an entire day or [00:27:00] multiple days just trying to get help. And honestly, it just feels really unfair that it's so hard to be able to do something that you're legally obligated to do because there aren't enough resources to do it. The people at the.
Beverly Moran: Irs are not trying to hurt anybody. And yet you could understand why millions of people hate them and it's not their fault. It's the fault of this system that they're in.
Hannah McCarthy: 90% of taxpayers rely on the outside help of tax experts [00:27:30] or software. You don't have to rely on help. You can fill out your tax forms by mail or over the phone, but many people do not do that. This gets us to how we ended up with the prevalence of tax preparation software in the late 90 seconds and early 2000. Businesses offering tax software started popping up for anyone with access to a computer and the Internet, and they helped you fill out your tax return. And in 2001, the IRS was tasked with overseeing tax preparation software. This is something people are clearly [00:28:00] using, right? So the IRS should have some oversight. One of the mandates was to make sure the software was available and accessible for people who needed it.
Beverly Moran: Congress passed a law saying that the Internal Revenue Service had to make sure that taxpayers could file their returns for free. And from that time till now, the rule has been that people who are below a certain income level, [00:28:30] which I believe for 2022, was $73,000, should be able to go on line and file their taxes for free.
Hannah McCarthy: Basically, Congress passed a law that said that at least 70% of people had to have access to free tax preparation software. And to figure that out, the IRS calculates a max income that 70% of Americans fall under. That's where that $73,000 comes from. If your income was less than 73,000 in [00:29:00] 2022, you qualify for a free tax return.
Nick Capodice: Did the IRS develop its own software?
Hannah McCarthy: Not exactly.
Beverly Moran: What happened was that the IRS by that time was already being squeezed. Right. And so what it did was it made a contract with all these not all of them, but about ten companies so that those companies would provide the free filing.
Nick Capodice: All right. So the IRS outsourced it. They did. [00:29:30]
Hannah McCarthy: These companies, many of which offer tax preparation software for fee, normally agreed to have tax software that people could use for free, which people could find if they went to the IRS website. The problem is that these companies are just that, you know, they're businesses. They want to make money.
Nick Capodice: Okay. But if 70% of people could go to the IRS website and find free tax filing software, what do these companies get out of it?
Hannah McCarthy: Well, for one thing, they get name recognition. They get to [00:30:00] advertise as a company that offers free filing and that boosts the number of people who will seek them out without going through the IRS website, especially if they buy thousands of commercial spots, you might click on an ad or Google free Tax return and end up on their website that way. And once they have you on their website, they can try to make you pay for tax services instead.
Beverly Moran: And what happened? These companies, at least according to the Treasury Department, they [00:30:30] put algorithms in their software that constantly moved people from the free site to the paid site. And you can just imagine if you've done the whole return and now you see you're going to get a $2,000 refund, But all of a sudden this return that you thought was free is $50. And they're telling you, oh, you don't even have to pay the $50, we'll take it out of your refund. You might just throw up your hands and say, okay, take the $50, [00:31:00] You know, And that's what they're counting on.
Hannah McCarthy: And we've got to give credit to ProPublica. Again, they did an investigation into the major software companies that proved that they were making it very, very hard to find and stay on the free file program. For example, TurboTax even went as far as removing its free file page from Google's search results. So if you Googled TurboTax or TurboTax Free File, you would never get a result that actually took you directly to that page.
Nick Capodice: So basically, [00:31:30] there is absolutely no way to get to the free file software unless you went through the IRS. Even if you clicked on a link from TurboTax that said, hey, file your taxes for free.
Hannah McCarthy: Exactly.
Nick Capodice: Well, that that's like that sounds patently illegal. I mean, if you're going to offer a certain software, but make it basically impossible for people to get to that software, you're not really offering that software.
Hannah McCarthy: Yeah. And the inspector general of the Treasury and the taxpayer advocate called these companies out. [00:32:00] Congress investigated.
Beverly Moran: And so the the government was trying to force these companies to do. Right. What did they do? They left the program and then they went and did all sorts of. Advertising, which everybody's seen like that. Free, free, free, free, free, free, free.
Archival: That's right.
Archival: Turbotax Free is free, free, free, free, free.
Beverly Moran: And they did the same thing. So that's still 70% of people who file [00:32:30] taxes are not owned by companies or people. Right. Should be eligible for that program. And less than 3% get a free return each year.
Hannah McCarthy: By 2021, both H&R Block and TurboTax had pulled out of the Free File program, so they are no longer mandated by the government to provide free tax filing for anyone. They may have free filing software as part of their business and they may advertise it, but that does not mean it will be easy to find. [00:33:00]
Nick Capodice: But there are still other companies that are mandated to provide free filing software, right?
Hannah McCarthy: Yes. And Beverly has some advice for how to find these services and some general wisdom for all of us taxpayers who are just trying to file our taxes correctly.
Beverly Moran: Okay. So the first thing is people should know that for most people, really and truly, you can go on the IRS website, you can get a company that will [00:33:30] walk you through it. They give you two choices. One is they give you a return and you just fill it out yourself. And the other is it's it's like other software. They ask you questions and based on the answers to those questions, they fill in the amounts.
Nick Capodice: So one is a more hands on approach where you fill in the answers and then they file the return for you.
Hannah McCarthy: Yeah. Or they give you the paperwork that you need to fill out by yourself.
Beverly Moran: It really is possible to get a free return, [00:34:00] so you should not allow yourself to be deterred in that, you know, if it pops up and you're supposed to pay, you're on the wrong software and you need to just move over to the next software. If you make less than $73,000 and you don't have like crazy things going on, like you just inherited $1 million, the chances are very high that you have a right to a free return.
Nick Capodice: Well, if I inherited $1 million, I think that my [00:34:30] first phone call would be to an accountant to figure that out. Anyways.
Beverly Moran: Number two, always go to the IRS website for the free file. Start at irs.gov. Do not do a search engine search because you will be guided to the wrong place.
Hannah McCarthy: Our producer googled free file taxes and the first two results were ads for tax preparation software from TurboTax and H&R Block that promised free online tax filing, which, as we just learned, they [00:35:00] have no obligation to provide anymore. However, the first non-ad result was irs.gov.
Beverly Moran: Number three, you should have all your quote unquote paperwork. And for most people, that paperwork is going to consist of W-2 forms. Don't be shocked if you only have a few pieces of paper. You're only supposed to have a few pieces of paper.
Nick Capodice: Okay. Have all your paperwork. [00:35:30] What else?
Beverly Moran: Also understand that if you're not John Dillinger.
Archival: This is John Dillinger, the greatest bank robber of all time.
Beverly Moran: You really don't need to be that afraid of an audit. I mean, most of what you need to fear about an audit comes from the fact that the IRS is underfunded, which means that you should always make sure you have the name and the identification number [00:36:00] of the person you talked to. You should keep track of phone numbers. If you put anything in the mail, you should make sure to keep a copy just because even though you're dealing with people of goodwill, all they're sort of in chaos over there and you don't want to get caught in the chaos or you don't want to add that to their chaos or have their chaos come into your life.
Hannah McCarthy: This [00:36:30] episode was produced by Christina Phillips with help from me, Hannah McCarthy, and Nick Capodice. Jacqui Fulton is our producer. Rebecca Lavoie is our executive producer. Music In this episode by Baegel, Poddington Bear, Anemoia, Kesha, Mama Zula, 91Nova, [00:37:00] Metre and Arc du Soleil. If you liked this episode and even if you didn't consider leaving us a review on Apple Podcasts or wherever you get your podcasts. We read them all. They really do help us. We love your feedback. Civics 101 is a production of NPR, New Hampshire Public Radio.