September 15, 2015

In Response to Dylan Matthew's Attack on the Tax

In this week's session, I'll address an article published by Dylan Matthews on news website Vox earlier this month attacking H&R Block and its position as a Tax Prep Company. We'll post a link to the piece below.

Great piece, Dylan. Well researched. Nice writing. Lots of hyperlinks. Awesome headline. A clear agenda without stating both sides of the story.

Upfront, I am no big fan of H&R Block, they are a competitor of ours. I respect them even if I don't think their model is the future of the industry. Their founder Henry Bloch is an inspiring entrepreneur whom I look up to. They clearly are big and powerful and have a gigantic lobbying budget. They absolutely have much to gain by the changes to the law and that very may well be their motivation for lobbying to do so, however...

Point by point, here we go. 😉

Title: H&R Block snuck language into a Senate bill to make taxes more confusing for poor people

Mario: Did Buzzfeed write that for you? That implies that H&R Block writes our laws, not our government. And taxes can be confusing for everyone, not just poor people. I'm sure they don't appreciate you implying that they are not capable of reading a handful of additional questions on a tax form.


Dylan: H&R Block's entire business model is premised on taxes being confusing and hard to file.

Mario: Their business model is based on most people wanting a service of someone to do a tedious task for them. A task that in itself is a hard one for most people who aren't financially savvy or (in today's age of software) completely comfortable preparing a tax return themselves online. H&R Block started out in 1955 when tax returns were much simpler and even so back then, people didn't trust the IRS (the federal government) to prepare their tax returns for them so they turned to private industry which simply does it better and more efficient.


Dylan: For example, the Obama administration has pushed for automatic tax filing, in which the IRS uses income information it already has to fill out your tax return for you. That would save millions of Americans considerable time and energy every year, but the idea has gone nowhere. The main reason? Lobbying from H&R Block and Intuit.

Mario: In many cases, when the IRS files a return for a taxpayer who hasn't filed it themselves, the IRS files the return in favor of the government and not the citizen. They don't necessarily do this maliciously, they just don't know the taxpayers situation (expenses, deductions, basis, etc) and cannot accurately do so. It is all taxpayers responsibility to file their returns, so the IRS is justified in filing for them when someone doesn't file, however if the IRS filed everyone's return and people didn't have the opportunity to file themselves, there would be billions of dollars less in tax refunds that these taxpayers deserve and get rightfully so by preparing their own return or trusting a tax professional to do so.


Dylan: But H&R Block's latest lobbying effort is even more loathsome than its opposition to automatic filing. At the company's instigation, the Senate Appropriations Committee has passed a funding bill covering the IRS whose accompanying report instructs the agency to at least quadruple the length of the form that taxpayers fill out to get the Earned Income Tax Credit.

Mario: You are failing to mention are a couple of key items here. First off, there are currently dual standards for filing for an Earned Income Tax Credit. A taxpayer who is self filing their returns is required to answer substantially less questions in order to qualify for the credit if they are self preparing their return than if they are required to answer if they are using a tax professional to prepare their return. The IRS instituted this requirement for the Form 8867, Paid Preparer's Earned Income Credit Checklist to be filled out AND electronically filed with all paid preparer tax returns starting in 2012 to combat some of the $16 - $19 billion dollars of EITC payments it makes yearly improperly due to fraud or errors. Some of that fraud is being done by outright criminals, some by tax preparers and some by taxpayers who are gaming the system. Currently, approximately 60% of tax returns filed nationwide are prepared by tax professionals while 40% are self prepared. Tax professionals have fiduciary duties to make sure that tax returns being prepared are not fraudulent. Paid preparers must meet due diligence requirements in determining the taxpayer's eligibility for the EIC. The whole reason for the change to require the 8867 was to combat some of this fraud. And it has worked. Why shouldn't those self preparing be held to the same standards?


Dylan: The EITC is awesome, and this makes it harder to get. It is hard to adequately express how despicable this is. The EITC is one of America's premier anti-poverty programs. 

Mario: I agree with you is a great program when and where it is being used properly. The problem is that it also doling out money to many that don't deserve it or are committing fraud. These changes don't make it much harder to get for those that deserve and really need this awesome credit.

Questions on the newly proposed form for self prepared EIC eligibility should not stop those in need of this program from filing to receive their Earned Income Credit of up to $6,143. Clearly this program helps those in need. But is answering a handful of additional questions to truly determine if they qualify too much to ask someone receiving a credit so large that is funded mostly by the middle class?


Dylan: The EITC is awesome. But because it offers refunds for people who otherwise don't make enough to file taxes, the EITC expands the market for parasitic tax prep companies like H&R Block and Intuit. Currently, recipients only have to fill out a single-page form, and the IRS operates free tax preparation centers for low-income people having trouble completing their returns. But that hasn't stopped commercial tax preparers from swooping in, and currently two-thirds of EITC claimants pay to have their returns prepared. Commercial preparers charge hundreds of dollars in fees, so a huge chunk of EITC benefits are going to these useless garbage companies, rather than to actual poor people.

Mario: "Parasitic tax prep companies"? Tell us how you really feel. 😉 Why all the hate towards free market companies? The changes in the proposed laws your article talks about do nothing to stop people from using free tax prep centers that the IRS and other organizations operate. Clearly, those who qualify to have their taxes prepared at a free center and yet still choose to goto a paid service are making that choice on their own and not being forced to go there. Instead of calling free market companies parasitic, maybe realize that they are more convenient, or that the taxpayers don't trust the government to prepare the returns, or that they like the experience and want a professional to prepare their returns. Do you call plumbers or car washes or hair salons "garbage companies"? Tax prep companies are providing services that people prefer not to do themselves just like those and dozens of other service providers. Low income people and all people have choices on where they can spend their money in our free society. And many of them do not have computers to prepare the taxes themselves and the wait times at the free centers are horrendous in many cases. Have you ever been to one of these centersDylan? These centers also cannot offer tax planning advice. The tax industry also employees approximately 1 million people to service those who want help preparing their taxes. Everyone is not comfortable with numbers or technology to do their tax returns themselves. Everyone might not want to spend hours waiting in a government sponsored office to get their taxes done. Choices = freedom. Not sure what you are calling for when the market is speaking loudly that they prefer to use a paid preparer.


Dylan: But this apparently doesn't exploit the poor enough for H&R Block's taste, so they pushed hard to expand Schedule EIC, the form that EITC recipients fill out, from one page to four or five. The proposal, included in the recently passed Senate Appropriations bill, adds a battery of questions regarding eligibility ("Is the taxpayer's investment income more than $3,350?"; "Is the taxpayer's filing status married filing jointly?") currently included in a form that tax preparers have to fill out. The idea is to force tax preparers to double-check their work; most EITC errors are the fault of incompetent tax preparers, not individuals. But adding the questions to the individual return makes no sense, as they're already answered elsewhere. The return will obviously already state if the taxpayer is married filing jointly, for instance.

Mario: The idea of the 8867 questions is not for tax preparers to double check their work. It is to confirm that the taxpayer is eligible for this often abused large tax credit of up to $6,143. As mentioned above, billions are paid out each year to those that don't deserve it. The study that you reference is a result of the government visiting 19 tax offices and not in of itself a comprehensive study of accuracy of tax preparers as a whole (there are over 300,000 holders of EFIN's for tax businesses nationwide). And even so, with that study, the accuracy difference is 10%. And individuals don't do a very good job of being accurate either. Thanks for insulting all million of us in this industry as incompetent tax preparers. I agree that taxes can be hard, especially for low income working people. There are 74,608 pages in the US tax code. I and most in the industry agree that there should be licensing and testing in the industry. Much of the errors are a result of preparers who are fly by night and not licensed, certified or regulated preparing tax returns. H&R Block, Happy Tax and all national chains test their preparers and have higher standards that we would also like to see imposed on all preparers. In most states, you need a license to cut hair but not to prepare taxes. Also, you are completely incorrect as not all of the questions on the current 8867 form (or the proposed update the self filing form) are answered elseware in a tax return. The purpose of these questions is to make sure that the IRS, meaning the government, meaning the US taxpayers who fund this program; are not paying out thousands of dollars in Earned Income Credits to people who are not eligible. It is not to cause any undue burden or impact on those who deserve the credit.

For example, some of the questions on the 8867 that are not elseware on the tax return or on Schedule EIC currently are:

"Does the taxpayer (and the taxpayer's spouse if filing jointly) have a social security number (SSN) that allows him or her to work and is valid for EIC purposes?"
"Was the taxpayer (or the taxpayer's spouse) a nonresident alien for any part of 2014?"
"Could the taxpayer be a qualifying child of another person for 2014?"
"Is the child the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them?"
"Was the child unmarried at the end of 2014?"
"Did the child live with the taxpayer in the United States for over half of 2014?"
"Was the taxpayer's main home, and the main home of the taxpayer's spouse if filing jointly, in the United States for more than half the year?"
"Was the taxpayer, or the taxpayer's spouse if filing jointly, at least age 25 but under age 65 at the end of 2014? "
"Is the taxpayer eligible to be claimed as a dependent on anyone else's federal income tax return for 2014?"

I'm certain that someone who is capable of filing their return return themselves will be able to answer them or seek help of the instructions or the internet or a friend to get them answered if they need help.


Dylan: There is no good policy rationale for this change. H&R Block CEO William C. Cobb has attempted to justify it as a way to reduce improper payments, but there's little reason to think it would have that effect. Again, taxpayers already have to supply all this information, and the real misreporting problem is from paid preparers like H&R Block, not individuals. A recent IRS study found EITC-claiming returns from paid preparers were more likely to result in overpayments than self-filed returns. That's right: People who fill out taxes for a living are, on average, worse at it than taxpayers who do it themselves (and, by the way, the IRS's volunteers do a better job than anybody).

The only possible reason to change the form, then, is to confuse taxpayers enough that even more of them will pay companies like H&R Block to prepare their returns.

Mario: There is a clear policy rationale. Mr. Cobb has a valid point as to the fact that there is almost 20 billion dollars that we are charged taxes for each year that is improperly paid out for EIC and efforts like this should be made to reduce and eliminate that.The questions asked in the proposed form are requirements to be eligible for the EIC, not arbitrary ones to stop people from receiving it or push them to a paid tax preparer. By not asking those questions to people who self prepare their returns, many are receiving money that they don't deserve. Money that is coming out of taxes paid by middle and high income folks. It is not the government who pays these credits, the American people do and there should be accountability in order to receive thousands of dollars of tax credits. I'm not knocking the program, it is a great one to help those in need, I would just like you to give the full facts. The study you reference in this section also speaks about returns prepared by unlicensed preparers among the most prone to error. So to knock the entire industry or a company like H&R Block that employees many Enrolled Agents and CPA's is unfair and inaccurate. That same study also states that it cannot conclude if the differences in error percentages is from the behavior or ability of each type of preparer, or whether they stem from the differences in the characteristics of taxpayers who seek assistance from each kind of preparer. I don't know Mr. Cobb personally nor do I know his motivation and your assumption may in fact be true about their reasons for lobbying for these changes however the changes will produce less waste and improper payments which will potentially save the American people billions of dollars in wasted tax revenue paid out to those who are either purposely or mistakenly taking EIC that they shouldn't be.


Dylan: Other low-income families will just not bother to claim the credit at all if this policy takes effect. "Were this directive implemented," Robert Greenstein of the Center on Budget and Policy Priorities writes in a piece decrying the proposed change, "no one should be surprised to see large numbers of individuals who now file their own returns either giving up and not claiming the EITC due to the added complexity or turning to paid preparers, who could charge hundreds of dollars for their services."

Mario: Do you really think that someone who has a low income and knows that they can get thousands of dollars which will make a difference in their lives and that of their family will now stop filing taxes because they have so answer some additional questions? Get real. And if they turn to a professional for help in filing their return, that is their choice. The questions aren't that hard and there are instructions for those who want to self prepare and continue to file without paying a fee.


Dylan: It's not just the EITC, either. Worse, Greenstein notes that the language also instructs the IRS to add similar questions to forms for the refundable part of the Child Tax Credit, the American Opportunity Tax Credit for college tuition and fees, and the Premium Tax Credit that subsidizes Obamacare plans.

Think about what tax breaks are being targeted here. These are all refundable credits, which, with the exception of the college credit, overwhelmingly help low-income and working-class people. H&R Block is not pushing to make the mortgage interest deduction more complicated, or to make the charitable deduction more confusing. Tax breaks that mostly help rich people go untouched. H&R Block knows that rich people already use TurboTax or hire accountants; because it wants new business, it has decided to prey upon the poor.

In a better world, companies like H&R Block wouldn't exist, because the IRS would fill out returns itself. But if H&R Block must exist, the least it can do is not try to actively harm poor people. Sadly, even that appears to be asking too much.

Mario: What you are missing again is that these are some of the most abused credits prone to fraudulent filings. According to a report published in May by the Treasury Inspector General for Tax Administration (can be seen at there was over 5 billion dollars in potentially erroneous education credits on 2012 tax returns alone. What is clear is that the government has to do a better job of stopping tax fraud and improper payments as it is costing the American people billions upon billions of dollars per year. H&R Block's position is one of common sense and the American people should be given the opportunity to view both sides of the argument, not just  yours. I'm sure most (including readers who only saw your prospective) do not understand the gravity of how much money we pay into our tax system that is paid out improperly and to fraud. The one sided nonsensical nature of your article can only be compared to someone who has the same position as you on if H&R Block should even exist: Donald Trump.

Mario: Dylan, Have a Happy Day! 😉

Have a wonderful and productive rest of the week and take care.

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