H&R Block has been running an ad campaign for tax season claiming that when taxpayers do their own returns, they end up leaving $1 billion on the table, presumably because they don't have a pair of professional eyes spotting all the potential deductions and credits. The ads are all premised on viewers being wowed by the size of the $1 billion figure and wanting to get a piece of the pie. So is it true? Are people really overpaying that much on their taxes?
When asked where H&R Block got this $1 billion figure, a spokesperson said the company did a study in which H&R Block professionals looked at tax returns done by taxpayers on their own. Based on the study, about 1 in 5 people who did their taxes had on average $450 in unclaimed money, either in the form of a higher tax refund or a smaller tax balance due.
After that, it's just a quick skip and a jump to the $1 billion figure, according to H&R Block. Since there were about 56 million U.S. filers who did their own taxes, according to the firm, all you have to do is take one-fifth of that population, then multiply that figure by $450. The result: more than $5 billion sitting needlessly in the Treasury's coffers. H&R Block might have decided that $5 billion was an overreach, so they ratcheted the claim back to $1 billion.
But it's hard to weigh in on that detail, or any other aspect of the study. H&R Block declined to share a copy of the research on which the ads are based. "The study itself was a proprietary study and we do not release the complete results," wrote spokesperson Gene King in an e-mail. "But I can assure it is statistically valid."
Regardless of whether the study adds up, the H&R Block ads work precisely because deep down, many Americans aren't really sure if they filed their returns correctly. Even Donald Rumsfeld tweeted on Tuesday that he doesn't know whether his returns are accurate.
— Donald Rumsfeld (@RumsfeldOffice) April 15, 2014
There is no definitive answer to whether Americans tend to overpay or underpay their taxes. But short of that, experts point to the earned income tax credit (EITC) as a good way of understanding how tax law plays out in real life.
The results for the EITC are not pretty. The Internal Revenue Services estimates that 21 to 25 percent of EITC payments were issued incorrectly during the fiscal year 2012, totaling from $11.6 to $13.6 billion in too much money being paid out to taxpayers. As a result, the Office of Management and Budget has labeled the EITC a "high-error" government program. Projections by the government show that the rate of error is expected to remain stubbornly high.
The EITC is particularly hard to administer correctly. One-third of the participants turn over annually, and it's difficult for many people to tell if they're even eligible. To make things even harder, low-income filers are particularly vulnerable to scams from unregulated tax preparation companies. Two-thirds of returns claiming the EITC are done by a tax preparer. Some of these are done correctly, but without much oversight over the industry, abuse is common.
And just as many of these filers are claiming too much in these credits, the IRS estimates that 21 percent of those who are eligible do not claim the credit at all. And so the EITC cuts both ways: both too much being handed out to taxpayers and too little.
You can imagine similar dynamics with countless other tax credits and deductions. With the government increasingly relying on the tax code to enact major policies, the law gets more complicated for taxpayers, who will inevitably overpay and underpay.
There is potential relief in the form of "return-free" filing, in which the IRS would give taxpayers a pre-filled return that would take minutes to verify. The Treasury Department has estimated that as many as 44 percent of taxpayers would be eligible since their returns are relatively simple. But companies like Intuit, which owns TurboTax, and H&R Block have lobbied against such a change, according to ProPublica's reporting.
For taxpayers who want help, a reputable expert can help navigate the system. But contrary to advertising, there's no guarantee that having a tax preparer do your return will give you a legitimate added advantage. The Government Accountability Office sent people undercover to 19 randomly selected tax preparers, and all but two calculated the wrong refund amount. The errors ranged from calculating $52 less to $3,718 more than the right amount. (The GAO, unlike H&R Block in its ads, is careful to say that the sample can't be generalized.) Some of these mistakes might be honest. But they don't bode well for the accuracy of Americans' tax returns.