Tuesday 24 March 2009

Why Canada Revenue Agency Should Provide Free Tax Preparation Software

One would have thought that the computer and Internet age would make the annual chore of filing a tax return easier and cheaper than the days of paper-only. The Canada Revenue Agency's NETFILE (for self-filing) and EFILE (for filing through a professional prep service) certainly make it easy and I applaud that success as something government has done right. But cheaper it is not, since the only way to file a tax report electronically is through private companies and their software, which they charge for, naturally.

There are a good dozen private suppliers charging anywhere from $6 per return to $70, with market leaders QuickTax and UFile averaging a base price of about $15 (see Wikipedia's list of NETFILE suppliers and prices).

Why do we individual Canadians have to pay?

CRA's answer is: "Development, distribution, and the subsequent ongoing maintenance of free tax software would represent a tremendous expenditure for the CRA. It would also require a continuous support network to assist users of the product. Regardless of our efforts to provide free software, some Canadians will always prefer to purchase products from the private sector market, as many of these products offer tax-planning tools and are often compatible with home accounting software."

My answer is, as the Scots say,rubbish! Here's why I think everyone would be better off, CRA and average Joe Canadian NETFILEr with free tax prep software provided by the CRA.

1) Paper tax forms are free and all it costs is a stamp to mail them in. The precedent, the starting point of the argument and the onus is on CRA to continue that way.

2) Private software makes tax calculation errors, as I pointed out in my previous two posts. This result happens with software that CRA has tested and certified. We and CRA cannot be sure tax reports are accurate. Let us keep in mind that CRA makes up and interprets the rules so private companies are necessarily using second-hand knowledge of tax rules with attendant misinterpretation possible.

3) Cost to taxpayers - CBC' Netfiling 2009 reports from a CRA source that 4.3 million returns were filed in 2008 using NETFILE. At $15 a return, that is c.$65 million every year. That's wasted money in an economic sense. No one is fed, clothed, housed or entertained in the process of filling in a tax return. On the other hand, the CRA could fund an awful lot of software development using that money. Anything less than $65 million a year would be a net gain. Some of the existing private software packages are built by what are obviously very small companies. A basic package should be very cheap to build.

4) Cost to CRA - The indirect costs to CRA of the present system include:
  • extra resources to deal with the certification process, building and running test suites, communicating back and forth with the companies
  • extra resources to fix returns that are incorrect despite the certification process
  • lost revenue from higher non-compliance and effort to deal with non-compliance using private packages. CBC reported last August a CRA finding that people using NETFILE and software understated their taxes by almost $570 million. Though the apparent main cause of non-compliance - absence of receipts - would certainly not be eliminated by CRA-supplied software, there would certainly be a "big brother is watching you" deterrent effect. The vast majority of people who cheat, i.e. putting aside those who are saints or incorrigibly immoral, do so because they think they can get get away with it. If a person were to be using the official free CRA web browser program that they know is hosted on the CRA's own servers, I bet they would be a lot less likely to try overstating expenses. Even a 10% reduction in non-compliance would give the CRA $57 million more in annual funding for building a free tax prep package.
5) People want free software from CRA - Check out the comments on the CBC Netfiling report and see how many people give the thumbs up to suggestions that CRA do so.

6) Other countries offer free tax software - like the UK, Australia and the USA, though the latter program appears to be income-limited and offered jointly with private companies

7) Privacy and security vulnerability of web-based packages - Only the CRA has a right to an individual's tax data. Using a commercial web preparation service exposes that data to an extra step and an extra location where that data might be compromised. No doubt all the companies claim that their security procedures are 100% bullet-proof but one cannot be sure since CRA does not audit them and no one else does either in any systematic way. I can guarantee if it is not measured and tested it not as good as it can be.

In certain cases I discovered in doing my review of the various web packages, the license and corporate connections of the companies mean that a Canadian's tax data might end up being disclosed to US authorities. In its anti-terrorism efforts, the US government is not shy about going after financial data and US laws are far-reaching.

What a Free CRA Package Could Look Like:
  • basic forms only fill in the boxes and add them up or calculate schedules and forms automatically from raw data
  • could be fillable pdf or web package - to avoid desktop PC compatibility issues and support
  • no optimization functions - if people want that let them use a private package, which I would see being allowed to continue being offered so that people have a choice to pay if they think it's better or easier than CRA's
  • help consists of links to each line item in the CRA guides as a base but CRA should include links to its own suggestions for deductions and other assistance to help ensure people claim what they are due


Frank said...

For what it's worth, you're making me a believer in this proposal.

Anonymous said...

To suggest something like this, you never have worked in govt IT. They are so clueless that the last thing they need to do is more IT in govt.

This include anything like the proposed free tax software.

You think the private software makes calculation errors ? Wait till you see govt sponsored software, its more bugs then features.

What you are looking for is a tax credit to buy tax filling software.

Michael James said...

I'd have to agree with the anonymous commenter. I doubt that CRA could sneeze for $65 million. I've been involved directly and indirectly in software development for many years and can tell you with certainty that large bureaucracies are very bad at software development. A partnership with an existing private tax software company is possible, but I'm not sure that this is necessary.

Your testing that shows inconsistencies between different packages is very valuable and shows the need for CRA to do a better job at testing prior to certification.

Unknown said...

Oh dear god no. Do you honestly want to be forced to use software designed, developed, and supported by the government of Canada? I'll pay the $5/return to stick with the software I have been using.

A. Noid said...

I use studio tax, which is free.

Anonymous said...

@A. Noid
leaving undiscovered optimizations on the table is not free. the $15 to $25 cost of a professionally developed product could be worth many many times the investment.


CanadianInvestor said...

Anon, MJ, rp et al it would be interesting to do a real assessment of the chances of success for CRA to deploy a web package service (as opposed to calling it a software development exercise - that's a narrow view that would inevitably lead to a bad solution).

A few things suggest CRA might succeed. First, CRA already has the program logic built into its backend - how else do they check the validity of the NETFILE returns but to re-enter the data into their own system, which already calculates it correctly ... by definition! Second, the program logic is narrowly defined and fixed and most software/application development I have been involved in founders on changing user requirements. So that wouldn't be a big risk factor. Third, I'd look at the CRA itself - being big and bureaucratic doesn't necessarily mean incompetent. I had a very good impression of Revenue Canada when I worked with them on EDI development years ago. Maybe they've maintained a good tradition.

One method CRA might try would be to invite people to join in an open source effort. CRA could provide its cooperation and tax expertise.

Or CRA could buy out one of the existing forms-type packages (for a lot less than $65 million), fix the errors I found, re-brand it with the Canada logo (like H&R Block did with UFile), move it into their own physical environment and presto T1-Electro is born for 2010.

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