Tax tech

In a somewhat under the radar acquisition, Square bought Credit Karma’s tax filing business last year. The acquisition seems to have been completed and Cash App had a great press release where they are now offering free tax filings to all users.

For the consumer, I think this is huge news as tax filing software can often cost hundreds of dollars. I’ve never used Credit Karma’s product but I heard that it’s pretty good overall.

Given my background in tax, I’ve had a lot of people ask me why I haven’t looked into building a better and easier tax product. It’s a good question.

There’s undoubtedly demand in this space. No one likes doing their taxes and if tech can make tax filings easier then people will buy the product. Given that, the market is somewhat limited. I read somewhere that the market for tax filing is a $11b business which seems about right. It’s growing, just not at an exponential speed as it’s tied to Americans growing up to become paying tax payers.

Possibly the biggest issue with create a tech forward solution here is that you are bound to the Federal, State and Local government’s tech. There’s 1 Federal government, 50 states, and many more locales for you to deal with to complete all your tax filings. I can tell you right now that the IRS still requires you to fax stuff over to them and there’s also some tax forms that you MUST paper file. Multiple this by the 50 states and local governments and you got a gigantic mess on your hands.

On top of all this, tax is insanely complicated. It is very much a garbage in, garbage out situation. Taxpayers are required to collect documents and enter it into their tax software. Most do not know where to get these forms and these forms can often come in paper, electronic or never show up at all. It’s an absolute mess.

This creates a perfect storm where taxes become a very manual process. There’s limited ability to automate tax filings. Consumers can either use a software to file themselves or hire someone to do it for them. If you have a somewhat complicated tax return, it becomes very difficult to file yourself unless you understand what you are doing. This results in these individuals paying firms to do the filings for them.

Most people I speak to are looking for something in between. They want a tech solution but someone to review and verify what they do. Unfortunately, everything I’ve seen in this space ends up becoming much more of a manual solution. The tech ends up being the front end only and there’s little to no automation possible.

I do wish to see someone prove me wrong here, but there needs to be a lot of changes within the IRS, state and local governments from a tech perspective before something can be done here. Given that this is the government, I’m not expecting that to happen soon.