Intuit $94M R&D Funding Request Shows Need for Tax Transparency

There is perhaps no more compelling example that underscores the need for tax expenditure transparency than the September disclosure that Intuit Inc., maker of TurboTax, sought a staggering $94 million in research and development tax credits in tax year 2022. This move coincided with enactment of the Inflation Reduction Act, through which the IRS received funding to develop a public tax preparation option.

This presents a paradox wherein tax expenditures and revenue spending were simultaneously funding Direct File and an entity—facing an existential threat from the program—actively lobbying against its implementation.

The expenditure information surfaced incident to a related disclosure in a Form 10-K financial summary report that Intuit filed. Following this, Sen. Elizabeth Warren (D-Mass.) sent Intuit a letter requesting a detailed accounting of the expenses qualifying for these breaks—a request that remains unfulfilled.

The scenario highlights a significant concern that the true nature of tax expenditures often only comes to light through incidental disclosures by the selfsame entities benefiting from them. For taxpayers, there’s no way to accurately and reliably determine where expenditures are being allocated without policy reform for mandatory and comprehensive transparency in tax expenditures.

Despite lack of clarity in expenditure data, the Global Tax Expenditures Transparency Index ranked the US sixth in transparency, a score that would be barely passing in any college classroom—indicating the extent this is a worldwide problem.

The exterior of a building at Intuit headquarters on Nov. 28, 2023, in Mountain View, Calif.

Photographer: Justin Sullivan/Getty Images

Intuit Ouroboros

The Intuit example shows the need for expenditure disclosure. The TurboTax maker spent nearly $3 million on lobbying in each of years 2022 and 2023 and spent more than $44 million on federal lobbying since 1998—much of their efforts focused on opposing a public free-file option.

Bearing in mind the widely accepted principle that money is fungible, let’s trace the path of some of our tax expenditures and revenue spending. Starting with the public option, the IRS set aside $15 million from the Inflation Reduction Act to conduct a feasibility study.

The new IRS Direct File system is expected to cost between $64.3 million and $248.9 million per year to operate. These investments drive the advancement of Direct File and free tax preparation services.

Conversely, in 2022, Intuit’s quest for $94 million in R&D credits partially intends to integrate artificial intelligence into its product. The company also spent $3.5 million in federal lobbying.

These expenditures and efforts can be considered investments in restricting the advancement of Direct File and free tax preparation services. It is the tax policy equivalent to running the heat and air conditioning at the same time and waiting to see which wins.

Competition in the market is healthy. But something is amiss when a private entity seeks access to tax expenditures to be more competitive against a publicly owned free option, aiming to quash that option in its early stages through lobbying. It places the allocation of tax credits to private entities such as Intuit in direct competition with already underfunded public services.

Greater Transparency

The most apt policy metaphor for the fairness of increased tax expenditure transparency lies in patent law’s foundational principle—in exchange for a temporary monopoly on an invention, the patent holder compensates society by revealing the production details of that invention.

The reciprocity between the benefit accruing to the patent holder and the contribution to collective knowledge is a cornerstone of innovation. In much the same way, transparency in tax expenditures can lead to more informed public discourse and policy development.

When an entity seeks to reimburse R&D costs through tax credits, society has a right to know where tax expenditures are being spent. At the absolute least, there must be a transparent accounting of what’s being researched and developed and by whom.

This transparency would ensure accountability and give valuable insight into areas where technological advancement and growth are being prioritized. The alignment of public funding and the public interest would ensure taxpayer dollars are fostering developments that broadly benefit the wider community.

The default method of disclosure can’t be the current status quo wait-and-see approach with details on tax expenditures being leaked or revealed well after the fact and by the receiving party.

Entities seeking to expense R&D should be made to disclose pertinent details on that research, namely the nature of the research, projected and actual expenditure, expected benefits to the company, and public impacts. Under Section 174 of the tax code, entities such as Intuit that seek to expense R&D costs are already required to track the nature of the research for purposes of current-year expensing, so the additional administrative overhead, while significant, wouldn’t be without precedent.

Undoubtedly, there would be resistance from companies on the basis of privacy and the proprietary nature of their research pursuits, but there’s a carrot to go along with the stick of the mandate—increased market sector intelligence. It is hard to imagine more information on where competitors are placing their research efforts being a net negative for any company.

The juxtaposition of Intuit’s tax credit pursuit against the broader backdrop of its lobbying efforts and Warren’s request for more details illustrates how much one hand of the government doesn’t know what the other is doing, much less the general public. It underscores the need for reform that ensures accountability in tax expenditure allocation.

Ultimately, increased transparency best serves the interests of both taxpayers and the broader economy.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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