For many, that leads to a second question too: “Why am I paying a middleman to help me file?”
The U.S. government is wondering the same thing. The recently passed Inflation Reduction Act provides $15 million for the IRS to study how it could implement a program that allows Americans to file their taxes for free. A resulting report, which must include third-party input, is due before Congress in nine months.
The program would theoretically replace the current free filing program, which isn’t available to all taxpayers and isn’t widely used by eligible filers. It would also no longer rely on partnerships with private tax prep firms, meaning the IRS could one day send you a bill directly for what you owe, experts say.
“Tax nerds like me will be getting our popcorn out to watch,” says Robert Cordasco, a certified public accountant and founder of Cordasco & Co. in Savannah, Georgia. “Everything about free filing has been a disaster for a decade at least.”
Why The IRS Is Exploring Free Filing Now
The IRS last explored the idea of free tax filing in the early 2000s, but major tax preparation firms lobbied hard against it.
In a resulting compromise, the IRS agreed to drop the idea of offering its own program provided that a group of tax preparers, including TurboTax maker Intuit and H&R Block, provide free filing services to Americans under a certain income threshold.
The program, known as IRS Free File, proved to be extremely flawed. Although it is currently available to individuals making $73,000 or less — around 70% of taxpayers — only 3% of eligible filers used the program in 2020, according to a report from the Government Accountability Office.
In 2019, a ProPublica Investigation found that Intuit and other firms were deliberately attempting to lead users away from the free versions of their programs. Following federal investigations and lawsuits from the states attorneys general, Intuit admitted no wrongdoing, but paid out a $141 million settlement to users of its service who qualified for Free File but instead paid for tax preparation.
Over the past two years, Intuit and H&R Block — the nation’s largest tax preparers by far — have withdrawn from the Free File program.
“With the agreement with major tax preparers effectively dissolved, the IRS is now free to develop its own program,” says Glenn Borst, senior legal analyst at Wolters Kluwer Legal and Regulatory U.S. “There’s no reason it shouldn’t work just as well, but it’s going to provoke a lot of lobbying by the companies.”
An IRS Free Filing Program Could Work, But Will Take Time
Tax preparation companies argue that free online filing through the IRS wouldn’t necessarily be a win for taxpayers.
“Taxpayers see an inherent conflict of interest in having the IRS be the tax collector, investigator, auditor, enforcer and now preparer,” said Rick Heineman, vice president of corporate communications at Intuit, as part of a longer statement given to ProPublica.
Although for-profit tax preparers have a clear financial incentive to take this position, it is worth questioning whether the IRS would be incentivized under a free filing system to maximize refunds (or minimize tax liability) for filers using its system.
“There are certainly political figures who would say it’s like a fox guarding the henhouse,” says Borst. “But the IRS will of its own accord point out if a customer misses a deduction. And if under a new system the IRS is missing obvious deductions, H&R Block and TurboTax will be able to say, ‘They didn’t get you this, and we did.’”
For millions of Americans with straightforward tax situations, a free filing program could be a massive benefit. Between 41% and 48% of all returns could be pre-populated based on taxpayers’ previous filings and current-year financial documents from employers, according to recent research published by the National Bureau of Economic Research.
“So many returns are just pure math. It wouldn’t take much to automate it, send the result to the taxpayer and have them validate it,” says Cordasco. “People don’t trust the IRS, but for the simplest of returns, the option should be there for people to file without so much complexity and cost.”
But don’t expect to have the option to file your taxes by the next time you file, or even the year after that.
“If you look at what the bill does, you can get a feel for Congress’s priorities,” says Borst. The $15 million Congress is spending to look into this idea pales in comparison to the nearly $80 billion allocated to the IRS for purposes such as hiring more agents, increasing audits and updating aging computer systems.
“Something like this will likely require further appropriation,” says Cordasco.