The IRS is using $15 million that it received from the Inflation Reduction Act to answer the wishes of Democratic lawmakers and millions of taxpayers: It will look into setting up a free e-filing service, The Washington Post reported.
The IRS will use the money to study the feasibility of such a service within the agency. Taxpayers making less than $73,000 a year—70 percent of taxpayers—are entitled to file their taxes for free.
The IRS’s lack of funding has, in the past, rendered it unable to counter the intense lobbying by the commercial tax preparation industry, and develop its own free, e-filing program. That industry was worth $11.9 billion in 2022.
In the early 2000s, the IRS reached an agreement with the tax preparation industry—including the two biggest companies, Intuit TurboTax and H&R Block—that the agency would not create its own free-filing platform if the companies agreed not to charge those lower-income taxpayers. The companies agreed to offer a “Free File” option. But that alliance did not work seamlessly. According to the Post, these companies frequently offered narrowly tailored "free" e-filing options that actually included some fees. Many also implemented certain requirements and used the program to advertise their products and services.
They also made it very difficult for taxpayers to find the free-filing option on their websites. In May of this year, New York Attorney General Leticia James announced a settlement with Intuit Turbo tax, pursuant to which Intuit would pay $141 million to customers across the United States who "were deceived by misleading promises of free tax-filing services," NPR reported. The attorney general's investigation came on the heels of a 2019 report by Pro Publica that found that TurboTax essentially hid its free-filing options.
“The IRS is completely beholden to the software companies at this point because it just doesn’t have anything to replace them,” said Nina Olson, a former national taxpayer advocate.
Nine out of 10 individual returns were filed digitally in 2021, and tax experts envision a free and more trustworthy service that could encourage more taxpayers to file electronically.
Only 3 percent of taxpayers use Free File, according to the General Accounting Office—an argument in favor of a government-run program. But the idea has detractors.
Tim Hugo of the Free File Alliance, an industry group of online tax services that provide no-cost programs to low- and middle-income users, told the Post that “private free products save the IRS from having to build a redundant system or handle taxpayer inquiries related to e-filing.”
The tax prep giants’ lobbying and financial efforts have helped to derail any attempt by the government to infringe on their turf. Intuit and H&R Block have spent a combined $63.3 million in federal lobbying since 2011 on e-file and other issues, according to the Post, while spending more than three quarters of a million dollars on lobbying between April and July this year alone.
Prominent lawmakers such as U.S. Sens. Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio) and Ron Wyden (D-Ore.), chair of the Finance Committee, are encouraging the tax agency to study the free e-file option. In his capacity as Finance Committee chair, Wyden has asked the IRS to conduct a taxpayer opinion survey on the matter and to consult a vendor that could build such a system.