IRS starts process to provide free online tax filing software

The current tax filing system in the US is absurdly complex. Part of the reason is that the tax code is used to achieve various economic and social goals by making them have economic consequences. Another reason is that special interest groups lobby hard to get favorable items put into the code to benefit their own interests.

One of the less-publicized items in the big bill that was passed recently known as the Inflation Reduction Act is a provision to allow the IRS to study the creation software that people can use to file their taxes online.

The sweeping domestic policy bill passed by the House and Senate last week mandates that the IRS study options to provide a free tax filing option for Americans. That study represents a threat to the for-profit tax prep industry dominated by TurboTax, a product of the Silicon Valley company Intuit.

Unlike many developed countries, the U.S. does not offer free tax filing services for taxpayers, who instead pay billions of dollars every year to highly profitable private tax prep companies.

This is an obvious service that is long overdue. Currently, the IRS is forbidden to do it because of lobbying by the tax preparation companies who want to profit off the complexity by claiming that they will do your taxes for you. In return for this gift to their profits, these companies said that they would offer free online preparations services to those with lower incomes. But as ProPublica reported, they make the free service very hard to find and even then, trick consumers who qualify for it into buying their services.

The industry has tried to block or subvert a government free tax filing system for decades. ProPublica has reported for years on how companies have sometimes even tricked customers into paying for services that they should have gotten for free. Those articles led to investigations by federal agencies and states as well as a barrage of consumer legal actions. The reporting was also cited by Senate Finance Committee chair Ron Wyden, who was behind the new provision. The companies maintain they did nothing wrong.

As we detailed in our story on Intuit’s 20-year campaign to prevent a government-provided tax filing service, the so-called Free File program was flawed from the start. Supposedly available to 70% of taxpayers, it only reached between 2% and 3% in recent years. After ProPublica reported that Intuit and others were intentionally making it harder for taxpayers to find the program online, there was renewed focus on Free File, including numerous investigations. The company stopped including code on its Free File website that made it harder to find the free version. Eventually, both Intuit and H&R Block, by far the largest providers, pulled out.

In a recent settlement with state attorneys general, the company agreed to pay $141 million to filers who paid for tax prep services they were eligible to get for free. More than four million people are expected to receive payments of up to $90 each in the coming months. Intuit maintained it did nothing wrong.

The next step is to eliminate yet another feature that is superfluous. The IRS gets much of the financial information on ordinary taxpayers from their employers and the financial institutions they deal with. And yet, each year, each person has to get all the records together and enter those numbers into the forms when the IRS could pretty much fill most of those forms automatically for you and send them to you just to check for accuracy.

Through information forms like W-2s, the IRS already has the info on wages and other forms of income in its systems that it would need to provide such a service. A recent study by researchers from the Treasury Department, Minneapolis Federal Reserve and Dartmouth College found that “between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return.”

At a Senate hearing in June, Treasury Secretary Janet Yellen said she supported a new free filing service. “We need to develop a new system,” Yellen said in an exchange with Sen. Elizabeth Warren, D-Mass. “There’s no reason in the world that a modern economy shouldn’t have a system that makes it easy for such a large group of taxpayers to file their returns.”

The new law only provides a provision for the IRS to study the issue. It will take a while for it to actually develop the software and have it actually implemented and you can bet that the for-profit tax preparation companies will keep objecting all the way.

I have never used the tax preparation software provided by the private companies. I did not see why I should give my information to them, preferring to do the taxes myself, calculating them using a spreadsheet and then entering them on the fillable forms that the IRS provides. It is not that hard.