The United States has taken a small but significant step toward creating a public system that will allow millions of Americans to file their taxes for free.
The sweeping domestic policy law passed by the House and Senate last week mandates that the IRS study options provide a free tax filing option for Americans. This study poses a threat to the for-profit tax preparation industry dominated by TurboTax, a product of Silicon Valley company Intuit. President Joe Biden said he plans to sign the bill, the Inflation Reduction Act, into law today after the party line in the House of Representatives voted to approve it on Friday.
The bill provides $15 million to study how the IRS might implement such a program, how much it might cost, and how Americans would view it. The report, which must include input from an independent third party, must be submitted to Congress within nine months of the passage of the bill.
Unlike many developed countries, the US does not offer free tax filing services to taxpayers, who instead pay billions of dollars each year to highly profitable private tax preparation companies.
For decades, the industry has tried to block or undermine a government-free tax filing system. ProPublica has reported for years how companies have sometimes even tricked customers into paying for services they should have gotten for free. These articles led to federal and state investigations and a spate of consumer lawsuits. The coverage was also cited by Senate Finance Committee Chairman Ron Wyden, who was behind the new rule. The companies claim they did nothing wrong.
“I have been working to enable taxpayers to file directly with the IRS for many years, and this is an important step toward achieving that goal,” Wyden said in a statement. “Coverage of industry fraud has certainly helped members see the importance of this issue and get it across the finish line.”
The last time the federal government tried to offer free tax returns was in 2002 under the George W. Bush administration. Back then, shortly after the White House unveiled “a simple, free way for taxpayers to file their tax returns online,” Intuit and its lobbyists fought back. The result was a program that instead relied on Intuit and other private software vendors to provide the service.
As we detailed in our story of Intuit’s 20-year campaign to prevent a government-provided tax reporting service, the so-called Free File program was flawed from the start. Said to be available to 70% of taxpayers, it has only reached between 2% and 3% in recent years. After ProPublica reported that Intuit and others were intentionally making it difficult for taxpayers to find the program online, it refocused on Free File, including numerous investigations. The company stopped including code on its Free File website that made the free version harder to find. Eventually, both Intuit and H&R Block, by far the largest providers, withdrew.
Through information forms such as W-2s, the IRS already has the information about wages and other forms of income in its systems that it needs to provide such a service. A recent study by researchers from the Treasury Department, the Minneapolis Federal Reserve and Dartmouth College found that “between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately prefilled using only the current year’s returns and the of the previous year were used.”
At a Senate hearing in June, Treasury Secretary Janet Yellen said she supports 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 on earth that a modern economy shouldn’t have a system that makes it easy for such a large group of taxpayers to file their returns.”
A spokesman for Intuit reiterated the company’s opposition to the IRS’s offer of a free public tax return.
“Decades of experience and numerous independent studies, surveys and in-depth research into the idea of an IRS operated tax preparation system show that taxpayers see an inherent conflict of interest in the IRS being the tax collector, investigator, auditor and executor and now preparer when taxpayers choose for the IRS to focus on its core mission, rather than spending billions of taxpayer dollars on a system that would disenfranchise millions of taxpayers and endanger their financial freedom,” said Rick Heineman of Intuit.
In a recent settlement with attorneys general, the company agreed to pay $141 million to claimants who had paid for tax preparation services they could obtain free of charge. More than four million people are expected to receive payments of up to $90 each in the coming months. Intuit claimed it did nothing wrong.
A spokesman for the IRS declined to comment on the determination to investigate free filing options.