Cut Inflation Act Pushes IRS to Seek Free TurboTax Competitor

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Electronic tax filing could soon be as easy as a few clicks on a government website – for free.

The Internal Revenue Service will spend $15 million to study a free, government-backed tax-filing system under a provision of the sweeping Climate and Health Care Act passed by Congress this summer. It’s a historic step toward overhauling the way most Americans file their taxes and ending years of tax preparation dominance by private corporations.

Democrats have long lamented that millions of Americans are paying for the privilege of filing their taxes and that corporate tax departments are taking money from the most needy households. Virtually no one uses the free e-filing options that the industry supports due to restrictions on eligible returns.

But the IRS doesn’t have the funding — or the clout to outwit private lobbyists — to seriously consider its own e-filing platform, current and former officials say, forcing taxpayers to deal with it instead. a consortium of private providers and setting the agency back decades. technology and customer service.

“The IRS is entirely indebted to the software companies at this point because it simply has nothing to replace them,” said Nina Olson, who served as the national taxpayers’ attorney, the internal rights watchdog of IRS consumers, from 2001 to 2019.

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The commercial tax preparation industry is gargantuan, worth $11.9 billion in 2022, according to market research firm IBIS World; 9 out of 10 personal tax returns were filed digitally in 2021, the IRS reported.

The biggest players, Intuit TurboTax and H&R Block, offer closely tailored free e-filing options and charge $59 and $55, respectively, for their lowest-paid tiers, plus variable filing fees and costs for tax filings. States.

Tax experts say a government-backed system could give more Americans access to free, reliable services, while increasing IRS efficiency by encouraging more taxpayers to file easy digital returns. to process rather than cumbersome paper declarations.

But it would disrupt an ecosystem that in many ways has served taxpayers and government well for decades. The U.S. voluntary tax compliance rate — the proportion of filers who pay their federal taxes accurately each year — is 86.3% according to the most recent measures, among the highest among developed economies.

The US tax system is complicated and the fear of making a mistake, experts say, can drive taxfilers to resort to paid services. Americans’ tax filings have also become more complex recently with the rise of the gig economy, cryptocurrency, and pandemic-related benefit programs.

“Big companies can throw more bells and whistles,” said Terry Lutes, former director of IRS e-Tax Administration. “Their argument is that their customers want the ability to choose those bells and whistles, and they provide a service. I don’t think they claim they are the product for everyone.

Tim Hugo is executive director of the Free File Alliance, an industry group of online tax services that offers free programs to low- and middle-income users. Hugo said the free private products save the IRS from having to create a redundant system or deal with taxpayer requests related to e-filing.

This alliance was created in the early 2000s after the IRS reached an agreement with industry – including giants Intuit TurboTax and H&R Block – that the government would not create its own platform if companies agreed not to charge the most needy taxpayers.

But that coalition — and the relationship between the IRS and the industry — has frayed. The companies used the “Free File” program to advertise other paid products, apparently with the imprimatur of the federal government.

Seventy percent of taxpayers — those earning no more than $73,000 a year — were eligible for free e-filing, but companies also set their own stricter requirements, creating a patchwork that excluded many. Some cap income at well under $73,000 or set minimum income requirements. Others have instituted age limits or operated only in certain states.

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“Most people, it’s not like they’re making much more than their income, but if you make a few thousand dollars more, you’re thrown into the freemium version,” said Rebecca Thompson, a member of the ‘Internal Revenue Service Advisory Council, the agency’s public sounding board for customer service and vice president of economic equality advocacy group Prosperity Now.

Thompson works at the IRS’ volunteer tax preparation clinics, whose provider is TaxSlayer. But the company caps its Free File income eligibility at $39,000. Frequently, Thompson said, taxpayers who exceed that income cannot file through the clinic without paying $29.95 for TaxSlayer’s “classic” product or finding a separate free file provider themselves.

Representatives for TaxSlayer did not respond to a request for comment.

Taxpayers using certain businesses could only file for free by browsing the IRS website; Free File was inaccessible on corporate web pages. Free File has never gained the popularity hoped by federal tax authorities: less than 3% of taxpayers use the program, according to the Government Accountability Office, the nonpartisan congressional watchdog. Intuit left the program in 2016 and H&R Block in 2015.

State regulators said at least one company used deceptive practices to direct low-income people to paid products: Intuit settled with eight state attorneys general for $141 million in May after accusations that its advertisements for free tax preparation were misleading and deliberately confused the IRS-supported Free File program with “freemium products” that start at no cost but include fees for completing even modest tasks .

Under the terms of the settlement, Intuit made no admissions of guilt, Kerry McLean, the company’s general counsel, said in a statement at the time.

Intuit spokeswoman Ashley McMahon said in an emailed statement that the free edition of TurboTax is “designed only for those filing simple (Form 1040) returns.”

H&R Block, in an emailed statement, said qualifications for its free service “depend on the complexity of each individual tax situation. If further assistance is needed, a taxpayer may choose to connect with a tax professional via chat or online, charges may apply.

IRS officials did not respond to a request for comment.

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The industry has spent millions of dollars over the years to frustrate IRS plans to establish public filing software. Intuit and H&R Block have spent a total of $63.3 million on federal lobbying since 2011 on the eDossier and other issues.

Between April and July, H&R Block retained the services of two lobbying firms and sent three in-house lobbyists to Congress at a cost of $760,000, on issues such as “tax administration”, “funding of the Internal Revenue Service” and “Government-Completed Reports,” according to Federal Disclosures.

Intuit spent $50,000 in lobbying expenses on issues such as “IRS Taxpayer Assistance Programs,” during the same period.

Now lawmakers, including Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), who lobbied for the free IRS study, say they hope the funding will encourage the agency to pursue its own platform more vigorously. -form.

Sen. Ron Wyden (D-Ore.), chairman of the House Finance Committee, asked the IRS to conduct a taxpayer opinion survey on an electronic records system and consult with a vendor to begin build a government-backed platform.

These are modest steps, said Lutes, the IRS’ former director of electronic tax administration. It will take well over $15 million to build an electronic file platform that can integrate with the rest of the IRS’ more than 60 case management systems, many of which are decades behind modern standards. .

“Many other IRS systems would need to be modified to accommodate this,” he said. “I can’t imagine a world 50 years from now where people won’t just go to a government website and file their tax returns.”

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