Apr 30, 2024 - Business

Turns out people like filing their taxes for free

Illustration of tax forms with smiley faces all over them

Illustration: Natalie Peeples/Axios

The Biden administration says that the IRS' Direct File program, which allowed folks to file their taxes directly online, was a hit — with use exceeding the agency's expectations and overwhelmingly positive reviews.

Why it matters: This could mark a turning point in the way many Americans pay their taxes.

  • It could also spell trouble for the two big tax prep companies: Intuit, which owns TurboTax, and H&R Block.

Catch up fast: A small part of the 2022 Inflation Reduction Act funding was used to assess the feasibility of a direct tax filing operation.

  • The IRS launched the Direct File pilot program this year in 12 states, targeting folks with simple tax returns based on W-2 forms.

State of play: More than 3 million users checked to see if they were eligible to use the site, and over 140,000 taxpayers used Direct File, surpassing the agency's goal of 100,000.

  • Direct File users saved an estimated $5.6 million in tax prep fees, the Treasury Department said in a release late last week
  • And 90% of Direct File users rated their experience as "excellent" or "above average," according to a survey of about 11,000 conducted by the General Services Administration.
  • It took just a half-hour to file taxes using Direct File for Marina Garcia, a project manager at a nonprofit in Texas that advocated for the free file program. That's quicker than it's taken in the past with H&R Block, her typical go-to, she tells Axios.

Zoom out: The idea for a free tax filing system isn't new — there were efforts going back decades, but the tax prep industry fought them off, as reported exhaustively by ProPublica.

  • Instead, in 2002, Intuit and other tax prep companies said they'd provide free online filing to lower-income taxpayers.
  • That system, called Free File, didn't catch on. And, per ProPublica reporting, Intuit used a range of tools to steer those who'd qualify for free help into paid services.

After that reporting drew criticism and regulators' attention, H&R Block and Intuit stopped working with Free File. In 2022, Intuit settled a case filed by all 50 state attorneys general, paying $141 million with some of that money going toward customers who paid for tax prep that should've been free.

Today: The company points out that there are still free e-filing options from the private sector, philanthropies, and IRS-sponsored methods. (You can also print out a form, fill it in by hand and mail it.) However, as the AP notes, those options and complicated and leave taxpayers calculating their own liability.

The big picture: The U.S. is an outlier when it comes to taxes. While other nations also require people to self-report their financial information annually, most of them do some of the work to make that easier.

  • For example, 83% of advanced and emerging economies pre-fill some part of the tax return with information reported by third parties — like wages or investment profits, according to a report from the IRS.
  • Many have systems where you can file for free directly with the tax agency.
  • In the U.S., of course, things are more complicated. Americans spend, on average, about nine hours and $150 a year doing their taxes, according to IRS data from last year.

The other side: Intuit doesn't see a success story here, arguing that the Direct File program is costly for taxpayers and unnecessary.

  • Some Republicans are also against the idea of a free tax filing system, viewing it as a waste of taxpayer money since there are private sector options that are better, the WashPost reports.

What's next: The IRS said it still needs to analyze the data from this tax season to decide its next moves. Advocates for the program hope to see it expanded.

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