The Inflation Reduction Act Will Require the IRS to Study Free Tax Filing Options

The United States has made a small but significant move toward creating a public system to allow millions of Americans to file their taxes for free.

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. President Joe Biden said he plans to sign the bill, the Inflation Reduction Act, today, following the party-line vote in the House to approve it on Friday.

The bill provides $15 million to study how the IRS could implement such a program, how much it might cost and how Americans would view it. The report, which must include the input of an independent third party, is due to Congress within nine months of the bill’s passage.

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.

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.

“I’ve been working to allow 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. “Reporting about industry scams certainly helped members see the importance of this issue and get this across the finish line.”

The last time the federal government attempted to provide free tax filing was back in 2002, under the George W. Bush administration. Back then, soon after the White House floated “an easy, no-cost option for taxpayers to file their tax return online,” Intuit and its lobbyists fought back hard. The result was a program that relied on Intuit and other private software providers to provide the service instead.

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.

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.”

A spokesperson for Intuit reiterated the company’s opposition to the IRS offering a free public tax filing option.

“Decades of experience and numerous independent studies, polling, and in-depth research about the idea of an IRS-run tax preparation system show that taxpayers see an inherent conflict of interest in having the IRS be the tax collector, investigator, auditor, enforcer and now preparer when taxpayers want 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 jeopardize their financial freedom,” said Intuit’s Rick Heineman.

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.

A spokesperson for the IRS declined to comment on the provision to study free filing options.