Taylor: Why the IRS doesn’t offer its own free online tax software — and why it should

Happy federal income tax filing day. To celebrate, let’s raise our voices to say why free tax-filing software provided by the federal government should be available to anyone who wants it.

First, I’ll review why we don’t have that, according to investigations by others in recent years. The vast majority of people who prepare their own taxes pay private companies for the use of software to do so.

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Then, I’ll tell you why I don’t do my own taxes and why people with any financial complexity in their lives should pay a professional to do theirs.

Free filing for most a must

In 2022, 95 percent of all individual tax filings were done electronically , a process called eFile. About 150 million tax returns were eFiled last year.

Of those, 44 percent of eFiled taxes were self-prepared, while 56 percent were prepared by tax professionals.

The annoying part of having to pay to file federal tax returns is that for a majority of people, the IRS already tracks their income with a W2.

For people with a single source of wage income, filing should be done the way it is in other countries, where the government sends a form to each such taxpayer with all the information it knows filled in. The government essentially asks: “Is this right? Anything to add?”

If the information on the form is correct, the taxpayer affirms it — for free and in minutes — and their tax filing is done .

It stands to reason that, since the dawn of the internet, we should be able to do this for free. What a sane world that would be.

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In the U.S., free filing is technically available, but it’s hard to do and rarely done.

Technically, if you earn less than $73,000 in adjusted gross income per year, you may use the IRS’ free online filing system, known as Free File. About 70 percent of taxpayers are eligible. Traditionally, however, only about 4 percent of tax filers or fewer use Free File , according to the Government Accountability Office.

Also, before you can use the Free File program, you start on the IRS’ website, from which you are redirected to use a private tax preparation company’s software .

The IRS agreed in 2002 not to build free software that would compete with private, do-it-yourself tax software providers, as long as the industry participated in and offered a Free File option. The IRS didn’t pay the private providers, who were willing to offer Free File to prevent the IRS from creating a competing product. But at the same time, they are happy not to promote a service that they don’t get paid for. In fact, they historically have made it very difficult to find Free File using a search engine.

When the IRS moved to negotiate for a different and presumably better taxpayer experience, the two largest private software companies opted out of the Free File program: H&R Block in 2020 and Intuit — the maker of TurboTax software — in 2021.

Before that, these companies in particular seemed to be conspiring to keep consumers from using the Free File program.

According to a ProPublica investigation and a lawsuit filed by the New York attorney general, Intuit purposefully hid the Free File function from search engines and tricked taxpayers into paying for TurboTax when they could have used the free option. ProPublica, an independent and nonprofit investigative journalism organization, worked on its story for years, explaining why households choose to pay for something that can be done for free.

H&R Block, another maker of tax preparation software, has also been accused of employing such strategies.

In May 2022, Intuit paid $141 million to settle the New York attorney general’s lawsuit.

In 2019, Congress nearly passed a law forbidding the IRS from offering free online tax filing, something the tax software industry seems to want. Fortunately, that was blocked.

The Free File agreement between the IRS and the remaining private companies remains in place until October 2023, but the IRS now has the right to build and offer its own software for Free File. Hopefully, after October 2023, the IRS will create a free and simple way for the majority of filers to do their taxes. The IRS has reportedly allocated $15 million toward developing this program.

But you pay someone

In a just world, the federal government would provide simple filers with a free and easy online eFile method that they can do in minutes, which would put companies like Intuit and H&R Block out of a big part of the do-it-yourself tax filing software market.

For people with multiple sources of income and business ownership, it makes sense to pay someone else to help navigate their tax complexity. If you own a business, you already can’t use the existing Free File system. And you really shouldn’t use a do-it-yourself system.

I am not a fan of do-it-yourself filing for my financial life, which is a bit complex. I have paid a tax preparer to do my household taxes since at least 1996, when I got my first real job.

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The most important reason to pay someone else is that few of us know enough about the intricacies of the federal income tax code to be sure we are taking every advantage we can, while still remaining safely on the side of legality and not running afoul of the IRS.

But for those in the simplest category of wage earners with few investment assets, it makes sense — as a matter of principle — that the federal government should provide free do-it-yourself software.

Michael Taylor is author of “The Financial Rules for New College Graduates” and host of the podcast “No Hill for a Climber.”

michael@michaelthesmartmoney.com | twitter.com/michael_taylor