It’s a worthy goal: to make annual federal income tax filing both easier and free for millions of Americans. But while these have been explicit goals of the IRS Free File program since its inception nearly 20 years ago, the tax department and an alliance of several tax software companies fall significantly short, and a majority of taxpayers , including those with the lowest incomes, are paying the price.
Although 70% of taxpayers are eligible for Free File, less than 3% actually use the service. This shortfall of some 87 million taxpayers, on average, could put up to $13 billion in the pockets of businesses and tax preparation professionals each year, according to analysis of data from the IRS and a NerdWallet survey conducted online by The Harris Poll.
How Free File works (ideally)
In 2002, the IRS partnered with a group of tax software providers, known as the Free File Alliance, to provide free filing services to federal taxpayers who met certain income requirements. Each year, 70% of all lowest earning taxpayers qualify to use Free File software. The income cap used to achieve this 70% goal is reassessed each year by the IRS. In 2022, those with an adjusted gross income of $73,000 or less are eligible.
While $73,000 in income can make you a pretty comfortable middle class, in some parts of the country, about half of those with adjusted gross incomes below $75,000 earned less than $30,000 over the course of the year. filing year 2020.
To take advantage of Free File, taxpayers must go to the IRS website and choose a software company on the agency’s portal. There are currently eight providers of the Free File service, including lesser-known software vendors like 1040Now and TaxSlayer. Larger companies such as TurboTax and H&R Block have left the Free File Alliance over the past two years. The other eight can control the number of returns they make for free by having additional limits such as age, state of residence, and more restrictive income caps. Taxpayers can review these restrictions and choose a provider that suits their needs before navigating from IRS.gov using a direct link to the Partner’s Free File page, where they can begin their tax filing.
The cost of not depositing for free
Assuming a typical filing cost of $150 per taxpayer and examining a decade of IRS data, we estimate that Americans could overpay by up to $13 billion each year. Even a more conservative estimate — $40 per taxpayer, on average — puts the tab at $3.5 billion.
An analysis of 10 years of IRS data indicates that 2.4% of taxpayers file their federal returns for free each year, on average, using Free File software or paper forms. This means that over the past decade, approximately 87 million taxpayers each year did not file for free, despite being eligible.
In 2020 alone, of the 148 million personal tax returns filed, only 4.2 million were filed for free, a shortfall of 99.5 million from the benchmark of 70%. As the number of federal filers has increased every year over the past decade, the magnitude of this shortfall has also increased.
Americans who paid to file federal tax returns in 2021 typically spent $150, according to a recent NerdWallet survey conducted online by The Harris Poll of 1,025 federal filers who paid to file 2021 tax returns ( called US filers). Half of US filers paid less and the other half paid more.
Assuming those who failed to Free File paid roughly the same price as other paying filers, that’s $13 billion in wasted spending.
The amount a person pays to file their tax return depends on a variety of factors, including the complexity of the return, the software company they use, and whether they choose to hire a professional. Even those considering using a tax company’s free option can be persuaded to upgrade to paid versions when not quite necessary, according to a years-long survey series from ProPublica. Some of the cheapest software options run around $40. Even at this rate, those who could have used Free File are spending $3.5 billion unnecessarily.
And remember: this group includes the lowest paid taxpayers in the country.
Taxpayers probably don’t know about free file options
Offering a product or service does not guarantee its use — people need to know it is available. Taxpayers who knew they could file their federal return for free probably would. The sheer volume of those not taking advantage of the free file service indicates that many may simply not be aware of it.
A 2020 audit of the Free File program by the Treasury Inspector General for Tax Administration found that approximately 30% of taxpayers who paid to file were unaware of the program or how to access it. Faced with this discovery, the IRS responded that it advertises the service and the rules governing it through its website, social media and press releases, documents that the average taxpayer – unless they considers an income tax fan or an IRS fan – is not likely to come across.
And knowledge of the program is not enough – taxpayers must also understand the requirement to access these filing options through the IRS website. Navigating directly to a Free File Alliance member page does not guarantee that taxpayers encounter the Free File option, and instead they may see a software publisher’s free version not governed by the same rules of the agreement with the IRS.
The biggest tax software providers specialize in obscurity
If taxpayers come to Google to find “free file” results, they are first greeted with three to four sponsored ads, each for free versions of tax software not governed by Free File Alliance rules. A small “Ad” designation differentiates the results. It is only after scrolling through these that people find an IRS entry point.
This potential pitfall was one of many discussed in a series of 2019-2020 surveys by nonprofit newsroom ProPublica that identified how popular tax software companies have been actively working to make tax preparation simpler and more affordable revenue stream for taxpayers. These companies would offer their services for free but use clever marketing to convince users to upgrade for a fee, according to the series.
These companies also typically raise their prices as the tax deadline approaches, penalizing taxpayers who don’t file right away.
In addition to muddying the waters on what qualifies as free file versus free filing, at least one of the tax software giants has withheld its true free file landing pages from Google search results.
This series and the attention it garnered led to increased scrutiny and ultimately a tightening of the standards of the Free File Alliance agreement.
In 2020, H&R Block left the Free File Alliance. TurboTax, owned by Intuit, followed suit in 2021.
What taxpayers need to know in 2022 and beyond
Find out if you qualify for the free file
Your 2021 adjusted gross income must be $73,000 or less to qualify for the IRS free file this year. You can start your return with one of the Free File Alliance companies or estimate your AGI yourself, if you are unsure if you meet the income criteria.
Access the free file only through the IRS website
On the IRS official website, browse through all eight providers, or use an IRS tool to choose the Free File software company that best suits your needs. If you use a search engine to find a “free file”, you run the risk of landing on a page that is not subject to the rules of the IRS-Free File Alliance.
Know what to expect when you file your status report
Twenty-two states and Washington, DC, offer their own free file programs, according to the IRS. But fees in other states vary widely. The tax software company you choose should be able to explain the costs and details to you, given your state(s) of residence. You can also visit your state’s Department of Revenue website to check the cost details beforehand so you are not caught off guard.
If you don’t qualify for the free file, be careful
There is a lot of tax software publishers offering filing assistance for a fee, and these fees vary widely. Research your options so you know what to expect for the price you’re paying and the services you really need.
Know where to turn for help
Tax preparation software usually holds your hand through the filing process, but questions may arise. Many tax preparation companies have online chat services and phone support to answer questions as they arise, but these may incur additional fees.
The IRS provides answers to some Frequently Asked Questions, opens Taxpayer Assistance Centers in the most populated areas during tax season and provides tax preparation services to certain populations, including adults 60 and older and people with disabilities, as well as people with low income or whose English is limited. The agency can also be reached at 800-829-1040 for simple tax assistance.
The article Analysis: Taxpayers Waste Billions Filing Federal Returns originally appeared on NerdWallet.
