The voices of Tax Policy Center's researchers and staff
Most of us dread filing tax returns—it’s too complicated, too confusing, and often too expensive. The Free File Program eased some of those burdens for a few million tax filers each year, including me.
But its future is uncertain. Less than 5 percent of eligible tax filers use Free File and the two biggest tax prep companies that partnered with the IRS to operate it have quit the program.
It’s time to redesign Free File to ensure that households with low to moderate incomes can prepare and electronically file their tax returns without paying a tax preparer.
The private-public consortium, led by the IRS since 2003, was established to provide no-cost online federal tax prep and electronic filing to households with low to moderate incomes (up to $73,000 for tax year 2021). The program’s original memorandum of understanding prevented the IRS from creating its own tax prep software and e-filing services, though this condition was removed in December 2019.
Aside from some restrictions, such as limits on their ability to advertise retail products to Free File users, commercial tax preparers have had flexibility over how to administer the program, including determining which customers can use it. For example, some have restricted access to those whose incomes are lower than the IRS threshold (such as TaxSlayer’s $39,000 upper limit for tax year 2021).
According to the Free File Alliance, about 60 million federal tax returns have been filed through the program since its inception. The IRS estimates the program has saved tax filers more than $1.8 billion in filing costs, assuming they avoided $30 on average per return.
In 2020, 4.2 million tax returns were filed through Free File. That was the most in the last ten years but still only about 4 percent of those likely eligible (those with incomes below the 2020 threshold of $69,000, or about 70 percent of all tax filers).
Why do so few eligible tax filers participate? Some may not meet the commercial tax preparers’ rules. Others may find even Free File too complicated. But many tax filers simply may be unaware that the service exists. And outreach efforts by the IRS and others have failed to spread the word.
Even tax filers who have heard of the program may not find it. Most tax filers must access Free File from the IRS website since the commercial tax preparers may not provide a direct link on their own sites. Back in 2019, when I tried to access TurboTax’s Free File option (once called “Freedom edition”), I had to wade through a few pages of Google search results to find it.
According to the Treasury Inspector General for Tax Administration, at least 14 million tax filers who were eligible for Free File in 2019 may have paid fees to commercial preparers instead.
And participation is likely to decline further. Both TurboTax and H&R Block, the two largest commercial US tax preparers, have quit the Free File Alliance. The non-profit newsroom ProPublica estimates that those two companies accounted for about two-thirds of all filings through the program. TurboTax and H&R Block still offer no-cost tax prep, but not through the IRS Free File program.
TurboTax’s departure from Free File followed years of controversies. The company allegedly steered tax filers away from its Free File option (“Freedom edition”) towards its retail products (including a “Free edition”) using a range of marketing and coding tactics. Legal battles over claims of consumer fraud are ongoing.
With low participation, the future of the Free File program looks dire. Current Free File partners are small companies that are unfamiliar to most tax filers: TaxAct, 1040Now, TaxSlayer, EZTaxReturn, Free 1040 Tax Return, OnLineTaxes, FileYourTaxes, and FreeTaxUSA.
Free File is an example of how a well-meaning public-private partnership may fail to work out as intended. As an alternative, Congress could consider allowing the IRS to create its own free online tax filing service, though TurboTax and H&R Block would likely lobby against such efforts. And the underfunded, overworked, and backlogged IRS may not be able to handle such a project any time soon.
With millions of prior tax returns waiting to be processed and millions of phone calls going unanswered, fixing and expanding Free File may not be high on IRS’s list of priorities right now. But the federal government must take an active interest in making sure that low- and moderate-income households can file their tax returns easily and at no cost.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Rogelio V. Solis, File/AP Photo