File it away: Why the US ‘free file’ tax program needs to be free

The new tax filing season has started, and I can’t wait to do my taxes. As a tax professor, every year I look forward to spring break, when I can put some basketball games on television in the background and start working on my tax return. Of course, the games are often interrupted by commercials for tax prep companies.  

I do not rely on tax prep software, but instead rely on a spreadsheet, my own knowledge of the tax law, and my eagerness to continue to learn year after year how taxes actually get calculated.

Invariably, several hours into this project, I get frustrated and wish filing my taxes weren’t so complicated. Despite coming to tax filing season as a tax expert able to rationalize time spent doing my own taxes by hand as “professional development,” I get frustrated because I’m willing to invest the time and my only tax preparation fees are the postage it takes to mail my return — while Americans collectively spend over $11 billion outsourcing their tax preparation services annually.

It’s time for the Internal Revenue Service to develop a “Free File” program that actually lets taxpayers file for free. Since 2002, the U.S. government has had a Free File program to allow qualifying taxpayers to file for free. That program is broken.

From the beginning, the U.S. government outsourced the program to profit-seeking companies, who had every incentive to hide their free offerings from taxpayers in order to boost their bottom lines.

Worse, as part of its agreement with these bad actors, the government agreed not to develop its own system to allow taxpayers to file for free. This non-compete clause further dampened incentives for companies participating in the Free File program to innovate while simultaneously preventing government resources from being devoted to making filing easier for taxpayers.

Thankfully, the IRS has been reforming the Free File program. Tax prep companies are now prohibited from hiding their free products.

Perhaps more importantly, the IRS removed the non-compete clause, opening the door for the government to offer its own free filing assistance. That is a necessary step. Continuing to leverage profit-seeking companies to make it easier and costless for qualifying taxpayers to file their taxes is the wrong solution because their incentives will never be in the right place.

The IRS has already demonstrated its capacity to provide free tools to low-income Americans. Since 2020, the Expedited Filing Portal has allowed over 7 million users to file a simplified tax return in order to determine eligibility for and administer payment of stimulus checks legislated by Congress during the pandemic.

The IRS implemented this powerful tool despite notoriously limited resources. Fortunately, the Inflation Reduction Act earmarked $15 million for the IRS to study the feasibility of offering a free online filing service. That’s just part of the agency’s $80 billion in increased funds over the next 10 years. Just think of what could happen if just some of those funds were dedicated to developing a free filing system.

But there are some members of Congress who want to claw those funds back. House Speaker Kevin McCarthy (R-Calif.) triumphantly fulfilled his promise to lead a House vote to repeal the $80 billion allocation. House Republicans cited the repeatedly debunked falsehood that the funds would be used to hire a new army of tax enforcement agents to target low- and middle-income households, despite statements to the contrary from IRS Commissioner Charles Rettig and Treasury Secretary Janet Yellen.    

Repealing the IRS funds is not a good move. It’s time to join the ranks of economically developed countries — Spain, Sweden and Iceland — by using pre-populated returns to make filing a tax return easier and costless, particularly for a set of low-income taxpayers who can’t afford the average $400 filing fee annually.

To be sure, the tax preparation industry will not like this. Lobbying efforts will be fierce. That is why it makes sense to develop an improved free file program over time, starting with low-income filers and non-filers.

Because they already qualify for free services, these users shouldn’t be target customers of the tax prep firms anyway. A slow expansion from there will allow the tax preparation industry time to adjust to the change. These companies could pivot to tax planning services and supporting taxpayers in disputes with the IRS.

The Free File program is open for this tax filing season, so once again policymakers are failing American taxpayers. It’s time to put that to an end. It’s urgent to stop relying on profit-seeking companies to provide their products for free. The U.S. government needs to improve the cost and process of filing for the average taxpayer. The act of filing taxes shouldn’t itself be a tax on American taxpayers.

Lisa De Simone is an Associate Professor of Accounting at the McCombs School of Business, a Public Voices Fellow of The OpEd  Project at the University of Texas at Austin, and co-host of the podcast “Taxes for the Masses.“