Written by Elizabeth Renter | Nerd Wallet
There is a legitimate IRS program designed to allow 70% of taxpayers to file their federal income tax returns for free using online software. But the latest he IRS data shows hundreds of millions of people are not taking advantage of that benefit, potentially resulting in billions of dollars in overspending.
The Free File program began 20 years ago to establish a way for the lowest income earners to file their federal taxes using free online software. The income threshold for eligibility is adjusted each year to ensure that 70% qualify. For example, for tax year 2023 (currently preparing returns), a person with an adjusted gross income of $79,000 or less is eligible to use Free File.
A review of the most recent available IRS data for 2022 revealed that even though 70% were eligible, only 2.2% actually took advantage of the program.
Proportion of taxpayers using Free File will decrease in 2022
Just under 3.3 million federal taxpayers used Free File in fiscal year 2022. But 102 million people didn’t take advantage of it even though they were eligible.
In 2020 and 2021, the percentage of Free File users increased from the previous year to 2.8% and 3.1%, respectively. The increase may be due in part to a very public effort to keep filers and non-filers alike on record and eligible for economic impact payments as part of COVID-19 pandemic relief. There is a gender. The tools created to facilitate the delivery of these payments were built in collaboration with the Free File program. But that progress had all but disappeared by his 2022 year.
Overall taxpayer knowledge about the program appears to be low. A survey conducted in conjunction with the NerdWallet 2024 Tax Report found that only 13% of Americans know whether they are eligible for the Free File program, and the Treasury Department’s Tax Administration Office of Inspector General In a 2020 survey by the public, 30% of people who paid a premium to file for the Free File program had no idea about Free File.
So how much are taxpayers overspending? It’s hard to say, but a conservative estimate assuming each return costs him $40 in fees would put him at $4 billion.
Online tax preparation where the word “free” can be misleading
In January, the Federal Trade Commission found that Intuit Inc., the maker of TurboTax, engaged in deceptive practices when promoting its free tax software. Only after users went through a rather lengthy process of filling out a form online did TurboTax reveal whether they could file for free. Many were unable to do so and were then directed to paid products. The FTC currently prohibits companies from advertising their services as free unless they are actually free for everyone or disclose the percentage of people who will be eligible before users start. Intuit claims the FTC’s decision is flawed and said it will appeal.
As of this writing, TurboTax currently advertises on its “Free Edition” landing page that “approximately 37% of filers are eligible.” But this is only about half of his 70% of all taxpayers covered by his IRS Free File.
The FTC’s ruling against TurboTax is not the first criticism the tax software company has faced regarding its “free” software. In 2020, the New York State Department of Financial Services ruled that several tax software providers engaged in deceptive practices that directed free filers to paid products.
At the time, these providers were members of the Free File Alliance. Free File Alliance is the name given to a group of online tax software companies licensed by the IRS to offer Free File services. Via the IRS website. However, following the New York DFS investigation, ProPublica reporting, and the 2020 Treasury Inspector General investigation, the IRS increased regulation and oversight of these companies. Eventually, some companies, including TurboTax and H&R Block, left the Free File Alliance.
Where can I find the real free files?
I.R.S. provide tools Based on your answers to a short question (about 5 minutes worth), you’ll be shown some suitable free file providers. Not all free file providers are suitable for everyone. Because you can set your own income and age requirements, the IRS will match you appropriately and also indicate whether your provider will allow you to file for free with your state. By going directly to these providers through the IRS, you won’t end up on a page that appears to offer a free tax return and calls you a switcher.
The IRS is also offering free tax filing through Direct File to eligible taxpayers in 12 states this year. Direct File does not have the same income restrictions as Free File, but it cannot be used for more complex filing needs. If you don’t qualify for Free File and live in Arizona, California, Florida, Massachusetts, New Hampshire, New York, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, this option may be right for you. The agency plans to roll out Direct File in phases, making it widely available across eligible states by mid-March.
Analysis methods are available at: Original workpublished on NerdWallet.
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Elizabeth Renter writes for NerdWallet. Email: elizabeth@nerdwallet.com. twitter: @elizabethrenter.
