Democrats optimistic about IRS’ plan to offer free tax prep software, aiming to break TurboTax and H&R Block’s dominance.

Democrats optimistic about IRS' plan to offer free tax prep software, aiming to break TurboTax and H&R Block's dominance.

The Excitement Over the Free Direct-File Tax Program Development Under the Inflation Reduction Act

IRS

It’s been approximately one year since the passage of the Inflation Reduction Act, which has brought about significant changes in the US tax system. One of the notable provisions of this act is the development of a free direct-file tax program by the Internal Revenue Service (IRS). This pilot program is set to be available in 2024, and congressional Democrats are eagerly anticipating this change with great enthusiasm.

Signed into law by President Joe Biden in August 2022, the Inflation Reduction Act aims to tackle tax system cheating and reduce healthcare and energy costs for Americans. Additionally, the act has increased funding for the IRS and instructed them to explore the establishment of a program that allows certain taxpayers to directly file their taxes with the IRS, free of charge. This move challenges paid tax-filing services like TurboTax and H&R Block.

TurboTax currently dominates the tax filing service market with a staggering 73% market share, according to a Bloomberg Second Measure report from May 2021. H&R Block follows as the second-most popular service, with a 21% market share. Therefore, the introduction of a free direct-file option not only addresses the chronic underinvestment in the IRS but also recognizes the importance of providing a free alternative to taxpayers.

Speaking at a virtual press conference to mark the one-year anniversary of the Inflation Reduction Act, Rep. Don Beyer praised the act for reversing “years of chronic underinvestment in the IRS” and emphasized the necessity of a direct-file option. He pointed out that without such an option, Americans would continue to spend time and money on a service that should be freely available. The Free File program, established in partnership with tax preparation companies, has not been successful for over two decades, as revealed by Beyer.

The Free File Alliance currently assists taxpayers earning $73,000 or less per year to file their taxes for free. Although this service has been around for years, it has been vastly underutilized, partly due to efforts by tax filing services to hide or divert taxpayers away from cost-free alternatives. During the pandemic, both Intuit (the maker of TurboTax) and H&R Block withdrew from the Free File Alliance.

Surprisingly, despite the potential benefits of the free direct-file program, only around 3% of eligible tax filers have used the Free File Alliance services in previous years, while approximately 70% could have done so, according to the US Government Accountability Office. This significant underutilization highlights the urgency for a more accessible and user-friendly tax filing option.

Rep. Katie Porter, in a recorded message, echoed the IRS’ push for a free direct-file program. She pointed out that the IRS already possesses all the necessary tax data, suggesting the possibility of pre-populated forms sent to taxpayers for review and signature, reducing the burden on individuals. California has successfully implemented pre-populated tax forms, which garnered positive feedback from taxpayers.

While Democrats like Porter, Beyer, and Sen. Elizabeth Warren support the free direct-file pilot program, some congressional Republicans have expressed opposition. In May, the Republican-controlled House Ways and Means Committee issued a press release criticizing the IRS for pursuing the pilot program. The committee chairman accused the Biden Administration of “cooking the books” in its study that recommended the implementation of such a program.

Opposing Republicans argue that IRS control over tax preparation is a part of the Democrats’ efforts to empower the agency and target working-class families. They stress that with the IRS fully controlling the tax filing process, taxpayers will be powerless. These opposition voices have previously attempted to defund or reduce the IRS’s funding, slashing over $20 billion from the Inflation Reduction Act’s IRS funding.

Rep. Porter responded to these objections by drawing a proverbial line in the sand. She expressed her determination to protect the progress made towards a fairer and more accessible tax-filing system, stating that any attempts to hinder this progress would require opponents to go through her.

The development of the free direct-file program under the Inflation Reduction Act represents a notable change in the US tax system. This pilot program aims to promote fairness, simplicity, and cost-effectiveness for American taxpayers. While challenges and opposition remain, proponents of the program are optimistic that it will revolutionize tax filing processes and empower individuals and families across the country.