The Internal Revenue Service (IRS) has announced plans to launch a pilot plan, Direct File, providing a free method for U.S. workers to file their federal taxes.
This new system aims to allow taxpayers to submit their federal tax returns at no cost through an in-house filing system. But it also presents a significant challenge to tax preparation firms like TurboTax.
Who Qualifies for the IRS Free Filing Program?
In order to use the IRS Direct File, Americans must meet specific income criteria.
First, filers must choose the standard deduction. Second, they must have income that comes primarily from wages documented on Form W-2, Social Security, or unemployment. And finally, their interest income cannot exceed $1,500.
Which States Have Approved Direct File?
According to the IRS, there are only 12 states currently participating in this pilot.
The dozen states are Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming, along with the District of Columbia.
How Will Direct File Work?
For those who qualify and live in the aforementioned states, filing taxes through Direct File is supposedly quite simple.
There is no software or app required to file; all one needs to do is access the IRS’ Direct File website from their smartphone, tablet, or computer and follow the prompts.
Direct File Offers Customer Service Support
As well as foolproof checklists on every page, Direct Link will also provide readily available customer service representatives in case the filer is confused at any point.
Additionally, Direct File is available in both English and Spanish and is constantly being updated to ensure the best possible user experience.
The IRS Direct File Pilot Is Completely Free
One of the most important aspects of the Direct File pilot is that it is completely free for all who use it.
But while it may seem like there are no downsides to the program, as with any change in the system, there has been some debate about the IRS’ plan.
IRS Commissioner’s Perspective on Direct File
Of course, the IRS believes it’s a fantastic idea that portrays its commitment to exploring new, cost-free options for taxpayers to file their returns.
IRS Commissioner Danny Werfel said, “This is a critical step forward for this innovative effort that will test the feasibility of providing taxpayers a new option to file their returns for free directly with the IRS” (via The New York Times).
Businesses Like TurboTax Are Less Excited
On the other hand, companies such as TurboTax, which provides tax filing services to millions of Americans every year, are less thrilled with the plan.
TurboTax said in a statement: “Direct File is not free tax preparation, but rather a thinly veiled scheme where billions of dollars of taxpayer money will be unnecessarily used to pay for something already completely free of charge today — free to the taxpayer and actually free for the government” (via Newsweek).
Inuit Reacts to IRS’ Free Filing Initiative
In response to the IRS initiative, Intuit, the parent company of TurboTax, also criticized the plan.
Intuit’s spokesperson, Tania Mercado, described the IRS’ move as a “half-baked solution” and called the direct file scheme a “solution in search of a problem” (via The New York Times).
TurboTax Is Already ‘Free of Charge’
Part of TurboTax’s argument is that their services are already “free of charge,” so it’s really an unnecessary offering.
Additionally, TurboTax claims that Direct File will actually cost taxpayers money in the long run as the government will need to fund the service somehow.
TurboTax’s ‘Free’ Service
But it’s important to note that while TurboTax does offer free services, nonprofit news outlet ProPublica revealed many users have complained that these features are often hidden behind paywalls, and not all taxpayers qualify for them.
Bloomberg disclosed that in 2022, 42 million people used TurboTax for their tax returns, with only 13 million not paying for the service.
TurboTax’s Past Settlement with Customers
TurboTax has faced criticism in the past, notably when it had to compensate 4.4 million customers for misleading them into paying for services that should have been free, per Newsweek.
Additionally, TurboTax charges for filing tax returns that include unemployment income, student loans, homeowners, and cryptocurrency transactions.
The Average American Spends $323 on Filing Their Taxes
Of course, there are some “free” filing services available, but as mentioned, once things get a little complicated, these companies usually charge some kind of fee.
In fact, according to a study conducted by the National Society of Accountants, the average American paid $323 to file their taxes in 2021 (via Newsweek). So a completely cost-free filing option certainly sounds appealing for many.
The Potential Impact of Direct File on TurboTax
Newsweek argues that the IRS Direct File program, though currently limited in scope, has the potential to attract a significant portion of TurboTax’s user base if it expands nationwide and caters to more complex tax situations.
This could result in a noticeable decrease in revenue for TurboTax, especially if the program successfully addresses the needs of a broader taxpayer audience.
Funding and Aims of the IRS Direct File Program
The Direct File program is funded by a portion of the $80 billion allocated by President Joe Biden’s Inflation Reduction Act to reform the IRS.
This investment hopes to improve IRS services, including reducing phone line waiting times, hiring new staff, and expanding online services.
IRS Clarifies Intentions Behind Direct File Launch
The IRS has clarified that the launch of Direct File is not intended to create competition with private tax filing companies.
“Projects like Direct File represent a goal of the IRS Strategic Operating Plan to give taxpayers choices in how they interact with the tax agency,” the IRS revealed in a statement.
The IRS Wants Taxpayers to Have Choices
The statement explained, “This includes choices in how they prepare and file their taxes, whether it’s through a tax professional, commercial tax software or free filing options. Direct File is one more potential option from which qualifying taxpayers will be able to choose to file a 2023 federal tax return during the 2024 filing season.”
But while it seems like the government has the best interest of Americans in mind, some question what Direct File means for personal privacy.
Concerns and Support Around the IRS’ Direct File
Newsweek reports Grover Norquist, president of Americans for Tax Reform, expressed concerns about privacy if the IRS takes over tax filing processes.
Norquist explained, “If the government does your taxes for you, they have to know everything about you. It is the end of economic privacy.”
The Government Already Has All Relevant Economic Information
Others on social media and various platforms have argued against Norquist, saying that TurboTax and companies like it share all economic information with the government anyway.
And many others simply aren’t considered with their government having a slightly more detailed insight into their finances.
Free Filing Is a ‘Fundamental’ Right
On the other hand, according to Newsweek, some believe that it is the government’s duty to provide a free filing option.
Founder of the nonprofit Center for Taxpayer Rights, Nina Olsen, said, “It’s a fundamental taxpayer right to have the government provide free electronic filing of taxpayer forms. Taxpayers shouldn’t have to pay for the privilege of filing their taxes.”
Public Reaction to the Program
And it’s not only those who work within the industry that are responding to the IRS’ new initiative. In fact, it has created a range of reactions among Americans.
Alec Stapp of the Institute for Progress criticized tax companies like TurboTax in a post on X, formerly known as Twitter, writing: “TurboTax (Intuit) and H&R Block have lobbied for years to stop this from happening. These companies are parasites and I can’t wait for the IRS to put them out of business.”
Sen. Elizabeth Warren Weighed In
And Sen. Elizabeth Warren, a Massachusetts Democrat, agreed wholeheartedly.
She took to X to write: “The tax breaks that Intuit got in 2022 could have funded a year of free tax filing for millions of Americans. Instead of subsidizing a corporation that shamelessly lobbies its way into bigger profits, let’s make our tax system work for everyone.”
The Direct File Pilot May Not Even Work
It’s important to note that the Direct File initiative is currently in its experimental phase, and it may never become available throughout the entire country.
It will all depend on whether or not the eligible Americans within the 12 states where it’s available use it and like it for the 2023 tax year.
Direct File: A Step Toward Tax Filing Evolution
Most agree that the IRS’ Direct File program is a significant step in the evolution of tax filing in the U.S.
While it has sparked debate and concern among some, its success in the pilot stage could pave the way for more accessible, free tax filing options for American taxpayers.
