Since the Free File agreement was implemented, the option for individuals earning less than $73,000 annually to file their taxes for free has been available. That would be done through designated companies associated with the IRS. Interestingly, despite the free option, the program is hardly used. Within this reality, there are some significant factors, such as TurboTax.
Before developing this topic, it is crucial to evaluate the real impact that the Free File program has obtained, and it is really low: only 4% of the Americans who could file free tax returns did so in this way in 2021. The 2022 figures are similar in principle. It is interesting to try to understand the reasons why this is happening.
TurboTax’s Role and Operating Model Internal Revenue Service (IRS)
At the beginning of this century, some significant tax return preparation and management companies entered into agreements with the Internal Revenue Service. These agreements involved offering free tax filing services to millions of users. In return, the Internal Revenue Service would not create a tax filing system competing with the corporate business.
In the United States, therefore, there is no non-refundable filing system. These systems are based on the fact that the institutional body completes the filer’s form. In this way, the taxpayer, at the time of filing the return, verifies the data and checks that they are correct and, in any case, makes the corresponding modifications.
Obviously, by implementing these systems in the United States, companies dedicated to tax management would significantly drop in income.
This scenario led to some episodes initially uncovered by the media and subsequently investigated by the authorities. The most relevant was the discovery that the promoter of TurboTax had deceived millions of users through misleading marketing practices to file their taxes at a cost, while they could have done it for free.
Last spring, 2022, the company settled the case for more than $141 million. Theoretically, almost 4 million users will, at some point, receive a portion of the money as compensation, although it is not known when they will receive it.
And what does Free File for Tax look like after all this?
After the abandonment of some of the significant tax management companies, including the promoter of TurboTax, the Free File program is still in force, but with problems and difficulty in finding free tools for the declaration. The IRS has created a search engine to find free options this year. The reality is that, since last summer, a study has been carried out to evaluate the creation of a public filing system. That would modify the whole scenario and probably change the free filing model.