Why Are Millions Paying Online Tax Preparation Fees When They Don’t Need To?

Few taxpayers use the Free File system — intended to help moderate- and low-income filers — and that benefits companies like Intuit and H&R Block. Now Congress is moving to make the program permanent.

By Tik Root

This story was co-published with Quartz.

As internet use took off at the turn of the millennium, the Office of Management and Budget asked the Internal Revenue Service to create no-cost electronic tax-filing options for low- and moderate-income taxpayers. The tech-challenged agency turned to the online tax-preparation industry for help and soon struck a deal with companies such as Intuit (the maker of TurboTax) and H&R Block, which had organized as a 12-member consortium called the Free File Alliance.

The Free File Alliance agreed to offer tax-prep service to millions of Americans at no charge. In exchange, the IRS pledged to “not compete with the Consortium in providing free, online tax return preparation and filing services to taxpayers.”

The arrangement went into effect in 2003 and the IRS and the alliance have kept the framework in place ever since. Today the Free File system appears on track to become permanent. In April, the House voted unanimously to enshrine the provision in law, and the Senate is now considering whether to follow suit.  

It’s hard to argue with the goal of the program. Free File theoretically allows 70 percent of American taxpayers to prepare and file their taxes at no cost. More than 50 million no-cost returns have been filed using the program over the past 16 years, according to the IRS, saving users about $1.5 billion in fees. Intuit lauds the program as “an example of a public/private partnership that works.” And Tim Hugo, executive director of the Free File Alliance, called Free File “a great product,” adding, “Free File has changed the market.”

But 50 million returns over 16 years represents only about 3 percent of eligible tax returns. By ProPublica’s estimate, that suggests U.S. taxpayers eligible for Free File are spending about $1 billion a year in unnecessary filing fees.

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Source: ProPublica