An Internal Revenue Service pilot might just eventually bring US citizens a free direct-file alternative to commercial options like TurboTax and H&R Block. Yesterday, the agency announced that 13 states are joining its pilot program for the 2024 filing season, four of which will also be able to integrate their state taxes into the pilot.
Since 2001, a partnership between companies like TurboTax maker Intuit and the IRS called the Free File Alliance has given consumers a free alternative to paying for tax preparation. However, it turned out that when you try to get companies to offer an alternative to giving you money, they will do their best to hide that option. When the IRS updated the agreement to forbid companies from doing that — and give itself permission to create its own free file option — both H&R Block and Intuit left.
According to the IRS, these are the states joining the pilot:
- States with state income tax: Arizona, California, Massachusetts, and New York
- States without state income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming
The pilot doesn’t guarantee a nationwide rollout of the program. Danny Werfel, who heads the IRS, says this will test the government’s capacity to do this, adding that the Internal Revenue Service will work closely with participating states to gather the information it needs to see if the program works.
The IRS says its scope could change, but the pilot is starting small. Only some people can participate, depending on their income, tax credits, and deductions. For instance, if you’re filing a W-2 and have basic deductions like student loan interest or the standard deduction — the default one that everyone gets unless they need to deduct more — you can directly file. If you’re an independent contractor, though, it sounds like you may be stuck with your usual options.
Intuit seems to be worried. Shortly after this story was published, Rick Heineman, the company’s communications VP, emailed The Verge with an aggressive statement calling the IRS’s pilot “redundant” and “half-baked.”
“The Direct File scheme is a solution in search of a problem,” he wrote, adding that it could end up “costing billions of dollars in taxpayer money.”
Intuit, which profits from tax prep software, has lobbied against programs like this pilot for over a decade. It’s insisted, then as now, that taxpayers already have free alternatives, but not everyone sees it that way.
In 2022, the Federal Trade Commission sued Intuit, alleging false advertising around its “Free Edition” software, which the FTC’s chief administration law judge ruled was not truly free. As ProPublica noted in a 2019 report, TurboTax customers are often told after entering their taxes that their tax situation doesn’t meet the free software’s criteria, and they must either pay for preparation or move on. Last year, New York Attorney General Letitia James announced that Intuit had agreed to pay out $141 million to customers in that state for similar reasons.
The IRS pilot, of course, also comes with limits. The agency says a “limited, controlled environment” is the “best way to test a new service offering” so that it can adjust the program before scaling it up later.
Update October 18th, 2023, 2:07PM ET: Added a statement from Intuit, along with further context on TurboTax.
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