In recent years, the share of tax filers that took advantage of a free program for filing their taxes has increased. However, the number of people who don’t use it has increased, leading to billions in unneeded spending.
The IRS has been partnering with tax software vendors, the Free File Alliance, for free online filing since around 20 years. This is to help taxpayers with qualified incomes. The income cap for this year is $73,000. Anyone earning an adjusted gross income of at least $73,000 for tax year 2022 will be eligible to file free online using at least one provider this year. To ensure that the lowest-earning 70% of taxpayers are eligible to file online tax software for free, the income cap is updated annually.
This noble plan has one problem: Very few people take advantage of it.
2021 data shows a 101,000,000 shortfall in free filers
An IRS analysis of fiscal year 2021 data shows that 70% of taxpayers were eligible for Free File. However, only 3.1% actually used it. This is a slight improvement on the 2.8% that was reported last year. This is a shortfall of approximately 101 million taxpayers, up from 99.5million in 2020. They are now paying federal taxes when they don’t have to.
Depending on the service they used and how taxed they are, their spending habits will vary. A 2022 NerdWallet survey by The Harris Poll revealed that most people who paid for federal tax returns were paying more than $150. This means that 2021 filers could have paid $15.2 billion more than they actually did.
Even a conservative spending estimate of $40 per return, which is close to the advertising claims of many online tax services, would result in an excess of $4 billion.
These taxpayers are among the poorest in the country due to the Free File program. The program was created to make it easier for these taxpayers to file income tax returns online.
Uncertainty and confusion are likely to be the reason is so confused
The Treasury Inspector General for Tax Administration’s 2020 report found that 30% of taxpayers who had paid to file did not know about the Free File program. You must be aware of it in order to use it. You must also know how to access it, how to avoid costly traps and how to spot scams by other providers offering “free” services.
Software supplied by companies that are members of the Free File Alliance must comply with strict regulations. Many tax software providers, however, offer their own software for free outside of the Alliance.
Google searches for “free tax filing” will return a page with a few ads. TurboTax, H&R Block and other tax service providers offer “free” services but have been criticised for misleading customers into paying high-priced upgrades. ProPublica’s investigation revealed that the practice was actually a violation of the Free File Alliance standards.
H&R Block, TurboTax By Intuit and TurboTax by Intuit both left the Alliance in 2020 & 2021 respectively.
Taxpayer tips for filing free
1. Find out if you are eligible. If your adjusted gross income is less than $73,000, you are eligible for free filing of 2022 income tax returns. If you are married filing jointly, the limit is your combined income. Unsure? Unsure?
2. Access tax software via IRS.gov. The Lookup Tool can narrow down your options by asking some questions.
3. Do not be swayed by any suggested charges. Additional fees may be charged by providers outside the Free File Alliance for add-ons such as audit protection and one-on-one advice. Get help if you are unsure about what you are signing up for.
4. Get support. You can also seek help directly from the IRS. There are Taxpayer Assistance Centers located all over the country that can assist you with tax questions and filing. The Volunteer Income Tax Assistance program (VITA) may be available to people with additional needs such as those who are disabled or older, or those who can only speak limited English.
METHODOLOGY
To determine the percentage of Americans who are eligible to use IRS Free File, the 2021 IRS Data Book was used to calculate the number of individual returns that were filed between Oct. 1, 2020 and Sept. 30, 2021 fiscal years. The difference between the 70% of these returns and the total number who used Free File was calculated using the 2021 IRS Data Book. The 70% guideline is for the percentage of filers who should have the ability to use Free File within a filing year. However, the fiscal-year data is an approximate proxy for these more exact (but not available) numbers.
The median amount spent on federal tax filing in one year does not include people who did not file in 2021, or those who didn’t pay to file in 2020. This is based upon a survey that was conducted online in the United States by The Harris Poll for NerdWallet February 22-24, 2022. It included 2,077 adults 18 years and older. 1,025 of them paid federal income taxes to file in 2021. For more details about the methodology, see our analysis.