Tax season is around the corner, but it may come with fewer headaches this time around, thanks to a new program that offers free filing services, regardless of income.
The Internal Revenue Service announced Tuesday plans to roll out a program called Direct File, a free tax preparation program tailored to suit the needs of millions of American taxpayers. The software will roll out on a monthly basis in 13 states—including Arizona—and will be available in Spanish and English.
Biden’s approach to tackling inflation
The IRS was tasked with looking into how to create a “direct file” system as part of the funding it received from the Inflation Reduction Act, which President Joe Biden signed into law last summer. It gave the IRS nine months and $15 million to report on how such a program would be implemented.
The software will file both state and federal taxes, and—unlike free filing services offered by other public entities like the city of Phoenix, or free offerings from companies like Intuit—will not have any income-based restrictions.
“Tax-filing is expensive and time consuming, but I am taking action to make it free and easy for Arizonans,” said Arizona Gov. Katie Hobbs. “Arizona is one of the first states to participate in this program and I’m proud that we are putting money back into taxpayer pockets and making filing convenient and easy.”
Limitations on certain circumstances
While Direct File will suit the needs of most filers, it will not be set up to handle more complex tax situations, including:
- Itemized deductions
- Self-employment income, such as gig work
- Income from interest above $1,500
The software will only be able to process certain deductions, like for student loan interest and educator expenses, and three tax credits: the Child Tax Credit, Credit for Other Dependents, and Earned Income Credit.
The IRS has faced intense blowback from private tax preparation companies that have made billions from charging people to use their software. The introduction of a free public option could upend the industry and fundamentally change the way taxpayers interact with the IRS.
Opposition from the private sector
Intuit, which has lobbied to block free tax prep services for two decades, is among the companies that have attacked the new program, without noting their clear financial stake in seeing it fail.
“[It’s] a solution in search of a problem,” claimed Intuit spokesperson Derrick Plummer. “That half-baked solution now has the potential to become a financial nightmare for tens of millions of Americans while unnecessarily costing billions of dollars for something free of charge today.”
Contrary to Plummer’s claim, providing the public with free tax filing services is estimated to cost the IRS anywhere from $64 million to $245 million, depending on how widely the service is used.
Intuit, meanwhile, stands to lose a substantial amount if Direct File is widely adopted and its TurboTax software falls by the wayside. A 2019 investigation by ProPublica found that 15 million TurboTax customers from the previous year paid for their tax filing services when they qualified for free tax prep, bringing in an estimated $1.5 billion for the company.
The pilot program for Direct File will begin to roll out in January, and is expected to be available to all Arizonans by April 2024.
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