TurboTax — which has been criticized for some sketchy tactics when it came to providing online access free of charge through the IRS site — is now shocking taxpayers by informing them that the big brand name has exited the Free File program.
The news officially was released in July, which frankly is a fantastic time to sneak in a tax change. Most early filers don’t start thinking about their taxes until January or February and some are now surprised to learn online or via email of a significant change ahead for Free File.
TurboTax notes online: “Intuit has elected not to renew its participation in the IRS Free File Program and will no longer be offering IRS Free File Program delivered by TurboTax.”
TurboTax is the second big name to stop participating. H&R Block exited Free File in October 2020.
The Internal Revenue Service is expected to announce the start of the tax season in the near future. If we don’t see delays, the tax season could kick off in late January.
This year, 2021 tax returns are due April 18, according to IRS instructions online for the tax season. (Those who live in Maine or Massachusetts have until April 19 because of the Patriots’ Day holiday in those states.)
The majority of people buy tax software to do it themselves or hire tax professionals to handle their income tax returns. Millions of lower income families and the elderly also turn to volunteers who prepare tax returns for free.
What is Free File?
Yet a simple way to cut down on costs — which many people oddly don’t tap into — remains using the IRS Free File system, if you qualify. Why pay $40 or $50 or more for online software if you don’t have to do so?
The Free File program at IRS.gov gives eligible taxpayers free access to brand name software programs offered by rival tax-prep companies. Those who qualify can use online software that prompts filers with key tax questions, does the math and allows you to file returns electronically for free. E-filing helps the IRS process returns and issue refunds more quickly than a return filed by paper.
TurboTax was but one partner in Free File. Those who selected TurboTax last year are able to opt for another online tax preparation service in the Free File program. Last year, there were nine tax software products available via Free File in English and two in Spanish.
Who qualifies for Free File?
If your adjusted gross income was $73,000 or less in 2021, you can use free tax software to prepare and electronically file your tax return, according to IRS instructions online for the 2021 tax season. If you earned more, you can use Free File forms.
See IRS.gov/freefile to research options.
Roughly 70% of taxpayers, based on income, qualify for some software services offered. But only a small fraction of those who qualify actually use Free File.
More than 4.2 million taxpayers used one of the free online partner products that are part of Free File in 2020, according to data from the IRS. That is excluding the millions of nonfilers who used the system to claim Economic Impact Payments.
For fiscal year 2020, the IRS processed more than 150 million individual electronically filed returns.
Why has Free File participation been so historically low — even after an uptick in 2020? Is it because taxpayers don’t know about the heavily-hyped Free File? Or did taxpayers go online and end up being directed somewhere else for tax services?
We’re not talking about a new program. It’s been about 20 years since the IRS first entered into a special agreement to encourage tax software companies to provide free tax return software to a certain percentage of U.S. taxpayers. But in exchange, the bargain included getting the IRS to agree that it would not compete with these companies by providing its own software to taxpayers.
What was the big criticism?
Big names, like Intuit’s TurboTax and H&R Block, faced much criticism back in 2019 after a ProPublica investigation detailed how the companies limited the program’s reach by making free options more difficult to find online and instead figuring out a way to steer eligible taxpayers into products that weren’t free.
ProPublica’s reporting included pointing out that Intuit added code to the Free File landing page of TurboTax that hid it from search engines like Google, making it hard to find.
In January 2020, the IRS announced some changes designed to offer more consumer protections.
One such change: Tax preparation firms agreed that they would not exclude “Free File” landing pages from an organic internet search.
The IRS suggested that taxpayers search for standard labeling: “IRS Free File program delivered by (the name of the software provider).”
As part of IRS Free File, taxpayers cannot be offered bank products that often carry fees, such as high-cost refund anticipation loans.
If you used IRS Free File last year, you’re required to receive an email from the same company that you used, welcoming you back to their official IRS Free File services.
The email must include a link to the company’s IRS Free File site and explain how to file with it. If you choose this email link and qualify, you will not be charged for preparation and e-filing of a federal tax return.
What’s TurboTax saying?
Some consumer report receiving emails from TurboTax in December alerting them that the company is no longer participating in Free File. (Those filing ultra-simple returns may still be able to use TurboTax Free Edition by Feb. 15 at Turbotax.Intuit.com.)
In an Intuit blog post dated July 15, the company said it has participated in Free File for nearly 20 years and has helped millions of Americans prepare and electronically file their tax returns for free.
Intuit blamed the lack of participation during the upcoming tax season on “limitations of the Free File program and conflicting demands from those outside the program.”
Instead, the company is focused on accelerating efforts that address other consumer financial challenges “without the restraints of the Free File program.”
Such efforts, according to the company, include:
Removing obstacles in tax preparation by importing data beyond the tax return.
Using AI models to proactively intervene with customers when they may be making a mistake or appear confused.
With customer consent, direct depositing refunds into free, high yield accounts.
Extending free refund advances to help those in need make ends meet.
Intuit’s products include the personal finance apps, Mint and Credit Karma.
Will we see simpler solutions ahead?
U.S. Sen. Elizabeth Warren, D-Mass., took a shot in July on Twitter at Intuit for exiting the Free File program and said the “IRS can, and should, create its own free tax preparation and filing system.”
Back in early 2020, before the pandemic hit, the IRS said it was no longer promising not to enter the tax return software and e-file services marketplace. The pledge no longer exists for not creating a government-run system.
Then, it seemed there could be a flicker of hope.
The pandemic, though, hit the IRS hard. Shutdowns to stem the spread of COVID-19 in the spring of 2020 triggered delays in processing income tax returns and issuing refunds. The IRS also picked up extra work for rolling out Economic Impact Payments and later the advance Child Tax Credit to shore up the economy. It wasn’t pretty.
Going forward, it only makes sense for the IRS to work harder to give taxpayers even more access to no-cost software options for those willing to do their own tax returns. Getting Congress to really simplify the tax code wouldn’t hurt, either. I wouldn’t bet on seeing these kind of big changes soon.
Tompor is the personal finance columnist for the Detroit Free Press. She may be reached at email@example.com.