Did You Pay for Tax Prep? You Probably Didn’t Have To

Number of the Day: The most relevant or interesting figure in personal finance

NOTD - 70%

That’s how many taxpayers could have filed their federal tax return for free under a government program that’s so little known that only 3% actually did. 

The IRS Free File program—which lets taxpayers file their income taxes online for free, through a partnership with private tax prep companies—remained extremely underused, the Government Accountability Office, a watchdog on federal agencies, said in a report Thursday that analyzed data from the 2020 tax season. The GAO recommended the IRS look into expanding the free tax filing options available to the public, and discussed the possibility that the agency could cut out the middleman and offer a way for taxpayers to file electronically directly to the government agency instead of through third-party companies.

The Free File program is not to be confused with various products advertised as “free” by tax prep companies—though it frequently is, according to the GAO report. The Federal Trade Commission recently filed a lawsuit accusing TurboTax of using its “free” tax filing service to funnel customers into paid products, for instance.

The GAO report is the latest salvo in a perennial debate over how Americans pay the taxes they owe the government. Some consumer advocates argue that the current system—where taxpayers often end up paying accounting companies fees in the neighborhood of $20 to $95—should be scrapped in favor of one where people can file directly to the government.

Several “stakeholders” who went unidentified in the GAO report pointed out this approach would have a number of advantages, including that the IRS would be able to use information it had on file to automatically fill out parts of tax forms and make the process easier for taxpayers. 

The IRS pushed back against that idea, arguing the agency does not have the funding or expertise to develop the kind of tax filing software that private companies like TurboTax and H&R Block currently offer. However, the GAO suggested that the IRS could get help from the U.S. Digital Service, a government technology agency, and Code for America, a nonprofit group that worked with the IRS to create a simplified way for families to apply for child tax credit payments last year. 

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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