Billions spent on tax returns that could be filed for free
While some taxpayers may be eligible to take advantage of free tax filing services, relatively few do. The result is billions in unnecessary spending on tax returns. Credit: Getty Images / AsiaVision
The estimated share of tax filers who took advantage of a free filing program has grown in recent years. Unfortunately, so has the number of those not using it, resulting in billions in unnecessary spending.
For about 20 years the Internal Revenue Service has partnered with tax software providers, known as the Free File Alliance, to provide free online filing for taxpayers with qualifying incomes. This year, that income is $73,000: Anyone with an adjusted gross income at or below this level for tax year 2022 can file for free using at least one of these providers this year. The income cap is adjusted annually.
But relatively few take advantage.
A look at IRS data from fiscal year 2021 — the most recent available — finds that while 70% of taxpayers qualified for Free File, just 3.1% used it. It's a slim improvement from 2.8% the year before. That represents a shortfall of about 101 million taxpayers — up from 99.5 million in 2020 — paying to file their individual federal returns when they didn’t need to.
Just how much they spent would vary depending on what service they used and their personal tax situations. However, a 2022 NerdWallet survey conducted online by The Harris Poll found that those who paid to file their federal returns typically coughed up over $150. At that rate, 2021 filers may have overpaid by $15.2 billion.
Even a more conservative spending estimate at $40 per return — close to what many big-name online tax services advertise — would amass about $4 billion in overspending.
As income tax filing moved from paper returns to online software over the past few decades, the Free File program attempted to ensure lower earners had access to helpful programs that would allow them to file more easily and at zero cost.
Lack of awareness
To use it, you have to know how to access it and how to look out for potentially costly traps — and how to look out for potentially costly traps from other providers advertising "free" services.
Software provided by companies in the Free File Alliance is governed by strict regulations. But many tax software providers offer free versions of their own software, outside of the Alliance, that isn’t governed by the same rules.
Searching Google for “free file taxes” or “free tax file” returns a page of not entirely free results — the first three to five are ads. Providers like TurboTax and H&R Block offer their own “free” tax services, but they have been criticized for misleading consumers into costly upgrades. A ProPublica investigation into the practice led to tighter Free File Alliance standards in 2020.
Taxpayer tips to file for free
1. Know if you qualify. For 2022 income tax returns being filed in 2023, you qualify if your adjusted gross income is $73,000 or less. If you’re married and filing jointly, that refers to your combined income. Unsure? You can estimate your AGI or begin the Free File process without knowing: The software will notify you early on if you do not qualify.
2. Access the tax software through IRS.gov. Rather than using a search engine, ensure you’re getting to an actual Free File page by accessing the filing options through the official IRS Free File website. The Lookup Tool will narrow down your options by asking a few questions.
3. Be wary of suggested charges. No matter how you file, read all instructions carefully. Providers outside of the Free File Alliance offer add-ons like audit protection or one-on-one advising for additional fees.
4. Get help. In addition to the help provided by tax software companies, you can seek support directly from the IRS. The agency has Taxpayer Assistance Centers around the country to assist with filing and tax questions.
