IRS Poised To Weigh In On Free Tax Prep Service—Sending TurboTax And H&R Block Stocks Sliding

The IRS is set to release a report this week on the feasibility of a free, government-run tax filing service as part of an effort by the Biden administration, but companies like TurboTax and H&R Block have spoken against the initiative, which would allow Americans to file directly with the IRS and forgo accountants and private companies that typically charge a fee.

TurboTax settled a lawsuit last year accusing it of deceiving customers to pay for services they ... [+] could get for free.

Although the IRS hasn't given many hints about the results of its feasibility study on a free tax filing service, stocks for H&R Block and TurboTax's parent company Intuit slid Monday morning as the report is scheduled to come out this week.

On Monday morning, Intuit's stock opened 3.4% lower than it was Friday afternoon, hitting its lowest point in May, and H&R Block opened 4.5% lower—following a Wall Street Journal article about the IRS report, due this week, on a direct filing system.

The Biden administration allotted $15 million to the IRS last year as part of the Inflation Reduction Act to study whether the agency can create a service to prepare and file Americans’ taxes electronically and for free.

While Democrats, who have largely championed the idea, argue Americans are overcharged by tax filing companies for a service they believe should be free, conservatives and pro-business groups are concerned about a conflict of interest that would allow the IRS to take more than its fair share if given authority to file, as well as audit, collect and enforce taxes.

The IRS has not said much ahead of the report—in an April report, the IRS said a free filing service "could lower barriers to claiming certain incentives," but IRS Commissioner Danny Werfel told senators during a budget hearing later that month he wouldn't "jump ahead with the conclusion" as the study was not yet completed.

After the report is published, the Biden administration will decide whether to move ahead with a direct filing service.

TurboTax and H&R Block, which currently account for the lion's share of the self-filing industry, have been under fire for overcharging for services and using deceptive practices to keep customers from filing for free. In 2019, investigative publication ProPublica released a report finding major tax companies, including TurboTax and H&R Block, were lobbying to minimize free tax filing options. The tax prep companies signed a deal with the IRS in 2002 agreeing the firms would offer a free service as long as the IRS did not create its own competing filing system—but ProPublica found the companies were purposely suppressing their own free filing offerings and, in May 2022, TurboTax paid $141 million to settle a multi-state lawsuit alleging it deceived low-income customers into paying for services they could have gotten for free. TurboTax and H&R Block have maintained they offer free services and Intuit said it "admitted no wrongdoing" in the $141 million settlement last year.

The IRS already offers a free file program for people with incomes under $73,000, but the software is not widely used. Although roughly 70% of taxpayers are eligible to use the free file service, only 4% of those taxpayers used the program in 2020, according to a report from the Government Accountability Office.

"Today, the consumer has great choice in where they turn for free help, with more than 30 companies and organizations offering free tax preparation, half of which are nonprofit organizations," a spokesperson for H&R Block told Forbes in an emailed statement. The spokesperson also cited an IRS study from February 2023 showing 15% of Americans said they would use a government-run, direct-file system like the one proposed by the Biden administration. Intuit did not respond to Forbes request for comment.

$250. That's how much the average American spends each year on tax filing services, according to IRS estimates. People also spent an average of 13 hours doing tax returns. Tax preparation costs have increased at a faster clip than inflation, rising 2.4% from February 2023 to March, while the overall cost of living increased 0.1% in that time period, according to the Labor Department.

IRS Weighs Creating a Government-Run Tax-Prep Option (Wall Street Journal)

IRS mulls offering free online tax prep services. TurboTax says IRS would turn into ‘judge, jury and executioner.’ (MarketWatch)

Inside TurboTax's 20-Year Fight to Stop Americans From Filing Their Taxes for Free (ProPublica)

Checks Are On The Way In $141 Million TurboTax Settlement (Forbes)