The United States is an outlier in its tax filing system in that it requires you to fill out tax forms on paper or online which provide the Internal Revenue Service with information it already has in its system for the vast majority of Americans who do not itemize deductions.
With President Biden’s signature on the Inflation Reduction Act, the U.S. has taken its first step toward finally making it easy and customary to file your taxes for free:
The United States has made a small but significant move toward creating a public system to allow millions of Americans to file their taxes for free.
The sweeping domestic policy bill passed by the House and Senate last week mandates that the IRS study options to provide a free tax filing option for Americans. That study represents a threat to the for-profit tax prep industry dominated by TurboTax, a product of the Silicon Valley company Intuit. President Joe Biden said he plans to sign the bill, the Inflation Reduction Act, today, following the party-line vote in the House to approve it on Friday.
The bill provides $15 million to study how the IRS could implement such a program, how much it might cost and how Americans would view it. The report, which must include the input of an independent third party, is due to Congress within nine months of the bill’s passage.
Unlike many developed countries, the U.S. does not offer free tax filing services for taxpayers, who instead pay billions of dollars every year to highly profitable private tax prep companies.
The industry has tried to block or subvert a government free tax filing system for decades.
Through information forms like W-2s, the IRS already has the info on wages and other forms of income in its systems that it would need to provide such a service. A recent study by researchers from the Treasury Department, Minneapolis Federal Reserve and Dartmouth College found that “between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return.”
At a Senate hearing in June, Treasury Secretary Janet Yellen said she supported a new free filing service. “We need to develop a new system,” Yellen said in an exchange with Sen. Elizabeth Warren, D-Mass. “There’s no reason in the world that a modern economy shouldn’t have a system that makes it easy for such a large group of taxpayers to file their returns.”
There are reasons why so many tax preparation companies have storefront offices in poor neighborhoods. Residents in these low-income zip codes are far more likely to fall prey to companies that charge high fees — plus a percentage of any tax refund — on a service that is completely unnecessary for most low-income tax filers.
When you’re poor and only getting $300-$500 back with your tax refund, paying $100-$200 in fees can mean the difference between getting only spending money or getting enough money to catch up on utilities and pay for groceries.
Despite its shortcomings, the Inflation Reduction Act is turning out to be the most consequential legislation in decades. These small things are adding up to a revolution in the way the U.S. government approaches its relationship with average citizens.