Filing Your Taxes Could Get Easier (If This Program Works)

Julia Press and Sarah Holder
·16 min read

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After years of letting the private tax e-filing industry run the show, the IRS is finally piloting an online tool that’s supposed to make tax season easier – and free – for thousands of taxpayers in a dozen states.

On this episode of The Big Take DC podcast, we explore how the idea got off the ground, who can use it, and whether the program could ever compete with the powerful private tax-filing industry.

Listen to the Big Take DC podcast every week.

Here is a lightly edited transcript of the conversation:

Sarah Holder: Loren Dalbert is the type of guy who does not put off filing his taxes.

Loren Dalbert: Getting it in as soon as I got my W2s so that I could get that refund as soon as possible.

Holder: In the past, he’s tried pretty much every strategy in the book to prep for them. Hiring a professional, using websites like TurboTax, even doing the math himself.

Dalbert: When I was in the army, I would do other guys’ taxes for them. And this was just, you know, paper and pencil back in the eighties and stuff like that.

Holder: This year, the Economic Security Project—an advocacy group that sometimes partners with the community organizing foundation where he works—told him that he was eligible for another option. As a California resident with just one income source, plus disability from the VA, he could file his taxes directly through the IRS website, for free — for the first time this year.

Dalbert: I didn't have to pay somebody, it could be over a hundred dollars by the time you finish, you know, using those online tax preparing services.

Holder: He says it was pretty user friendly. No extra bells and whistles. He did run into some trouble verifying his identity, but says it didn’t take long to connect with a real person who could help him. All in all, he says the whole process took less than an hour.

Easy? Free? Done in an hour? ...Are we still talking about filing taxes?

Today on the show: The IRS is piloting a new online tool this year that’s supposed to make tax season easier for thousands of taxpayers in a dozen states.

We’ll dig into how this came about, how well it’s working, who can use it… and whether this government pilot program could ever compete with the powerful private tax-filing industry.

This is the Big Take DC podcast from Bloomberg News. Filling in for Saleha Mohsin, I’m Sarah Holder.

We’re going to get into that new IRS program—but to understand why it’s such a big deal, and why it took so long for the government to offer it, you need to understand the rise of TurboTax…

So I sat down with my colleague, Brody Ford.

Brody Ford: I write about the tech industry here, especially software companies that we don't often think about, but end up running much of our life, like in this case, taxes.

Holder: So it's April, many Americans have just filed their taxes, or will have to in the next week or so. How did it become so complicated for Americans to file their taxes?

Ford: Since the dawn of time, it's been hard to do your taxes. Everyone's been mad at it. The IRS estimates that last year people spent an average of $150 and 9 hours doing their taxes. It's a funny way we do it in the US, right? We have to write what we think we owe the government and send it to them and then they say yes or no. They have that information somewhere, right? The thought being that especially if you just have W-2 income, this is a very simple calculation on how much money you owe, they can just spit out that number.

Holder: And nearly half of the country's taxpayers file using a do-it-yourself site like TurboTax. How did TurboTax promise to revolutionize the process of filing one's taxes?

Ford: So their promise was a simple one, that, this was kind of the late 80s. It was this notion of like everything could be done better digitally to some extent that was probably true. And that it would be a lot easier and even more fun to do it, you know, your taxes on the computer. Over time, what became interesting there is their promise went from it would be easy to it would be free.

I don't know if you remember on Super Bowl commercials or, you know, YouTube targeted ads, you'll see people throwing the word free around a lot as it relates to doing your taxes and TurboTax.

That's the talking point they settled on. And that is what became so contentious because it’s only if you have simple taxes, think about, just W-2 income, not too many assets, you probably didn't sell any stock, is that it's available for free.

Holder: What's it like to use TurboTax? Can you walk us through, you open up the site, you start putting in your information—

Ford: I did some gonzo journalism last week and I did my taxes. I am a TurboTax user. You know I just put in my W-2 from Bloomberg and they scan it and they say, okay, here's the deductions you should do. It's a very fast, streamlined process.

And it's very gamified. You know, think about, like if you've shopped on Temu or scrolled on TikTok with all these little like counters going like, “Congrats, you're finishing your taxes so quickly. You did such a good job.”

What's funky about it is they just try to upsell you like crazy, right? There are many many screens that will say things like “wait a second: do you want a second pair of eyes on this? Do you want an expert to take a look? Did you do this in the year? Oh, do you want audit protection?” Right? These things that—

Holder: You don't even know to want that—

Ford: No, right!

Holder: Until they suggest that—

Ford: I'm like, “dog, do I need audit protection?” Right? [laughs] Like you have this sense of, “wait a second, I probably need this thing.” That's a way that you end up paying when maybe you actually didn't have to.

Holder: This all raises a question: How did we end up in a situation where the government knows what you owe, but you might have to use a service like TurboTax to figure it out? Brody says, the government made a conscious choice not to provide this service, when it struck up an agreement with private tax filing companies:

Ford: A kind of non-aggression pact between private industry and the government, was this thing called the Free File Alliance, where essentially the government will not create a direct filing service as long as these private tax companies — think TurboTax, H&R Block, TaxSlayer — offer tax preparation for free to middle- and low-income Americans.

And they agreed that if you are below this certain income threshold, you can get your taxes for free. At the time, it was maybe $70,000, you know, like a relatively kind of middle of the road income. So a lot of people were included in this.

Makes sense. Fair enough. That, you know, okay, you can have a functional monopoly in this as long as you use the profits you get from the higher income earners to subsidize the system for free for the middle and low income.

Lo and behold, only about 4 percent of people ended up using the free service. And you can debate why that is. The companies will say because, well, they ended up wanting some of the more bells and whistles on the paid version.

What a horde of regulators will say is because you designed the product in a way that funneled people away from the free version to the paid version, right?

And regulators would say that they would do things that really do not pass the smell test, you know, like taking out advertisements that if you Google “free taxes,” the first result would be the paid version rather than the actual free version you're looking for.

Comedian Hasan Minhaj has a whole episode about this of just trying to get the actual free version of TurboTax, but it's just like felt nearly impossible.

Hasan Minhaj - Patriot Act: And boom! We hit a paywall.

Holder: We reached out to Intuit, the company that owns TurboTax. In response to the allegations of upselling, they told us: “IRS Direct File is a solution in search of a non-existent problem. Today 100% of Americans - regardless of income level or how complex their taxes are - can file their federal and state taxes completely free of charge. We are proud that over the last decade, we've helped more than 124 million Americans file their taxes completely free of charge.”

Ford: I think it's a very interesting talking point they use that essentially taxes are already free through our service. Which is only true if you didn't have certain complicated situations like unemployment income, student loan payments, owning a home. These very common situations that make it that taxes are not free.

Holder: So they're saying tax preparation is free. We're offering a better service for people that have these complicated needs.

Ford: I think in a broader sense too, they just use that kind of classic talking point of government is inefficient.

Holder: Right.

Ford: Government isn't going to be able to build this well. We've spent X number of years building this software that people, by and large, do find pretty streamlined and easy to use. The government's going to end up spending all this taxpayer money to build something that already exists.

You know, they're a prolific lobbyer. They've spent almost $50 million over the last two and a half decades.

Holder: Critics of that lobbying include Senator Elizabeth Warren, who, in a statement to Bloomberg earlier this year, called Intuit’s actions an effort to “try and stop free online tax filing because they're terrified that the billions in profits they make by scamming taxpayers are at risk.”

In response, an Intuit spokesperson told Bloomberg that the IRS e-filing tool will, “cost taxpayers billions of dollars for something already free of charge and with potentially disastrous effects on the finances of millions of Americans.”

It’s worth noting, last spring the IRS estimated that the pilot would cost between around $64 and $250 million, depending on how many taxpayers use it.

At the end of the day, whether it’s due to lobbying, or a lack of political will to fund an IRS e-filing effort sooner — it’s taken a really long time to get any kind of alternative up and running...

Ford: There was a conversation 20 years ago about whether the government should build what is effectively a TurboTax competitor, and now 25 years later, we are just starting to do that.

Holder: So, that brings us to today — and this new pilot program. How the government finally launched this free filing tool and how it’s going — after the break.

How did the idea of a government-run direct file option get off the ground?

Ford: There was a couple of large regulatory actions against TurboTax that led them to pull out of this non aggression treaty, this free file alliance this jargony thing that meant that the private industry would agree to give taxes for free to low income people but in practice never really worked.

And so eventually TurboTax pulled out of this system. They just said, we're not doing this anymore. Um, same for H&R Block, and these were really the anchors of that system.

So the collapse of this is really what led the government to say, ‘Hey. This program is not working. We have some fresh funding from Congress towards the IRS.’ Remember the Inflation Reduction Act? There was a large number of funds that went there. They said ‘This is a good moment to push forward and try to build this demo.’ And it's actually come together quicker than many expected.

They expect that it could cover 19 million taxpayers eventually, right? They hope 100,000 people will participate this season which is no small undertaking.

Holder: To get a closer look at the new pilot tool, I reached out to Erin Slowey, who covers the IRS for Bloomberg Industry Group.

Slowey: So, it's only in 12 states. Most of those states are states with no income tax. There's four that are partnering with the IRS that do have an income tax. It's New York, Massachusetts, California, and Arizona. So that's like location wise, the first requirement.

And then it's like, low and moderate income type of returns. So it's the simplest type of returns. Those are the people that are going to be able to qualify. And the IRS did that on purpose because it is in its pilot phase. So they just want to test it out to see if this is really going to work for people.

Holder: So Erin, how does it work?

Slowey: So they actually did a demo with some reporters, and I was really surprised about how, like, the clean layout, the way that it looked. You go on and they actually first vet to see if your situation qualifies before you even get started to use the pilot. And then after that you have to do a verification process and then after that is when you could start your direct file return. And I've heard it has taken as short as 15 minutes to file your returns through direct file.

Holder: Wow.

Slowey: So yes, it is a lot shorter than the average, granted that was one person filing a return, I think, depending on how prepared you are with your paperwork, it, it will just vary, but so far, the IRS has said they've had a lot of success with direct file.

Holder: How is the IRS measuring the program's success?

Slowey: As of mid-March, they've had about 51,000 people sign up to use direct file. Now, the caveat with that is that not all those people have filed their returns yet. So we'll see, I guess, once tax filing season closes, how many people actually file their returns using direct file.

But part of the battle that the IRS is going to have is because they're keeping it in such a limited size, both just limiting the number of states and the type of tax situations that can use direct file. Like they aren’t going to be like “look at the sheer number of people who used this pilot.”

So I think, the bottom line for the IRS, I think they're going to wonder, do people like it? And did it work? It seems like very fundamental questions, but like, with the way that government-run websites have gone before, that's what they need to get answered.

Holder: What do this program's skeptics say?

Slowey: The two big skeptics are the Republicans and the tax prep companies. People are really concerned about the cost. I think there's a lot of fear just surrounding the IRS's reputation. They don't want it to be an enforcer, collector and preparer.

Holder: The possible cost and the IRS’s reputation aren’t the only challenges for the program. The pilot didn’t launch until March, which critics say was too late to capture many taxpayers filing this season. Plus, as Brody points out, it’s limited in scope.

Ford: Keep in mind it is only for federal returns, so your state return you'll still have to do somewhere else. Maybe you'll have to go crawling back to TurboTax.

So I mean the headline that Intuit would be having their fingers crossed for is that nobody ends up using it.

Holder: Right.

Ford: Right? And I mean, that's a total possibility because at the end of the day, a big rule in software is that people stick to what they know. I think if you've been filing your taxes a certain way for a number of years, the odds of you trying the experimental new method is pretty low.

So I'm really watching for adoption. I mean, do people actually use this thing? Do we see some crazy complaints around like, hey, this messed up my taxes? I think a really famous kind of government failure with technology was the healthcare.gov.

Holder: Yeah, the Obamacare rollout.

Ford: Yeah, I mean, that is like one of those moments where, you know, people walked away and said, wow, maybe the government can't build technology. And I think. I've seen some articles where people seem pretty rosy on the new system, but if we have some situations like that, it could really dent it in the future.

Holder: Yeah. And since the government has promised and finally offered this free tax filing service, how has TurboTax reacted?

Ford: You know, so they say that, hey, this is a non-event to us. This is a very small shred of, you know, our user base.

Holder: To that point, Intuit told us: “IRS Direct File will not offer any improvement over filing options currently available to and used by taxpayers, nor do we believe it will have a material impact on the industry or our financial results.”

Ford: But what it is to them is a long term risk, right? Because they rely on TurboTax as a kind of new user pipeline and as a way to get data about the way that taxes look and improve their product for others.

The idea that 19 million of that group are going to go over to a free federal service, that is certainly a risk to TurboTax.

Holder: And to its bottom line.

Ford: Absolutely.

(Corrects date the Free File Alliance was launched in podcast published April 4 and transcript below.)

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