The IRS has a program that allows 70% of taxpayers to file their federal income tax returns for free using online software. However, the majority of taxpayers fail to take advantage of this program. Despite 70% qualifying, just 2.2% actually took advantage of the program, as evidenced by the 2022 IRS data. Analysis shows that only under 3.3 million federal taxpayers used Free File in fiscal year 2022, with 102 million qualifying but not using it.
The majority of taxpayers are unaware of the Free File program as reflected in studies that have shown only 13% of Americans know if they qualify for it. A survey found that 30% of people who paid to file their taxes were unaware of Free File altogether. As a result, taxpayers are overspending, with a conservative estimate assuming a $40 fee per return amounting to $4 billion. However, this doesn’t have to be the case as the IRS website provides a tool that will point taxpayers to several appropriate Free File providers, helping to ensure that they’re not being led to a page that appears to offer free tax filing but pulls a switcheroo.
Some tax software providers have faced criticism for deceptive practices when advertising free tax software, with the FTC finding Intuit Inc. engaged in deceptive practices and the New York State Department of Financial Services ruling tax software providers engaged in deceptive practices. As a response, the IRS stepped up its regulations and oversight of these companies.