Filing Federal Returns Costs Taxpayers Billions of Dollars

70% of taxpayers are eligible to file their federal returns for free every year, but few do. The amount of wasteful spending may exceed $13 billion.

Making it simpler and free for millions of Americans to file their federal income taxes each year is a good goal. However, even though those objectives have been made explicit for the IRS Free File program since its inception nearly 20 years ago, the revenue service and an alliance of several tax software companies fall far short. And the majority of taxpayers, including those with the lowest incomes, are suffering as a result.

Less than 3% of taxpayers use the Free File service. Even though 70% of them are eligible. According to an examination of IRS statistics, this shortfall of around 87 million taxpayers may put as much as $13 billion in the wallets of tax preparation businesses. As well as specialists every year.

How to Use Free File (Ideally)

The IRS and a consortium of tax software vendors formed the Free File Alliance in 2002 to offer free filing services to federal taxpayers who met certain income requirements. 70% of taxpayers with the lowest incomes are eligible to use Free File each year. The IRS reviews the income ceiling utilized to achieve this 70% target each year. Those with adjusted gross earnings of $73,000 or less are eligible in 2022.

While an adjusted gross income of $73,000 may put you in a comfortable middle-class bracket, in some regions of the country, about half of persons with that level of income filed tax returns for the 2020 filing year with less than $30,000 in their bank accounts.

Taxpayers must access the IRS website. And select a software provider from the portal to take advantage of Free File. The Free File service is now offered by eight organizations. The eight survivors may set further restrictions on their ability to perform returns for free, including age, state of residency, and higher income ceilings. By using a direct connection from IRS to the partner’s Free File website, taxpayers may read these limitations and select a provider that best suits their requirements. All before starting their income tax return.

The Price of Avoiding Filing for Bankruptcy

Based on an average $150 filing fee per taxpayer and an analysis of ten years’ worth of IRS data, we predict that Americans may be overpaying their taxes by up to $13 billion annually. The cost is estimated to be $3.5 billion. Even by a more reasonable estimate of $40 per taxpayer on average.

2.4% of taxpayers file their federal returns for free annually, on average, using Free File software or paper forms. According to an examination of 10 years’ worth of IRS data. This indicates that during the past ten years, although being qualified, almost 87 million taxpayers annually neglected to file for free.

Just 4.2 million of the 148 million individual tax returns filed in 2020 were free of charge. All falling short of the 70% criterion by 99.5 million. Over the past ten years, as federal filers have climbed year after year, so has the extent of this shortfall.

The intricacy of the tax return, the software provider, and if a person decides to engage a professional will all affect how much it costs to file a tax return. The lowest-priced software options start at roughly $40. Even at that pace, individuals who could have used Free File are wasting $3.5 billion.

Most Taxpayers Are Probably Unaware of the Free File Possibilities

People must be aware that a product or service is available for it to be used. If taxpayers knew they could file their federal return for nothing, they would probably do it. The number of people who do not use the Free File service suggests that many may simply be uninformed.

About 30% of taxpayers who paid to file were unaware of the Free File program or didn’t know how to access it. According to a 2020 audit of the program by the Treasury Inspector General for Tax Administration.

Additionally, it’s not enough for taxpayers to comprehend the program. They also need to be aware that they must access these filing alternatives via the IRS website. Direct access to a Free File Alliance member page does not guarantee that taxpayers will see the Free File choice. They can instead see a software provider’s free version that is not subject to the same restrictions as the agreement with the IRS.

Understand What to Anticipate When Filing Your Federal Returns

According to the IRS, 22 states and Washington, D.C. participate in the Free File program. However, taxes in other states differ greatly. Given your state(s) of domicile, the tax software provider you select should be able to walk you through the charges and technicalities. Additionally, you can look out for precise pricing information in advance on the website of your state’s Department of Revenue to avoid being caught off guard.

Know Where to Go for Assistance

In general, tax preparation software guides you through the filing procedure. But problems might happen. We can offer support to answer questions as you proceed with federal returns, and help you with anything along the way!