Watch Out, TurboTax: IRS to Test Free, Online Tax-Filing System

Commercial tax preparation services could face serious competition from the IRS, which is reportedly testing its own free, online tax-filing system. 

The agency has already built a prototype of the system, which is slated to launch to small groups of users next January, according(Opens in a new window) to The Washington Post, citing current and former IRS officials. 

The IRS built the prototype with $15 million from last year’s Inflation Reduction Act, which called(Opens in a new window) for the agency to study implementing a direct filing program. The IRS is expected to deliver its report this week, which the Biden administration could pursue, The Wall Street Journal reports(Opens in a new window).

The proposed system could become a serious rival to commercial tax-filing companies, such as Intuit’s TurboTax and H&R Block; the IRS’ solution would not only be free, but it could also fill out som tax-related information for the user. That’s because for many taxpayers, the IRS already receives their wage and other relevant details from employers. 

Currently, the IRS only directs users to free, online tax filing services from commercial providers, such as TaxAct and TaxSlayer, through an existing public-private partnership. However, it can be hard to navigate free tax-filing programs, which only apply to users who earn $73,000 or less in adjusted gross income. Indeed, a US government report found(Opens in a new window) only 3% of taxpayers rely on the free options, even though 70% of taxpayers are eligible to use them. 

The free direct-filing option with the IRS could help numerous consumers save money when filing their tax returns each year. However, it’s unclear if the IRS’ system would help users file state tax returns—which many commercial tax preparation services already do. Meanwhile, TurboTax’s parent Intuit is already criticizing the proposal as a bad idea that’ll cost the federal government, and thereby taxpayers, a hefty sum to implement.

“A direct-to-IRS e-file system will be redundant, and it will not be free—not free to build, not free to operate and not free for taxpayers,” a spokesperson for Intuit told the Journal.