The IRS is introducing a new free way to file taxes online, but it won't be widely available until March and is only being piloted in 12 states. This Direct File program is designed for relatively simple tax situations, and taxpayers in participating states could potentially file their federal taxes for free. However, the IRS Free File program offered through private companies is confusing and underused, with only 3% of eligible taxpayers using it in 2020. Additionally, the FTC has ordered TurboTax to change the way it advertises its free federal tax prep service, as many users end up having to pay after starting the process.
The IRS plans to launch a limited pilot program for a free, electronic tax filing system called Direct File, which could cost between $64 million and $249 million annually. The agency has not yet decided who will be eligible for the pilot program, but surveys found that 72% of taxpayers would be interested in using a free, electronic tax filing service offered by the IRS. Currently, taxpayers who earn $73,000 or less can file their federal tax returns for free through the Free File Program, which is not provided by the IRS.
TurboTax's parent company, Intuit, will be sending settlement checks to eligible customers who paid to file federal income tax returns through TurboTax for the tax years 2016, 2017, and 2018 but were eligible for the IRS's Free File program. The $141 million settlement came after a 2019 report showed Intuit had steered low-income taxpayers toward its fee-based products after promising them access to no-cost tax filing services. Eligible customers will receive a check in the mail automatically, without having to file a claim, with most expected to receive between $29 and $30.
