The estimated share of tax filers who took advantage of a free filing program has grown in recent years. Unfortunately, so has the number of those not using it, resulting in billions in unnecessary spending.
For about 20 years the IRS has partnered with tax software providers, known as the Free File Alliance, to provide free online filing for taxpayers with qualifying incomes. This year, that income is $73,000: Anyone with an adjusted gross income at or below this level for tax year 2022 can file for free using at least one of these providers this year. The income cap is adjusted annually to ensure the lowest earning 70% of taxpayers can file for free online using tax software.
One problem with this noble plan: relatively few take advantage.
2021 data reveals a 101 million shortfall of free filers
A look at IRS data from fiscal year 2021 — the most recent available — finds that while 70% of taxpayers qualified for Free File, just 3.1% used it. It’s a slim improvement from 2.8% the year before. That represents a shortfall of about 101 million taxpayers — up from 99.5 million in 2020 — paying to file their individual federal returns when they didn’t need to.
Just how much they spent would vary depending on what service they used and their personal tax situations. However, a 2022 NerdWallet survey conducted online by The Harris Poll found that those who paid to file their federal returns typically coughed up over $150. At that rate, 2021 filers may have overpaid to the tune of $15.2 billion.
Even a more conservative spending estimate at $40 per return — close to what many big-name online tax services advertise — would amass about $4 billion in overspending.
By nature of the Free File program, these taxpayers are the lowest earners in the country. As income tax filing moved from paper returns to online software over the past few decades, the program attempted to ensure these taxpayers had access to helpful programs that would allow them to file…
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