The IRS Is Piloting a Direct File System. The TurboTax Settlement Shows We Need It.

May 17, 2023

Last week, 4.4 million TurboTax customers got a notification years in the making: From 2016 to 2018, the matter-of-fact email said, they paid for TurboTax services that should have been free. And as part of a $141 million, multistate settlement with TurboTax parent company Intuit, most will soon receive a cool $30.

The payout is belated, and per person verges on comical. But the settlement’s premise—that people were tricked into paying to pay their taxes—illustrates a more systemic problem. Private tax preparers currently wield immense extractive power.

The alternative is obvious: cut out the middle man and allow taxpayers to file directly with the IRS, for free. Finally, that common-sense solution is now under consideration.

With funding from last year’s Inflation Reduction Act, the IRS is planning to pilot a Direct File system, in the vein of wildly successful programs in other countries.

This foray into Direct File is a natural extension of an existing IRS program, Free File, which is intended for low-income taxpayers but operationally reliant on companies like H&R Block and Intuit.

That partnership has never worked; instead, it’s created huge conflicts of interest—and led to sabotage. For years, H&R Block and TurboTax, the two most popular participants in Free File, concealed the available no-cost option and pushed customers toward more expensive alternatives.

The result of that obfuscation was as intended: The people eligible for Free File don’t know it. Of the 70 percent of taxpayers eligible for the program in 2021, only 3 percent used it.

Critics of an IRS-operated Direct File—especially the tax preparation industry—argue that government competition would put companies out of business.

It’s a far-fetched claim at best. Even with a Direct File option, much of the client base of private tax preparation companies would stay loyal to them, because complicated filers (i.e., high-net-worth individuals and firms) would still need the individualized assistance that private tax preparation companies provide. The taxpayers most likely to take advantage of Direct File, meanwhile, will be lower-wage earning taxpayers—the very ones least able to afford private alternatives.

As the TurboTax settlement helps prove, a business model predicated on public extraction isn’t a sound or sustainable one. Their conduct directly cost them hundreds of millions of dollars in legal fees and class action payouts.

Direct File would challenge companies to think bigger—because when the public sector and private sector compete, everyone wins. These kinds of public-private rivalries have been shown to reduce government costs and improve service delivery. And, once Direct File is fully operational, Intuit and H&R Block will save millions on foregone oppositional lobbying.

When filing taxes costs Americans two billion hours and $30 billion each year, and makes routine interactions with government unnecessarily arduous, we know the system is broken.

If the IRS’s Direct File pilot succeeds, American taxpayers will experience what many around the world have enjoyed for decades: free and easy filing.