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 more easily and at zero cost.
Lack of awareness and confusion likely to blame
A 2020 report from the Treasury Inspector General for Tax Administration found that 30% of taxpayers who paid to file were unaware of the Free File program. And you surely have to know about it to use it. But you also have to know how to access it and how to look out for potentially costly traps — and how to look out for potentially costly traps from other providers advertising “free” services.
Software provided by companies in the Free File Alliance is governed by strict regulations. But many tax software providers offer free versions of their own software, outside of the Alliance, that isn’t governed by the same rules.
Searching Google for “free file taxes” or “free tax file” returns a page of not entirely free results — the first three to five are ads. Providers like TurboTax and H&R Block offer their own “free” tax services, but they have been criticized for misleading consumers into costly upgrades. In fact, a ProPublica investigation into the practice led to tighter Free File Alliance standards in 2020.
H&R Block and TurboTax by Intuit subsequently left the Alliance in 2020 and 2021, respectively.
Taxpayer tips to file for free
1. Know if you qualify. For 2022 income tax returns being filed in 2023, you qualify for free filing if your adjusted gross income is $73,000 or less. And if you’re married and filing jointly, that limit refers to your combined income. Unsure? You can estimate your AGI or begin the Free File process without knowing: The software will notify you early on if you do not qualify.
2. Access the tax software through IRS.gov. Rather than using a search engine, ensure you’re getting to an actual Free File page by accessing the filing options through the official IRS Free File website. Participating tax companies may have additional restrictions — on age and location, for example — but the Lookup Tool will narrow down your options by asking a few questions.
3. Be wary of suggested charges. No matter how you file, read all instructions carefully. Providers outside of the Free File Alliance offer add-ons like audit protection or one-on-one advising for additional fees. Know what you’re signing up for and get help if you’re unsure.
4. Get help. In addition to the help provided by tax software companies, you can seek support directly from the IRS. The agency has Taxpayer Assistance Centers around the country to assist with filing and tax questions. People with additional needs, such as older or disabled adults, or those who speak limited English, may qualify for the Volunteer Income Tax Assistance program, or VITA.
The number of Americans who qualify to use IRS Free File but do not was determined using the 2021 IRS Data Book to determine the number of individual returns filed in the Oct. 1, 2020, through Sept. 30, 2021, fiscal year, and the difference between 70% of those returns and the sum of those who used Free File. While the 70% guideline applies to the share of filers who should be able to use Free File in a filing year, the fiscal year data is a proxy for these more precise (but unavailable) numbers.
The median amount spent in a single year on federal tax filing does not include those who didn’t file in 2021 or those who didn’t pay to file in 2021. This figure is based on findings from a survey conducted online within the United States by The Harris Poll on behalf of NerdWallet Feb. 22-24, 2022, among 2,077 U.S. adults ages 18 and older, among whom 1,025 paid to file 2021 federal income taxes. Read our analysis for additional methodology details on this survey.
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Elizabeth Renter writes for NerdWallet. Email: [email protected] Twitter: @elizabethrenter.