Intuit and H&R Block blast IRS free tax filing as a costly ‘scheme’

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Is it a “no-brainer” or a “thinly veiled scheme”? An experimental government tax-filing program has spurred some spicy takes from the tax-prep industry.

Earlier this year, the Internal Revenue Service (IRS) announced that it had created a new “Direct File” tax-filing option, and that it was launching a pilot program in 2024 to test it out. In October, the agency further announced that it was expanding the pilot program and that Arizona, California, Massachusetts, and New York would be participating in it. Taxpayers who live in any of the nine states that do not levy income taxes are eligible to participate.

On its face, the Direct File program seems innocuous. Only taxpayers in certain states would be able to use it and, on top of that, only those who have relatively simple tax returns and certain types of income. In all, a mere fraction of the overall taxpayer population would be eligible to use it. 

Many experts are lukewarm on the program overall, noting that, at this point in time, there isn’t really an indication of whether there’s much to get excited about. “My general thinking is largely wait-and-see,” says Alex Muresianu, a policy analyst at the Tax Foundation. “I’ve seen a lot of conflicting information as far as the expected uptake,” he says, adding that he’s viewing it “with some skepticism.” 

“There are other countries that offer these direct file-type of programs, but they have a less complex tax system,” he says. “Time will tell” if Direct File proves viable. 

The tax-prep empire fires back

Shoulder shrugs from some tax professionals haven’t stopped larger players in the tax-prep industry—including H&R Block and TurboTax maker Intuit—from expressing concern about the viability and cost of the program. And they’re using no muted terms.

“Americans have made it clear: They prefer existing tax preparation options over a government-run system,” Tom Gannon, chief government relations officer at H&R Block, said in a statement provided to Fast Company. “Today, there are more than 30 free tax filing choices available from non-profit organizations and tax preparation companies such as H&R Block, and the IRS should focus additional funding on improving its existing services for taxpayers.”

While H&R Block’s response is somewhat predictable given that the government is rolling out a product that directly competes with some of its own offerings, Intuit pulled even fewer punches. 

“Direct File is not free tax preparation, but rather a thinly veiled scheme where billions of dollars of taxpayer money will be unnecessarily used to pay for something already completely free of charge today—free to the taxpayer and actually free for the government,” the company said in a statement. “In addition to now paying for ‘free’ tax preparation, Direct File is asking Americans to file their taxes directly with the IRS after the organization publicly acknowledged systemic inequities that see low-income filers and Black taxpayers targeted for audit at a higher rate than non-Black taxpayers. The Direct File scheme is a solution in search of a problem, and that half-baked solution now has the potential to become a financial nightmare for tens of millions of taxpayers.”

Of course, Intuit is in the same position as H&R Block in that it is facing increased competition from the government. Both companies create tools to help taxpayers navigate a fairly complicated tax-filing process, and both offer versions of those tools for free or relatively low cost to a subset of taxpayers.

Intuit declined to offer any additional feedback about its objections beyond its on-the-record statement.

Valid concerns or industry self-interest?

It’s understandable that the two companies, and other potential competitors in the space, aren’t especially eager to embrace the Direct File program with open arms. At the same time, there are also some genuine concerns about the IRS’s ability to successfully devise and implement the program. The IRS has experienced serious issues related to staffing, technology, customer service, and more in recent years, giving credence to those who may doubt its ability to create and implement a new program. The government doesn’t have a stellar track record of rolling out related programs, either—the rollout of HealthCare.gov is a pertinent example.

But the IRS says that it’s merely giving taxpayers additional choices. “Projects like Direct File represent a goal of the IRS Strategic Operating Plan, to give taxpayers choices in how they interact with the tax agency,” the IRS tells Fast Company. “This includes choices in how they prepare and file their taxes, whether it’s through a tax professional, commercial tax software, or free filing options. Direct File is one more potential option from which qualifying taxpayers will be able to choose to file a 2023 federal tax return during the 2024 filing season.”

It’s worth mentioning, too, that the IRS already has a Free File program, which allows certain taxpayers to file their returns for free. The IRS has said that Direct File is not meant to be a replacement for Free File, and as such, the difference between the programs appears to be the income limits imposed on Free File users. (Taxpayers must have an annual income below $73,000 to use it.)

“Direct File does not replace existing filing options like tax professionals, Free File, free return preparation sites, commercial software, and authorized e-file providers,” the IRS says. “Taxpayers will continue to have choices, whether they want to use a tax professional, a software product, Free File, free tax preparation services like Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) as well as a paper tax return or Direct File.”

Ultimately, it looks as though the IRS hopes Direct File will be a free, simple alternative to third-party, commercial tax prep systems—yet another option on the market.

There are examples of similar systems that have been in place for many years at the state level, too. For example, The State of California Franchise Tax Board runs the “CalFile” system, which seemingly operates much like the Direct File system aims to, with a simple, step-by-step process allowing taxpayers to file their state returns.

CalFile launched around 15 years ago, and is available to “roughly half of California taxpayers,” a spokesperson from California’s Franchise Tax Board tells Fast Company. The spokesperson says that the IRS did meet with FTB officials to learn more about California’s system, although the system has not been widely adopted by eligible users.

“About 100,000 taxpayers use CalFile annually, and we receive more than 20 million personal income tax returns each year,” the spokesperson says. “Roughly 0.5% of returns are filed through CalFile. The share is relatively low mainly because taxpayers tend to use software that allows them to prepare both their federal and state returns simultaneously, and because many choose to use tax professionals.”

So there are potential weaknesses to the IRS program, including low uptake rates among taxpayers. But does that make it a “scheme,” as Intuit calls it? And should low-income or Black taxpayers balk at the prospect of using it? And perhaps most pressing: Do taxpayers have any real reason for concern about the Direct File pilot program?

In some respects, they might.

For instance, a brief from Americans for Tax Reform, a conservative advocacy group formed by Grover Norquist, points out that the program is being kickstarted without Congressional approval, despite assurances from IRS Commissioner Daniel Werfel that that wouldn’t be the case. There’s also a report from the Treasury Inspector General for Tax Administration (TIGTA) that found surveys the IRS sent to taxpayers in order to gauge potential demand for a Direct File system may have been designed to mislead them and artificially inflate support for it—along with downplaying the estimated costs of implementing it. 

In response, the IRS says that “while TIGTA concluded our overall survey design led to potentially overstated taxpayer interest in Direct File, we want to emphasize that we specifically flagged the potential for interest in Direct File to be overstated and influenced by a number of issues.” The IRS says that it included a disclaimer in its Direct File Report that estimated costs and uptake would be uncertain, so it used assumptions to formulate those estimates. 

It hasn’t stopped conservative groups from piling on: CPAC, the Club For Growth, FreedomWorks, and others have all expressed concern about the increasing size of the IRS, and potential government overreach.

But at the heart of the opposition to the Direct File program is a fairly simple notion: Taxpayers shouldn’t trust the government to give them a fair refund.

That may prove to be a powerful argument. The most recent Comprehensive Taxpayer Attitude Survey, published in January 2022, shows that only 66% of Americans trust the IRS to help them understand their tax obligations. While that is a majority, it’s a sign that as many as one-third of Americans have a baked-in skepticism of the IRS.

And, in effect, this skepticism—especially if it’s used to leverage additional opposition to the Direct File program—could be what does it in. The tax-prep industry’s argument, is, in essence, that the Direct File program gives the government more power, disempowers taxpayers, and that those taxpayers need a third party to stand as a trusted advocate when dealing with the IRS—be that a local accountant, a company providing tax-prep software, or other entity.

That argument may resonate with low-income families or taxpayers from marginalized communities, in particular, as implied by Intuit’s statement, which references disproportionate audits of households that earn lower wages—a widely reported on phenomenon.

Tax refunds, meanwhile, tend to serve as a significant financial boon for many American households, and with the IRS effectively preparing your taxes for you, there is the chance that it could—fairly or unfairly—reduce that refund and skim a little off the top, thereby cheating taxpayers out of their money.

Or, that’s the worry that some in the tax-prep industry would like to get into taxpayers’ heads.

And while many people don’t trust the government, there are likely many others who have unfavorable views of tax-prep software providers, too.

For all the criticism lobbied at the Direct File program by Intuit, the company itself has caught flak for some of its behind-the-scenes attempts at sowing disapproval of the IRS, and lobbying to kill off attempts to make tax filing easier. In 2023, the company utilized 75 lobbyists and spent more than $2.8 million to influence legislators, and, as ProPublica reports, utilized PR pushes and op-ed campaigns to sway public opinion. Intuit’s lobbying against alternative tax-filing programs goes back at least a decade, per ProPublica.

Skeptical optimism

While the battle to sway public opinion on whether or not an IRS-produced tax-filing system is a good idea or not, some experts say they’re not really sure what to expect as the program gets its start in earnest next year. But they do think that the philosophical angle—specifically, the skepticism of the American public toward their government—will play a role.

“At the end of the day, it’s a philosophical disagreement. America has an individual libertarian streak to it, and that’s one of the reasons that Europe does this stuff already, and we don’t: Because people don’t trust bureaucrats as much in this country,” says John Buhl, senior communications manager at the Urban-Brookings Tax Policy Center.

“It’s the complexity of the [U.S.] tax code—people are just not used to interacting with their tax administrators in America the way people in other countries are,” he says.

That said, Buhl adds that the Direct File pilot is still a good idea, if nothing more than to get a sense of whether it would actually work. “I think it’s a perfectly good use of a small amount of the large trough of funding that the IRS received,” he says, referencing the roughly $80 billion in funding that the agency is due as part of the Inflation Reduction Act. 

The law provided $15 million to study whether a program like Direct File was feasible, amounting to a fraction of a percent of the overall funding. As a proverbial drop in the bucket, Buhl says there really isn’t any reason not to put a pilot program together. If it fails, the IRS could go back to the drawing board.

“The experiment is a kind of a no-brainer,” says Buhl. “If it works, cool; if not, it’s not that big of a deal.”



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