TurboTax Faces Major Threat to Its Business

The Internal Revenue Service (IRS) plans to roll out a free way to file federal taxes, much to the chagrin of tax preparation firm TurboTax.

The IRS is launching a pilot plan, known as Direct File, that will offer a free way to submit taxes for U.S. workers. In December, the agency published its plans for an in-house filing system that taxpayers can use to submit their federal tax returns at no cost.

Residents of 12 states that meet certain income criteria will be able to try the new service. To qualify, filers need to opt for the standard deduction and maintain income within the confines of wages documented on Form W-2, Social Security or unemployment, along with interest income not exceeding $1,500.

The pilot will be available only to taxpayers living in Arizona, California, the District of Columbia, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

"This is a critical step forward for this innovative effort that will test the feasibility of providing taxpayers a new option to file their returns for free directly with the IRS," IRS Commissioner Danny Werfel said.

"In this limited pilot for 2024, we'll be working closely with the states that have agreed to participate in an important test run of the state integration. This will help us gather important information about the future direction of the Direct File program."

Reaction to the pilot has been mixed, with TurboTax owner Intuit criticizing the plan. Tania Mercado, a spokesperson for Intuit, told the New York Times that the IRS move is a "half-baked solution."

"The direct file scheme is a solution in search of a problem," she said.

Newsweek has reached out to Intuit via email for comment.

"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," TurboTax said in a statement.

According to Bloomberg, 42 million people used TurboTax to file their returns in 2022. Some 13 million of those did not have to pay for services. While TurboTax does offer free services, many complaints issued about the service outline how features are often hidden behind paywalls and that many taxpayers do not qualify for the free services.

TurboTax paid some 4.4 million customers after it emerged that the company had tricked consumers into paying for tax services that should have been free.

TurboTax levies charges on those who file tax returns with unemployment income, student loans, homeowners and cryptocurrency holders, according to Bloomberg.

Although not yet rolled out throughout all 50 states, and with no guarantee Direct File will make it out of the pilot stage, a sizable chunk of those who regularly use TurboTax may be swayed if the program is a success. The portion of people using the system is likely to rise if and when the plan broadens its reach to those with more complicated tax returns and higher income amounts, which could result in revenue loss for TurboTax.

Newsweek has reached out to TurboTax for comment.

Mercado said the IRS system "will cost taxpayers billions of dollars." Direct File is being funded by a portion of the $80 billion released via President Joe Biden's Inflation Reduction Act, which was granted to help reform the IRS in August 2022. Other changes spurred by the funding include slashing phone line waiting times, hiring thousands of new staff, and widening online services, according to Treasury Secretary Janet Yellen.

The IRS has insisted that the launch of Direct File is not to create competition with private companies.

"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 told 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."

Others outside of the IRS and TurboTax aren't happy with Direct File for different reasons. Grover Norquist, president of conservative tax policy organization Americans for Tax Reform, has argued that the IRS being responsible for the tax filing processes would impinge on privacy.

"If the government does your taxes for you, they have to know everything about you," Norquist said. "It is the end of economic privacy."

But others are on board with the pilot, claiming Americans shouldn't for forced to pay for doing something that is absolutely essential.

"It's a fundamental taxpayer right to have the government provide free electronic filing of taxpayer forms," said Nina Olson, founder of the nonprofit Center for Taxpayer Rights. "Taxpayers shouldn't have to pay for the privilege of filing their taxes."

Alec Stapp, co-founder of the Institute for Progress, wrote on X, formerly Twitter: "TurboTax (Intuit) and H&R Block have lobbied for years to stop this from happening. These companies are parasites and I can't wait for the IRS to put them out of business."

Senator Elizabeth Warren, a Massachusetts Democrat, took a more accusatory line with TurboTax and Intuit, writing on X: "The tax breaks that Intuit got in 2022 could have funded a year of free tax filing for millions of Americans. Instead of subsidizing a corporation that shamelessly lobbies its way into bigger profits, let's make our tax system work for everyone."