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TurboTax exiting Free File in 2022

Free File screen on taxpayer laptop
TurboTax won't be a Free File option when the 2022 tax filing season arrives.

Taxpayers who used TurboTax to complete and e-file their returns at the Internal Revenue Service's Free File website are going to have to find a new program in 2022.

The popular tax software is leaving the Free File program next filing season. It will, however, remain on the IRS.gov site for use by taxpayers who got an extension until Oct. 15 to finish their 2020 returns.

TurboTax is the second major tax software provider to leave the Free File Alliance, the nonprofit coalition of tax software companies that provide versions of their products for free use at the IRS website. H&R Block bowed out of Free File this year.

Goal reached, says software company: TurboTax, the dominant company in the tax-preparation software industry, says part of the reason for its departure from the almost two-decade old partnership with the IRS is Free File's success.

"Today, over 90% of all taxpayers e-file their taxes and free tax preparation is currently available to 100% of American taxpayers through a combination of commercial, philanthropic, and IRS sponsored methods," according to a post on Intuit's blog. Intuit is the software company that created, among other financial products, TurboTax.

"With the Free File program surpassing its founding goals of e-file and free tax preparation, and due to the limitations of the Free File program and conflicting demands from those outside the program, we are not able to continue in the program and deliver all of the benefits that can help consumers make more money, save more, and invest for the future," added the post.

Limits following controversy: Intuit's reference to limitations in its blog post is the other — some would argue main — reason for TurboTax's exit.

Following a 2019 exposé by ProPublica, the IRS, prompted by irate consumer groups and Congress, mandated that participating Free File companies ensure that taxpayers looking for no-cost tax prep help were directed to the IRS.gov site.

ProPublica's investigation revealed that several tax software companies had used deceptive computer code to hide the links to their Free File option from search engines, instead sending users to ostensibly free options at their company websites. Once there, however, taxpayers were offered add-ons that cost.

Even before the questionable code issue, the IRS had tightened limits on participating companies' ability to upsell Free File users.

By leaving Free File, the Intuit said in the blog post that it will be able "to focus on further innovating in ways not allowable under the current Free File guidelines and to better serve the complete financial health of all Americans through all of our products and services, in tax preparation and beyond."

Pressure on IRS to fill void: TurboTax's decision is likely to re-energize lawmakers who for years have pushed for the IRS to do away with the for-profit tax software middlemen and essentially handle Free File on its own.

One popular proposal that keeps popping up is for the IRS to use third-party information, such as W-2 and 1099 forms, to pre-fill taxpayer returns, send the documents to the taxpayers, and, after doublechecking for accuracy, have them sign and sign off on the IRS document. This, of course, would work only for individuals with simple tax and filing situations.

The California Franchise Tax Board's (FTB) ReadyReturn experiment is cited as a model. In 2005, the state tax agency sent 2004 tax year returns that had been pre-filled using tax data in the system to almost 52,000 Golden State taxpayers.

Those in this ReadyReturn pilot were single, had no dependents, received just wage income from one employer, and claimed the standard-deduction. Variations of FTB pilot appeared throughout the years, with some of the program's features incorporated into CalFile, the state's current free online tax preparation system.

Opponents of the state-initiated tax filings included the California-based TurboTax. Others, including some lawmakers, oppose direct government tax preparation because of what they see as potential conflicts when the tax collector also is the tax preparer.

Some, however, see a direct IRS tax return preparation program, at least for basic returns, as way to make free tax filing easier for more Americans.

Political, financial, and health hurdles: But to accomplish such a direct tax filing system, the IRS would need the money to upgrade its systems and then create an online filing system of its own.

Given Capitol Hill infighting in recent years over the IRS budget, it will take a while for enough money to flow to reach an IRS-led direct filing program. The closest it's gotten so far is the Free Fillable Forms option at Free File. Here, the IRS electronically accepts at no cost some common forms completed by taxpayers, but without any type of tax software help. Basically, it's just hand filling of PDF forms online.

Then there's the already historic backlog of tax processing that the IRS already is facing in the wake of the COVID-19 pandemic and the new tasks the agency was given in connection with coronavirus tax-related relief efforts. 

And don't even get me — and other taxpayers and tax pros — started on telephone hold times and sometimes questionable answers to tax law and filing inquiries.

Until Uncle Sam's tax agency gets on sounder footing in connection with its beleaguered basic jobs and is able to get back up to a relatively normal operating speed, the prospect of the agency also taking over TurboTax et al duties is a dream. Or nightmare.

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