Free online tax filing ... How do they make any money?

If one googles “free tax filing” you get lots of hits. How do these companies make any money?

I wonder if they collect the information and then sell it.

The free aspect is to get you “in the door”. Once in you are bombarded with irresistible offers to upgrade to their premium service.

That said, I’ve been using the free TurboTax site for several years.

They might do that. They might also try to upsell services that aren’t included in their free service. As I understand it, many of the free services cover only the most basic tax scenarios; if your situation is the slightest bit complicated or out of the ordinary, then you’ll need to pay for upgraded service, and the company will very helpfully and persistently remind you about this.

The governments of some tax jurisdictions (Germany, for example) freely provide official tax preparation software. In this case they don’t need to make money, because the system is entirely state-funded.

In the UK, most people don’t have to submit a tax return as PAYE automatically takes care of changes.

The self-employed do submit annual returns and they can DIY online but the cost of an expert is usually less than the savings they can find.

Youtube clip of Adam Ruins Everything, comedy with facts. In this case about how the US could make doing taxes much easier, but because of lobbying, they don’t.

I’m in the Netherlands and we have return free filing. I’n done with my taxes in one evening. And half of that evening is procrastination.

I don’t recall if I filed with CreditKarma last year, but I know I went through the all the steps, at least to compare it to another site. I don’t think CK had all that many ads, if any, while doing my taxes, however, anyone that uses CK for their free credit reports can tell you that you have to wade through a lot of ads to actually see anything about your credit. It’s not that bad, just a lot and it’s still better than paying $10 a month for the exact same thing.

In the US, we have free filing if your income is below $66,000, offered by private companies in partnership with the IRS.

From the IRS’s page “About the Free File Alliance”:

I could speculate that one reason those private preparers are participating is that they wouldn’t want the competition if the IRS provided its own free service.

They also try to confuse people with the different tiers of service.

I don’t know if they still do it, but TurboTax used to have separate “free” and “freedom” versions. If you knew you qualified for a free return through TurboTax, but just punched “turbotax free” into Google, you’d get routed to the “free” version which required payment for anything other than a simple 1040EZ. Once you started a “free” return and got to a form that needed money, it never actually told you that you could still file for free using “TurboTax Freedom,” and even if you realized your mistake, and even though the two sites used the same login information, you had to start from scratch on your “freedom” return.

It’s no wonder that people fall for fake IRS scams when the primary way to deal with the IRS is to go to the online equivalent of a sleazy pawn shop.

Here in the UK we have an online web-based system. I’m not covered by PAYE right now and it’s not difficult to complete, just tedious and not very helpful.

Again, that’s not the IRS’s fault. I’m sure that career employees at the IRS would be ecstatic to offer easy, simple on-line IRS-does-the-calculations-for-you filing, just like Britain and most European countries do.

Ask your Congresspeople why this isn’t happening (and maybe then ask them how much TurboTax, etc have contributed to their campaigns).

All of my income is reported to the IRS via W2 or 1099 forms (employment income, or interest and investment income) by large companies. I think the same thing is true for many Americans. So one suggestion I heard is that the IRS could send you a postcard or letter showing what its records show your income and tax liability should be, and what you underpaid or overpaid. You could sign the postcard if you agree and send it back to complete the return. No need to hire H&R Block or anyone else. But the tax preparation companies would be put out of business so we don’t do that.

Similarly, the student loan business could be run more cheaply if the private lenders were taken out of the process, but we don’t do that either.

I always pay the $19.00 just because I figure they earned it. Filed mine last night Turbo Tax.

The problem with that method is that it doesn’t take into consideration any deductions you may have which would decrease the amount of tax you owe.

That would work if you took the standard deduction. But the IRS doesn’t know what you paid in state taxes, what your mortgage payments are, how much you contributed to charity, etc. So many people would overpay their taxes that way. I’m not sure how other countries handle that. Maybe they don’t have such deductions.

I figure there’s a couple of ways the online tax prep make their money, even with the free editions:

  1. Anything outside the standard and base 1040 usually requires an upgrade. For example, I have an HSA, and the one form required for that means that I get bumped to “premium” editions, with a $30 charge. The marginal cost on that form is no where near $30, so it pays for earning a few new customers with the free forms who will stick with you when/if their tax situation becomes more complicated.

  2. The big one, I suspect, is that all of these services offer some sort of “instant refund” option, where you can get your “refund” immediately when filing, but with a hefty fee taken out. I’m sure more than enough suckers take this option.

Pretty sure they know the first two (state taxes are certainly on your W-2), and from a total economic benefit viewpoint, it would probably be worthwhile to require charities to report who gave what.

And you could still have the option to file, but with the increased standard deduction, I’d imagine that the IRS could do 75% of peoples taxes.

And the revised method could just be the IRS sending you what they know, you adding in what they don’t have and sending it back (which would cover charitable deductions nicely)

They don’t know how many children you have, whether the children are below 17/17-23/over 23, whether the children live with you or your ex-wife, whether the children are full-time college students for at least 5 months of the year, whether your divorce settlement allowed you or your spouse to claim them. Yet all of these are major factors in the tax American families pay.

Do you really want Planned Parenthood and the ACLU reporting to the government on who contributed what?

State withholding taxes are on my W-2, but not my state estimated tax payments, or the payment I sent with my annual state tax return. States do not report the property-tax portion of vehicle registration fees to the federal government. They do not report real estate taxes. And they do not report the sales taxes you pay (people in states without income taxes deduct sales taxes (everyone actually can use sales taxes in lieu of income taxes)), They don’t know what portion of my state income tax refund is taxable.

A lot of people do have just their W-2 to report, which is fine and dandy. But don’t underestimate all the other sources of income (from college tuition/expense grants to Uber earnings – we are in the “side hustle” economy) that people have to report. And don’t forget all the convoluted credits that Congress tries to impress us with (HSAs, IRAs (Traditional and Roth), 401ks, child tax credits, earned income tax credits, “other dependent” credits, etc).

A big hustle right now is the new Form 1040. Form 1040 used to be a single form (with two simplified variants: 1040A and 1040EZ). In 2018 Form 1040 is now the main form plus 6 “schedules.”

Under political pressure, the IRS helped the Republicans fulfill their campaign promise of “filing on a postcard.” Yeah, you can now file a 1040 on an oversized two-sided postcard. But you might have to staple up to 6 new schedules to it (in addition to all the old schedules).

The major tax filing companies are taking advantage of this. They used to file free Form 1040, but now that many taxpayers have to file the Form 1040 “postcard” plus one schedule, they are making them “upgrade” to the super-duper premium paid version for complex returns.

I have been using Tax Act for many years. It is free to file the Federal return, but $9.95 if you want to print it out and also save the information for use next year. That’s a big help, you just import all your information from last year and make updates. The state filing is also another fee.


First - the IRS generated form won’t handle everyone, granted. But it should be most. But to some of your specific points:

They know how many kids you had last year, their ages, and student status. If it changes, you would have to file an amendment to what they send you.

The state knows about your estimated payments. That seems an easy feed into the system, although I know if would face resistance.

Charitable deductions - you are already telling the IRS who you are donating to, but I can see an issue if you felt a need to be anonymous. I guess you could actually do an anonymous donation, or tell the receiving organization to not report it (and you forego the deduction).

Gig economy - Uber is reporting that income (or they should be). It might be 1099 instead of W2, but Uncle knows about it.

Sales tax is a good point - I guess that would need to be an amended return, but I think that is a small proportion of filers.

I’m not certain what the question on taxability of your state refund is, but I’m guessing that it isn’t a hard calculation for the IRS to figure out.

I get lots of tax forms from my kids colleges, so that is (mostly) sorted, I think.

And finally, it would be a golden opportunity to remove a lot of credits and implement a simplified system (income is income, as many tax brackets as needed). But a lot of the credits you mention are either on your W2 or reported by the companies on separate forms already.

The HR Block tax software I use mostly just requires me to enter data from forms already reported to the IRS. I think the only major ones not there are property tax (which should be easy to get to the IRS) and charitable (somewhat covered above).