IRS looks into setting up a government-run tax filing system

The Yahoo Finance Live team discusses a plan for a free government-run tax self-filing service from the IRS, the popularity of e-filing, and what this means for H&R Block and Intuit.

Video transcript

- The IRS is releasing a report this week on the possibility of a free government-run tax filing service. Our very own Rachelle Akuffo is here with us to break this down. Rachelle, what do you think we can expect from this IRS proposal?

RACHELLE AKUFFO: So as you mentioned there, so it's a combination of the IRS and the US Digital Service. Now they've been very tight-lipped on the details, but the "Wall Street Journal" and the "Washington Post" reporting that the agencies will lay out plans for this free government-run self-filing tax service this week. Now that's going to focus on some of these straightforward tax filers, so not if you have a lot of these complex tax issues. And they're supposed to be starting with a pilot test group in January of 2024.

Now all of this really shouldn't come as much of a shock. I mean, the Biden administration and consumer groups have been pushing for lower filing fees, lower fees for consumers overall. And $15 million was set aside in the Inflation Reduction Act to look into a direct e-filing program. Now according to IRS estimates, the average American spends about $250 each year in tax filing services. If you look at TurboTax parent company Intuit and H&R Block, they make up the bulk of the self-filing tax market.

Now the popularity of e-filing has skyrocketed, climbing 100% since 2009 before paring back just a little bit since COVID. And of course, those two names with the lion's share there, having a bit of an issue here when it comes to the stock price. We saw some selling action, but it has at least pared back at least a little bit for now.

- Yeah, Rachelle, how worried should those investors be because H&R Block-- it's still off almost 3% today on this news?

RACHELLE AKUFFO: Indeed. I mean, when you look at it, I mean, they had already been preparing a lot of their lobbying service money when you look at 18% and 29% for Intuit and H&R Block, respectively. Now they argue that they already offer a lot of these services, at least for the federal filing, for free. And some of these other fees that you see more about the state filing, some additional or specialized fees there. But they're basically saying, look, keep in mind, there's already an existing free filing service that the IRS has now. That's if you're earning under $73,000.

And according to the most recent survey from the Government Accountability Office, over 70% of people who are eligible for it, only 4% of people are actually taking advantage of it. So even though it's there, people not using it. Now you might be wondering why. If you're eligible for this, why aren't you using it? Well, part of it is this concern about perhaps filing on a website at the same organization that's also going to turn around and potentially audit you at some point. It's almost like a roach voting for RAID. Why would I come in willingly to the IRS? That's not something that people are keen on.

And also a caveat here that we saw from Kartik Meta, who's a northcoast research analyst. He was saying that, I guess what could break it is if the IRS said, we're going to take all this information and create your tax return. So not really worried about the companies right now at the moment. He said they have strong balance sheets. And again, you're not necessarily going to want to sign up to the IRS's free service if you think it's going to get you closer to getting a little bit more scrutiny.

I don't know about you, Diane.

- No.

RACHELLE AKUFFO: I don't know that many people are that keen to do that.

- [INAUDIBLE] Rachelle. I cannot-- I never thought I'd hear that on TV or digital space, a roach voting for RAID. All right, that's the takeaway right there.