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Free File is a software by the American IRS, which allows one to easily fill out their taxes as long as they earn less than $62k per year. Is there a particular reason for such a restriction?

I assume that the government generally wants its citizens to pay what they're due, so why exclude people from the middle and upper class?

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So what happens when you earn more than 62k? Do you have to pay someone to get your taxes filed in that case? I'm from France where paying taxes consists in checking an online pre-filled tax form, updating where necessary and clicking "Send", or printing it and bringing to tax office if you have questions. Both services are free, but you can opt to get a tax lawyer if you earn a lot and want to make sure you only pay what you have to. – Dmitry Grigoryev Jan 27 at 10:22
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@DmitryGrigoryev I think this deserves a separate question :) – JonathanReez Jan 27 at 10:22
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@DmitryGrigoryev - an individual taxpayer always has the option of filling out the paper forms and mailing them in. However, a family earning over the cutoff is less likely to be expecting a refund, so they don't mind their cheque taking a week to be processed and clear after the April 15th deadline. A family earning under the cutoff is more likely to end up with a refund, so they want to file as soon as they get W2s from their employer(s), in January. The form for the Child Tax Credit actually has a larger (1.2cm) box for the first three dependents' SSNs; duplicating a 4mm field elsewhere. – david Jan 27 at 14:31
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The short answer: tax companies lobby against free/automatic tax filing because they make tons of money selling that service every year. – TylerH Jan 27 at 16:41
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It's probably also worth noting that Free File Fillable Forms is available to everyone. However, it's essentially the same thing as doing your taxes on paper, except that it allows electronic submission. – reirab Jan 27 at 20:11
up vote 62 down vote accepted

It is very helpful to understand that Free File is not actually "by" the US Internal Revenue Service (IRS). The IRS does indeed offer access to the program through their website, but Free File is actually a public-private partnership program operated and maintained by the Free File Alliance. Who is the Free File Alliance? Well, according to their members list: 1040NOW Corp., Drake Enterprises, ezTaxReturn.com, FileYourTaxes, Free Tax Returns, H&R Block, Intuit, Jackson Hewitt, Liberty Tax, OnLine Taxes, TaxACT, TaxHawk, and TaxSlayer.

Why the income restriction? Well, that's part of the deal the IRS struck - the program is "dedicated to helping 70 percent of American taxpayers prepare and e-file their federal tax returns". Technically the member companies are offering their own software to handle tax preparation, and the rule is that 70% of American's must 'qualify' for at least one product, so this adjusted gross income limit changes periodically so that 70% of the population can use it.

Why restrict it at all? This was part of the give and take involved in negotiation with the businesses involved. If the program was "everyone files for free", then it is presumed that many reputable businesses that make the program valuable would choose not to continue to participate. In other words, they want to be able to not give away their services for free to customers who are - at least by income definition - more than capable of paying them. The IRS has said it does not want to be in the tax prep software business, so they are not offering their own free software to do the job that private companies would otherwise charge for.

However, there are other restrictions to being in the program - like the fact that no business in the program can offer "refund anticipation loans", offer commercial services more than a certain amount of times (so they can't hound you to upgrade), and so on. Some businesses were making a killing off these, though they are pretty much solely developed to be predatory on people with the lowest incomes (and education levels, and IQ, and with cognitive disabilities, and basically anyone they could sucker into paying what were effectively absurd rates for short term loans along with inflated filing/preparation fees).

Finally, Free File was partly developed as an initiative to increase the amount of digitally filed taxes and reduce the paper-based burdens of accepting and processing turns. In other words: to cut government costs, not to be a government welfare program. Even if it were, one can generally obtain commercial software for $30-$100, so the benefit to those above gross income levels is pretty minor; yearly costs to file taxes with such software for those payers would be less than 0.001% of their yearly expenses. Compared to the benefits obtainable by households living below the poverty line, fighting to cover an extra 5-30% of the population at the potential expense of having the whole program be a failure probably seemed like a more than worthwhile trade-off.

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+1 for the details on the up-selling restrictions. – Ben Miller Jan 26 at 21:04
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Might also be worth reading How the Maker of TurboTax Fought Free, Simple Tax Filing. – Mehrdad Jan 27 at 6:15
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"The IRS has said it does not want to be in the tax prep software business" This seems completely at odds with their stated goal of increasing digital filing. But then, I guess that's not exactly uncommon for a government agency. And if they did it too well they'd probably render a large part of their workforce obsolete. – Lilienthal Jan 28 at 12:14
    
Small correction: it's 0.1% rather than 0.001% of the income. – JonathanReez Jan 28 at 21:16

Free File is not software by the IRS. Free File is actually a partnership between the IRS and the Free File Alliance, a group of tax software companies. The software companies have all agreed to provide a free version of their tax software for low-income taxpayers.

According to the Free File Alliance FAQ, the Alliance was formed in 2002 as part of a Presidential initiative to improve electronic access to government. You can read all the excruciating details of the formal agreement (PDF) between the IRS and the Alliance, but basically, the participating software companies get exposure for their products and the possibility of up-selling services, such as state tax return software.

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Hah, 20 seconds faster than me :) +1 for finding the formal agreement itself in all its terrible glory, that's one thing I couldn't seem to find. – BrianDHall Jan 26 at 21:02

Regardless of the source of the software (though certainly good to know), there are practical limits to the IRS 1040EZ form. This simplified tax form is not appropriate for use once you reach a certain level of income because it only allows for the "standard" deduction - no itemization.

The first year I passed that level, I was panicked because I thought I suddenly owed thousands. Switching to 1040A (aka the short form) and using even the basic itemized deductions showed that the IRS owed me a refund instead.

I don't know where that level is for tax year 2015 but as you approach $62k, the simplified form is less-and-less appropriate. It would make sense, given some of the great information in the other answers, that the free offering is only for 1040EZ. That's certainly been true for other "free" software in the past.

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