Higher tax filing costs could take a bite out of your refund

Taxpayers are facing higher costs to file their returns this year. Some will find relief from a new government tool. Many won’t.

The costs of tax return preparation and other accounting fees rose 8.3% — steeper than the current 3.4% inflation rate — between November 2023 and the same month the year before, the latest federal data show. That category reflects the growing costs of using DIY tax software and of hiring an accountant.

Many tax preparation firms, like other employers, have had to offer higher pay to attract workers in an industry short on accountants as fewer college students pursue accounting degrees.

“A lot of older preparers are retiring [and] the client base is expanding, so we need to hire more staff,” said Atiya Brown, a certified public accountant and owner of Dallas, Texas-based The Savvy Accountant. She estimates she and her peers have raised prices by 7% to 12% to offset higher costs for labor and software.

The average cost for filing an individual return rose to $248 in 2023 from $213 in 2021, a study released in August by the National Association of Tax Professionals shows, basically in line with government data tracking price increases for these services.

It isn’t unusual for preparers to raise rates, though the impact on consumers can vary widely; some accountants charge a fixed hourly rate, while others set a minimum fee with added costs for more complex returns.

The NATP survey found 49% of tax professionals increase prices annually. About 37% of those who hiked their rates did so mainly to “stop giving away as much free work,” with 16% saying they were “at capacity and need to slow on-boarding of new clients.”

Some of the most popular DIY filing tools are getting more expensive, too.

H&R Block’s desktop software options this year range from $25 for preparing “basic” returns to $75 for its “premium” offerings, like those capable of handling taxes on rental property. Those two are up by $5 and $10, respectively, since last year. Later this tax filing season, prices across all of its plans will rise by another $10.

“We delayed it as long as we could,” an H&R Block spokesperson said, citing higher costs for distribution and development, adding that this year is the company’s first price increase in over a decade.

TurboTax has kept its pricing unchanged from a year ago, but that will only last a few more weeks.

Its desktop software tools, which range from $40 for filing “basic” returns to $105 for “premier” offerings, remain above H&R Block’s pricing. And they’ll also be going up by $10 later this tax season — a common practice that both companies typically advertise prominently, looking to lure customers to file early.

Both H&R Block and TurboTax offer free online filing services for simple returns. But itemized deductions and slightly more complicated tax situations often require paying for upgraded features. And as many tax filers are reminded each year, both companies’ “basic” software options cover only federal taxes, with state filings tacking on another $40 apiece.

Alex Knight, 44, turned to a “free” option to file his taxes last year, only to find the charges adding up to more than $140 for including taxes on an investment account.

“It was just so esoteric and bizarre,” he said, “having all these materials, investing all the time, and, ‘Oh, by the way, this is going to cost you money.’”

Knight, who lives in a Brooklyn, New York, and works at an streaming audio company, said he’s just going to hire an accountant this year, his first time filing jointly with his wife. He expects to pay around $300 to $350.

“It’s frustrating, too, that this is something you have to go through a private company to do,” he added.

The government hopes to change that. The Internal Revenue Service is now offering Direct File, a new option allowing many taxpayers to file straightforward federal returns for free.

It’s launching this year as a pilot program in a dozen states — Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming — and will roll out incrementally through mid-March. Many eligible taxpayers will be able to use Direct File to submit state taxes for free, too.

In Arizona, for example, full-time residents with simple returns — largely those with common income sources and limited claims like the child tax credit — can use Direct File to file both their state and federal returns at no cost, said Rebecca Wilder, a communications director for the Arizona Department of Revenue.

“We’re always looking for ways to make filing taxes easier and more seamless, and so it just made sense for us to jump onto a pilot program that was already underway,” Wilder said, adding that Arizona hopes to expand eligibility to other types of taxpayers.

The IRS already offers Free File, which steers people with annual incomes of $79,000 or less toward third-party software they can use for free.

Major tax software providers have slammed Direct File, which threatens to eat into their customer base, saying their offerings help filers maximize their refunds.

“The mission of the IRS is to collect as much revenue as possible to fund the federal government — not to guarantee that Americans get their maximum refund and best outcome at tax time,” the H&R Block spokesperson said.

A TurboTax spokesperson bashed Direct File as a “thinly veiled scheme where billions of taxpayer dollars will be unnecessarily used to pay for something already completely free of charge today.”

The IRS didn’t respond to a request for comment.

TurboTax netted its parent company, Intuit, over $4 billion in revenue in the 2023 fiscal year. At H&R Block, where assisted tax preparation drives most of its business, DIY products brought in over $300 million in revenue last fiscal year.

Last week, the Federal Trade Commission issued an opinion finding TurboTax engaged in “deceptive advertising” by promoting its tax products as free, even though many customers who are drawn to its no-cost product, like Knight, get hit with charges while using it. The regulator ordered the company to stop making what it said were misleading claims about who’s eligible for its free tier.

TurboTax contends it has “always been clear, fair, and transparent with its customers,” and said it doesn’t expect any significant impact to its business from the FTC’s move.