Tax Season Is Here: Meet The New Federal Program That Can Eat Away At Tax Preparation Companies

Tax season officially started this week with Monday being the first day when taxpayers can begin filing tax refund documents with the Internal Revenue Service (IRS).

What makes this season special is the launch of a new program by the IRS that could mean the beginning of the end for a substantial portion of business from tax preparation companies.

While tax documents can already be filed, most users can expect to receive documents from employers, mortgage companies and others during the coming weeks. These need to be submitted before the April 15 deadline, which is adopted by most states.

Tax refunds can be expected to hit accounts within 21 days, if filing was done electronically. 

Since last Monday, the IRS launched a free tax filing pilot program called Direct File, which is now available for federal and state workers in 12 states.

The program was developed in-house by the IRS with a budget allocated in Biden's Inflation Reduction Act of 2022.

Starting mid-March, the program will also be available for private sector workers in the same states, including Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

If successful, the program will expand to the rest of the country and is expected to directly affect the businesses of tax preparation companies like H & R Block Inc HRB.

Shares from the Kansas City-headquartered firm are down 1.2% on Tuesday.

Other companies in the sector that can be affected by the pilot program include TurboTax, a subsidiary of Intuit Inc INTU, Avantax, which is owned by Certara Inc CERT, as well as privately-owned Liberty Tax, Ernst & Young's TaxChat and TaxSlayer.

Back in May, shares of H & R Block and Intuit tanked as the IRS announced plans to develop the Direct File software.

The government distributed $236 billion in tax refunds in 2023, with an average of $2,753 per refund, according to the IRS.

Both Intuit and H & R opposed the development, with Intuit CEO Sasan Goodarzi saying “It would be a conflict of interest to have the agency that collects, investigates, and enforces taxes to also be a tax preparer.”

The pilot program has the support of politicians and activists who expect it to become a more equitable and accessible way for taxpayers to access tax returns.

According to the Treasury Department, taxpayers spent an average of $150 to file and prepare tax returns in 2023. This has caused many actors to push for a free tax filing system.

ETFs in the financial sector can also be affected by a drop in market share from companies offering tax preparation services.

Almost 9% of Global X FinTech ETF's FINX holdings consist of Intuit shares. This fintech company also occupies over 7% of iShares Expanded Tech-Software Sector ETF's IGV holdings.

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