updated 2:57 PM CEST, Sep 21, 2023

Controversial U.S. bill over free tax-filing services seen unlikely to matter much to non-resident taxpayers

Approval this week by the House of Representatives of legislation that would bar the U.S. Internal Revenue Service from  offering taxpayers a free suite of tax preparation software is not being seen as an issue that would greatly affect American taxpayers currently resident overseas. 

So said tax preparers who specialize in looking after expatriates around the world and other experts, who point out that most of their clients have complex reporting issues that would be far too complicated to be addressed by an off-the-shelf, DIY tax product.

And given the potential costs involved in getting it wrong, most such expats would be better off paying for professional help, eager as some might be to have the option to do it themselves, they said.

However, there was general agreement among expat American tax experts with British American Tax's managing director, Liz Zitzow, who said she was "in favour of the IRS having a free service for poor people with simple returns."

Zitzow, who is herself American and based in London, noted that the UK system is "so easy that about half the people in this country don’t have to file" at all, as it's done for them by the government, making use of their employers' payment records.

News of the passage of what The New York Times, in an editorial, referred to as the "misleadingly-titled...Taxpayer First Act" was covered by a number of major U.S. news outlets, many of which, including the NYT, quoted sources who saw it as a sign that Congress had allowed itself to be influenced by major tax industry players, such as H&R Block and TurboTax. 

Those expats who would most likely be affected by the ban on the IRS being able to offer taxpayers software to do their own tax returns would be those who are expecting to return home imminently, and who, when they do, are unlikely to have complex tax reporting needs, tax experts said. 

They also noted that a blanket ban on such free tax software for Homeland Americans with uncomplicated tax reporting requirements was out of step with many other countries, including the United Kingdom – as noted above – as well as Germany and Australia, where the option to file tax returns online for free has been successfully established, and by many accounts is working well. 

Dubai-based Virginia La Torre Jeker, another expatriate American tax expert, said that although she was among those who strongly felt that the U.S. government "has a responsibility to assist its citizens and residents in understanding and meeting their US tax obligations," and appeared "not [to be] doing what it should do in this regard overall," the blocking of the introduction of free tax filing software from the IRS specifically was unlikely to "strongly impact the majority of U.S. persons overseas."

"I know that many expatriates prepare their own tax returns using TurboTax or similar software," she went on. "However, I have seen numerous mistakes due to the complexity of the international provisions.

"Taxpayers are often not aware of certain provisions that may apply to them, and from what I have seen, the software is not picking up on all the nuances. In fact, many tax return preparers in this area also fall short of the mark.

"The depth of understanding required in the international tax area mandates years and years – yes, literally – of practice. [And] the penalties for improper reporting of foreign income and assets can be severe.

"For this reason I cannot imagine the IRS free-file system would be feasible for many US persons abroad, and I cannot see IRS free software meeting the requirements of many overseas Americans, unless the individual has the most simple situation without foreign investments of any kind."

Free program currently exists

The IRS currently does offer a program for low-income taxpayers that enables them to file their returns for free, but according to press reports, it is still done by making use of industry-provided software, and is not well-publicized. As a result, only a small percentage of eligible taxpayers make use of it, these reports noted.

To view the House Ways & Means Committee's announcement of its decision on the matter of the Taxpayer First Act of 2019 (H.R. 1957) on its website, click here.