Bank’s Free Tax Prep Feature Goes Head to Head With IRS Tool

An online bank is launching a free tax preparation service for customers just as the IRS starts to offer its own free filing program for taxpayers.

The new feature is a way for Varo Bank N.A. to retain and build trust among its customers, CEO Colin Walsh said in an interview. The goal is to make tax prep easier and less costly. The feature, for both federal and state returns, is only available to those with Varo accounts, but customer interest has been strong, Walsh said.

Varo wants in on the multibillion-dollar tax prep industry just as the IRS is set to release its own pilot that would allow certain taxpayers—those in the same category as the Varo target audience—to file federal returns for free. The total revenue for the tax prep industry is $5.3 billion and grew 5.69% over the past year, according to Bloomberg data.

Hidden fees or gathering and selling customer data are concerns with free, private tax prep services, said Ariel Jurow Kleiman, a Loyola Law School professor. But that isn’t the case with all companies; some may use free services to attract new customers.

“Whenever you see a free service, you have to ask, what is the business getting?” she said in an interview.

The Internal Revenue Service direct file pilot is intentionally limited, so it still isn’t an option for most people, said Jurow Kleiman, whose independent review of the program was included in a May 2023 IRS report to Congress.

More tax prep options could lower costs for taxpayers, said Demian Brady, vice president of research at the National Taxpayers Union Foundation. Some who qualify for free filing may not realize it, causing them to pay for tax prep services.

“Programs like this established by this bank can provide some valuable services for a lower-income taxpayer,” Brady said in an interview.

Free File Option

The IRS already provides free, guided tax prep through its Free File partnership with eight private companies. But only 2% of taxpayers use it, even though 70% are eligible, according to a 2022 report from the agency’s Office of the Taxpayer Advocate. People whose adjusted gross income is $79,000 or less qualify. Those who don’t meet that requirement could still file for free through fillable forms online.

Millions of taxpayers use Intuit Inc.’s TurboTax, which has said it offers free tax prep. But a Federal Trade Commission judge said the company’s advertisements misled customers about the costs.

The IRS’s direct file pilot could increase competition in the tax prep industry, Commissioner Danny Werfel has said. The agency didn’t respond to a request for comment about Varo’s platform.

Varo has about 3 million checking accounts and focuses on people who live paycheck to paycheck, Walsh said. Tens of thousands of people have opened the tax prep software since it was added this month, Walsh said.

The new tax-prep feature comes after a few years of funding problems for Varo, which laid off about 75 people in 2022 and 97 more in 2023. The bank also transitioned to focus on customer retention rather than acquiring new customers.

‘A Split in the Industry’

The software that Varo uses was created by financial technology startup Column Tax, which has about 30 customers, including other companies that offer banking services such as Moneylion Technologies Inc. and Current. Varo is the first with a national charter to implement the platform, said Column Tax CEO Gavin Nachbar.

Nachbar said he is seeing more momentum in the banking industry to adopt an embedded tax platform, including from major financial institutions. He declined to name specific deal discussions.

“You’re going to see a split in the industry,” Nachbar said in an interview. “You’re going to see companies that approach the next generation of banking with a multi-product strategy, and the ones that don’t.”

Jurow Kleiman said she hasn’t seen any banks offering similar free tax prep services.

New technologies, especially embedded finance and generative artificial intelligence, are continuing to affect how banks operate, according to a Deloitte 2024 banking outlook analysis. But banks will also have to contend with a slowing global economy and higher interest rates this year.

—With assistance from Evan Weinberger and Erin Slowey.