IRS will test a free, online tax-filing systems starting next year

The IRS has spent the past nine months studying whether U.S. taxpayers want to see a free, e-filing system run by the government — and is now preparing to launch a pilot program.

The prospect of a free, government-run, online tax filing system has been debated for a long time. Supporters argue that the option would make tax return services more equitable and accessible for taxpayers nationwide. But there’s also been pushback from some big tax-prep companies.

Now, the IRS plans to launch a pilot program for the 2024 filing season to test a “direct file” system and help the federal government decide whether to move forward with potentially implementing it in the future, IRS Commissioner Danny Werfel and the Treasury’s Chief Implementation Officer Laurel Blatchford said Tuesday.

There are still few details available about the pilot as the agency determines the basic structure, but Werfel said that members of the public will have the option to participate.

The IRS was tasked with looking into how to create a “direct file” system as part of the funding it received from the Inflation Reduction Act, Democrats’ flagship climate and health care measure that President Joe Biden signed last summer. It gave the IRS nine months and $15 million to report on how such a program would be implemented.

The IRS published a feasibility report Tuesday laying out taxpayer interest in direct file, how the system could work, its potential cost, operational challenges and more.

The report shows that the majority of surveyed taxpayers would be interested in using an IRS-provided tool to prepare and file their taxes electronically — and that the IRS is “technically capable of delivering direct file, but doing so would require additional resources and add complexity to IRS operations,” Werfel said on a call with reporters.

The IRS’s existing free e-file option, available to lower income taxpayers who qualify, will remain in place, he added. Individuals of all income levels can also still submit their returns for free via the mail — although it can take months to process paper returns and taxpayers still have to buy postage.

The new, direct e-file program being tested “could potentially save taxpayers billions of dollars annually,” said Blatchford, who noted that an individual taxpayer pays an average of $140 preparing their tax returns each year.

The report’s initial cost analysis shows that a pre-file option run by the IRS “could cost less than $10 per return to provide, and of course would be free to taxpayers — by comparison, simple electronic filing options currently available to taxpayers are around $40.”

The study estimates that annual costs of direct file may range, depending on the program’s usage and scope, from $64 million for 5 million users to $249 million for 25 million users.

“We believe today’s announcement is a significant step toward revolutionizing access to the tax system so that it is easier and more equitable. A free and simple direct file service will ensure that more families in America receive the tax benefits they are eligible for,” Amanda Renteria, CEO of civic tech nonprofit Code for America, said in a statement.

While supporters applauded the pilot program, critics have expressed skepticism about the IRS taking on the dual roles of both tax collector and tax preparer, arguing that the new service could create a power imbalance between taxpayers and the government.

Steve Ryan, general counsel of the American Coalition for Taxpayer Rights, an advocacy group for tax companies said “a direct e-file system is unnecessary, costly and will divert attention and resources from more pressing priorities at IRS.”

There’s also concern about historic racial disparities and bias seen in the IRS’s enforcement of tax laws. In a Monday letter to U.S. Senators, for example, Werfel confirmed the IRS found that Black taxpayers may be audited at higher rates.

“I will stay laser-focused on this to ensure that we identify and implement changes prior to next tax filing season,” Werfel said in the letter.

Big tax preparation companies also have millions of dollars to lose if the program comes to fruition. Last year, more than 60 million taxpayers were serviced between Intuit, the parent company of TurboTax, and H&R Block.

An Associated Press analysis shows that Intuit, H&R Block, and other private companies and advocacy groups for large tax preparation businesses, as well as proponents in favor of electronic free file, have reported spending $39.3 million since 2006 to lobby on “free-file” and other matters. Federal law doesn’t require domestic lobbyists to itemize expenses by specific issue, so the sums are not limited to free-file.

Derrick Plummer, a spokesman for Intuit, said the study “cherry-picks data to support its flawed conclusion,” namely that only 12% of taxpayers said they would use a government-run system if state returns are not included in the program.

He said the study “ignores the harm a government-run system will have on vulnerable taxpayers and the true costs to taxpayers.”

A representative from H&R Block was not immediately available to comment on Tuesday.

Werfel on Tuesday acknowledged concerns surrounding a possible direct file system, notably operational challenges, but maintained taxpayers should chose the filing option that works best for them and that “the IRS cannot run the tax system alone.”

“We rely on an extensive network of partners across tax professional groups, the software communities, the payroll community and countless dedicated organizations that work directly with taxpayers,” Werfel said. “This report changes none of that.”