NEW YORK — Most taxpayers are interested in filing their taxes directly with the IRS for free, says a new report, and that option will be tested next year.
The IRS has spent the last nine months investigating whether US taxpayers want to see a free government-run e-filing system — and is now preparing to launch a pilot program.
The prospect of a free online government tax filing system has long been debated. Proponents argue that the option would make tax filing services fairer and more accessible to taxpayers across the country. But there was also opposition from some large tax preparation firms.
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 proceed with possible future implementation, according to IRS Commissioner Danny Werfel and the Treasury Department’s Chief Implementation Officer Laurel Blatchford said Tuesday.
Few details are known about the pilot as the agency finalizes the basic structure, but Werfel said the public will also have a chance to participate.
The IRS has been tasked with establishing a “direct file” system as part of funding it received from the Inflation Reduction Act, the Democrats’ flagship climate and health bill that President Joe Biden signed into law last summer. The IRS had nine months and $15 million to report on how such a program would be implemented.
The IRS released a feasibility report Tuesday outlining taxpayer interest in a direct file, how the system might work, its potential costs, operational challenges and more.
The report shows that the majority of taxpayers surveyed would be interested in using a tool provided by the IRS to prepare and file their taxes electronically – and that the IRS “is technically able to provide direct files, but this would require additional resources.” require and add complexity to IRS operations,” Werfel said in a phone call with reporters.
The IRS’s existing free e-file option, which is available to qualifying lower-income taxpayers, will remain in place, he added. Individuals of all income brackets can continue to file their tax returns by mail for free – although paper returns can take months to process and taxpayers still have to pay for 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 each year to prepare their tax returns.
The report’s initial cost analysis shows that providing an IRS pre-filing option “could cost less than $10 per tax return and, of course, would be free for taxpayers – compared to simple electronic filing options currently available to taxpayers cost around.” $40.”
The study estimates that the annual cost of Direct File can range from $64 million for 5 million users to $249 million for 25 million users, depending on usage and scale of the program.
“We believe today’s announcement is a significant step in revolutionizing access to the tax system, making it easier and fairer. “A free and easy direct file service will ensure more families in America get the tax benefits they’re entitled to,” Amanda Renteria, CEO of civic tech nonprofit Code for America, said in a statement.
While proponents welcomed the pilot program, critics expressed skepticism about assuming the IRS’ dual role as 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, a tax company advocacy group, said, “A direct e-file system is unnecessary, costly and will divert attention and resources from more pressing priorities at the IRS.”
There are also concerns about historical racial disparities and bias in the IRS’s enforcement of tax laws. For example, in a Monday letter to U.S. senators, Werfel confirmed that the IRS had determined that black taxpayers may be subject to higher tax rates.
“I will continue to focus on this to ensure we identify and implement changes ahead of next tax filing season,” Werfel said in the letter.
Even large tax firms can lose millions of dollars if the program goes ahead. Last year, more than 60 million taxpayers were served between Intuit, TurboTax’s parent company, 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 firms, as well as electronic free filing advocates, have reported spending $39.3 million since 2006 lobbying for “free filing” and other causes. Federal law does not require domestic lobbyists to break down spending by specific topic, so amounts are not restricted to free disclosure.
Derrick Plummer, a spokesman for Intuit, said the study “selects data to support its flawed conclusion,” which is that only 12% of taxpayers said they would use a state system if state tax returns were not included in the program .
He said the study “ignores the damage a government system will do to vulnerable taxpayers and the true cost to taxpayers.”
A representative of H&R Block could not be immediately reached for comment on Tuesday.
Werfel on Tuesday acknowledged concerns about a potential direct filing system, particularly operational challenges, but stressed that taxpayers should choose the filing option that works best for them and that “the IRS cannot administer the tax system on its own.”
“We rely on an extensive network of partners across the tax community, the software community, the payroll community and countless dedicated organizations that work directly with taxpayers,” said Werfel. “This report doesn’t change that.”
Hussein reported from Washington, DC