The IRS is testing a free electronic filing system that could rival tax preparation giants

The Internal Revenue Service quietly built its model system to allow Americans to file tax returns digitally and for free, according to three current and former agency officials, essentially creating government programs that could disrupt the tax industry.

The system was developed by the IRS and the US Digital Service, the White House technology advisory agency. He. She It will be available through a pilot program to a small group of taxpayers by January, when the 2024 filing season begins, said the people briefed on the matter, who spoke on condition of anonymity to discuss internal agency talks.

Last year’s Inflation Reduction Act, one of President Biden’s major legislative victories, included $15 million for the IRS to consider creating a direct filing program. The tax agency has hired the left-leaning think tank New America to study the matter and prepare a report, which is expected this week.

Treasury representatives declined to comment on Monday.

The IRS is currently referring people looking for no-cost filing options to a handful of companies that offer free electronic filings to taxpayers whose income is below a certain level. Although 70 percent of taxpayers qualify for these products, less than 3 percent of taxpayers use them, according to a GAO report.

For a narrower group of taxpayers, industry giants Intuit TurboTax and H&R Block offer free products that are not officially endorsed by the IRS.

The federal government’s free filing system could directly disrupt the business tax preparation market that research firm IBIS World estimates will be worth $14.4 billion this year.

The online deposit business software system has served taxpayers and the government well by many accounts. The IRS reports that nearly 9 out of 10 individual tax returns were filed digitally in 2022. The voluntary tax compliance rate in the United States — the share of filers who accurately pay federal taxes each year — is 85.1 percent among the highest in developed economies, according to years From research in the United States and Europe.

But some experts say The public-private partnership also reflects the IRS’ technological inability. Much smaller countries, including Estonia, Chile, and Australia, offer government-subsidised digital filing services.

The Inflation Reduction Act gave the IRS $80 billion over 10 years to increase enforcement efforts on higher earners, improve taxpayer services and modernize its technology. The Biden administration has said the IRS needs additional money to keep up with sophisticated tax fraud and better serve low- and middle-income Americans who are entitled to a range of credits.

In April, when the IRS notified Congress of a spending plan for that money, Commissioner Daniel Werfel said the agency would consider “an electronic, question-based service for preparing and submitting tax returns directly to the IRS.”

The agency’s plan would also allow taxpayers to seek assistance from customer service representatives through secure online portals. That threatens to trespass into another territory as tax preparation companies attempt to distinguish themselves from the IRS by hiring legions of accountants and other experts to serve as guides on premium product lines.

Industry representatives have spoken openly to lawmakers and administrative officials about the Direct Files program.

Intuit spent more than $1 million between January and March to lobby lawmakers in the House and Senate on issues including “the integrity of the tax system” and “protecting intellectual property,” according to the disclosures.

H&R Block spent $720,000 over the same period lobbying about various anti-poverty tax credits, “tax administration” and “Internal Revenue Service funding,” according to its disclosure papers.

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