The IRS will test its free electronic filing system next year

FILE – The Internal Revenue Service’s 2022 tax form 1040 was filed April 17, 2023. The IRS plans to launch a pilot program for a government-run online tax filing system that is free to everyone. After months of research, the IRS published a feasibility report on Tuesday, May 16, 2023, outlining the taxpayer’s direct-file interest, how the system might work, its potential cost, operational challenges and more. (AP Photo/John Elswick, File)

A new report says most taxpayers are interested in filing their taxes directly with the IRS for free, and that option will be tested next year.

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

The idea of ​​a free government-run online tax filing system has been debated for a long time. Supporters argue that this option would make tax return services fairer and more accessible to taxpayers across the country. But there has also been opposition from some major tax firms.

Now, the IRS plans to launch a pilot program for the 2024 filing season to test the “Direct File” system and help the federal government decide whether to move forward with its potential implementation in the future, IRS Commissioner Danny Werfel and Treasury Department chief enforcement officer Laurel Blatchford said Tuesday.

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

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

The IRS published a feasibility report on Tuesday that outlines direct-file taxpayers’ interest, how the system might work, its potential cost, 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 capable of direct filing, but doing so requires additional resources and adds complexity to IRS operations,” Werfel said on the call. with journalists.

He added that the IRS’ existing free e-file option, which is available to eligible low-income taxpayers, will still apply. Individuals of all income levels can still file their returns for free via mail — though processing paper returns can take months and taxpayers still have to purchase postage.

The new direct e-filing software being tested “could save taxpayers billions of dollars a year,” said Blatchford, noting that an individual taxpayer pays an average of $140 to prepare their tax returns each year.

An initial cost analysis of the report shows that the pre-file option administered by the IRS “could cost as little as $10 per return to file and, of course, would be free for taxpayers—by comparison, simple electronic filing options currently available to taxpayers are about $40.”

The study estimates that annual costs for Direct File may range, depending on the use and scope of the software, from $64 million for 5 million users to $249 million for 25 million users.

We believe today’s announcement is an important step toward revolutionizing access to the tax system so that it is easier and fairer. The free and simple Direct File service will ensure that more families in America get the tax benefits they’re entitled to, Amanda Renteria, executive director of the nonprofit Civic Tech of America, said in a statement.

While supporters have praised the pilot, 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 an imbalance of power between taxpayers and the government.

Steve Ryan, general counsel of the American Alliance for Taxpayer Rights, an advocacy group for tax firms, said that “a direct electronic filing system is unnecessary, expensive, and will divert attention and resources from the IRS’s most pressing priorities.”

There is also concern about historical racial disparities and bias noted in the IRS’ application of tax laws. In Monday’s letter to US senators, for example, Werfel emphasized that the IRS has found that black taxpayers may be subject to scrutiny at higher rates.

“I will remain focused on this to make sure we identify and implement changes before the next tax filing season,” Werfel said in the letter.

The big tax preparation companies also have millions of dollars to lose if the software starts to pay off. Last year, more than 60 million taxpayers were served between Intuit, TurboTax’s parent company, and H&R Block.

An AP analysis shows that Intuit, H&R Block, other private companies, and big business advocacy groups for tax preparation, as well as free e-file proponents, have reported spending $39.3 million since 2006 to lobby for Free File and other issues. Federal law does not require local lobbyists to itemize expenses by specific issue, so amounts are not limited to pro bono files.

Derek Plummer, an Intuit spokesperson, said the study “picks data to support its flawed conclusion,” namely that only 12% of taxpayers said they would use a government-run system if state revenues were not included in the program.

He said the study “ignores the damage a government-run system would do to vulnerable taxpayers and the real costs to taxpayers”.

A representative from H&R Block could not immediately be reached for comment on Tuesday.

Werfel on Tuesday acknowledged concerns surrounding a potential direct-filing system, particularly the operational challenges, but that retained taxpayers must choose the filing option that works best for them and that “the IRS cannot manage the tax system alone.”

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


Hussein reports from Washington, D.C

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