The IRS is building its tax filing system online. Tax companies are not happy

The IRS is developing a system that would allow taxpayers to send electronic returns directly to the government for free, while avoiding commercial options like TurboTax.

The agency plans to pilot test the program next year.

Many other countries already offer taxpayers a government-run filing system. But the IRS plan is likely to face stiff opposition from the $14 billion tax preparation industry.

“The electronic filing system direct to the IRS is completely redundant and nothing more than a workaround to look for a problem,” said Rick Heinemann, a spokesperson for Intuit, the company behind TurboTax. “This solution will needlessly cost taxpayers billions of dollars and will especially hurt the most vulnerable Americans.”

Americans already spend a lot of time and money preparing their taxes. The average single filer pays $140 annually, according to the IRS.

While a coalition of industry players offers the free registration option through the IRS website, only about 2% of taxpayers use it.

“It’s because the tax prep companies sabotaged the program, so they can continue to make money,” Sen. Elizabeth Warren, R-M., said last month.

Last year, TurboTax paid $141 million to settle a complaint that it advertised free tax preparation and then charged customers for costly upgrades. The company did not admit any wrongdoing.

Taxpayers still have choices about how to file

IRS Commissioner Danny Werfel stressed that filing returns directly with the government would be completely optional.

“Taxpayers will always have choices about how they file their taxes,” Werfel told reporters during a conference call on Tuesday. “They can use tax software. They can use a trusted tax professional. They can use a paper tax return. We prefer filing them electronically, sure. But they have that option.”

Many Democrats have long favored the direct filing option. Legislation passed last year gave the IRS $15 million to study the idea.

“Democrats are committed to the proposition that it shouldn’t cost hundreds of dollars and many more hours to follow the law,” Ron Wyden, chairman of the Senate Finance Committee, said during a hearing last month. “When it comes to filing taxes online, the status quo is not acceptable.”

Through surveys, the IRS found great interest in the government-run filing system, but also found challenges.

One survey found that 72% of taxpayers would be “very” or “somewhat interested” in a system that would allow them to submit returns directly to the government at no cost. The option was more popular with young people, those with limited English skills and people doing their own taxes.

One respondent said, “If the government asks me to file, it should provide a free service.”

There are still concerns about filing online

However, other participants expressed concern that the collector might not provide them with the largest refund or the smallest tax bill—a potential inconsistency highlighted by business tax preparers.

The IRS estimates that building and operating a direct filing system would cost the government between $64 million and $249 million annually, depending on the number of users and the complexity of the returns it can handle.

One challenge is how to consolidate state tax returns, making the IRS-run system more attractive. The system could also be a stepping stone to having the IRS fill out portions of the tax return itself, using information from employers and other sources.

After reviewing the study, Treasury Secretary Janet Yellen ordered the agency to move forward with a pilot test next year. The scale of the trial and the types of eligible taxpayers have yet to be determined.