The IRS will test a free online tax filing system starting next year

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

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

The prospect of a free, government-run online tax filing system has long been debated. Supporters say the option would make tax return services fairer and more accessible to taxpayers across the country. But there was also pushback from some large tax preparation firms.

The IRS now 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 Treasury Department Chief Executive Officer Laurel Blatchford said Tuesday.

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

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

The IRS released a feasibility report Tuesday that describes taxpayer interests in direct file, how the system could work, its potential costs, operational challenges and more.

The report indicated 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 delivering direct file, but this would require additional resources and will add complexity to IRS operations,” Werfel said on a call with reporters.

The existing free IRS e-file option available to lower-income taxpayers who qualify will remain in place, he added. Individuals of all income levels can still file their returns for free by mail — although paper returns can take months to process and taxpayers still have to pay 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 to prepare their tax returns each year.

The report’s initial cost analysis shows that the pre-filing option, managed by the IRS, “could cost less than $10 per filing return and, of course, would be free to taxpayers — by comparison, the simple options of e-filing currently available to taxpayers is about $40.”

The study estimates that annual direct-file costs could range, depending on usage and program reach, from $64 million for 5 million users to $249 million for 25 million users.

“We believe that today’s announcement is a significant step towards revolutionizing access to the tax system so that it is easier and fairer.” A free and simple direct file service will ensure more families in America get the tax breaks they’re eligible for,” Amanda Renteria, CEO of the nonprofit Civic Tech for America, said in a statement.

While supporters applauded the pilot program, critics expressed skepticism about the IRS taking on the dual role 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 for the American Taxpayer Rights Coalition, an advocacy group for tax companies, said “a direct e-file system is unnecessary, costly and will divert attention and resources from more pressing IRS priorities.”

There is also concern about the historical racial disparities and biases seen in the IRS’s enforcement of tax laws. In a letter Monday to U.S. senators, for example, Werfel confirmed that the IRS has found that black taxpayers may be audited at higher rates.

“I will remain laser-focused on this to ensure we identify and implement changes before the next tax return season,” Werfel said in the letter.

Big tax preparation companies could also lose millions of dollars if the program goes through. 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 free-file e-file advocates, reported spending $39.3 million since 2006. d here to lobby for “free files” and other issues. Federal law doesn’t require local lobbyists to disclose issue-specific spending, so the amounts aren’t limited to freebies.

Derrick Plummer, a spokesman for Intuit, said the survey “picks data to support its flawed conclusion,” namely that only 12 percent of taxpayers said they would use a government-run system if state returns weren’t included in the program .

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

A representative for H&R Block was not immediately available for comment Tuesday.

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

“We rely on a broad network of partners in tax professional groups, software communities, the payroll community and countless specialty organizations that work directly with taxpayers,” Werfel said. “This report doesn’t change any of that.”

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