Internal Revenue Service commissioner Daniel Werfel said Tuesday the IRS plans to begin pilot testing a free direct-file online tax preparation program early next tax season with a group of taxpayers after a research study indicated heavy demand for such an option.
A provision in the Inflation Reduction Act required the IRS to carry out a study on the feasibility of a direct e-file option. Early word leaked out Monday that the IRS planned to make such an announcement in conjunction with the anticipated mid-May release of the study (see story). The IRS released its report Tuesday.
“Central to the IRS’s mission is meeting taxpayers where they are to ensure they have the options that work best for them for fulfilling their tax obligations,” Werfel said during a press conference Tuesday in announcing the initiative. “The concept of direct file, developed by numerous tax jurisdictions around the world, has long been considered by some to be an option for improving the customer experience for taxpayers in the U.S.”
He pointed to recommendations from the National Taxpayer Advocate, the Government Accountability Office, members of Congress, and academic and advocacy organizations that have asked the IRS create a free IRS-run tax preparation and filing tool to improve the taxpayer experience. On the other hand, he acknowledged some stakeholders have expressed concerns about the operational challenges of setting up such a system.
The report includes a wide range of views on the costs, benefits and operational challenges to help the federal government make a decision based on the available evidence on whether and how to move forward with a direct file option. The researchers surveyed and interviewed a variety of taxpayers about their preferences and tax-filing experiences.
To supplement the survey, the IRS enlisted the support of the U.S. Digital Service, a technology consulting agency that works with the White House, to build a functioning internal prototype of a multilingual “mobile friendly” tax filing tool.
“The prototype was only for limited user research and usability testing purposes,” Werfel cautioned. “It’s not a fully functional system. The prototype was similar to early stage development of products in a commercial and government environment. Taxpayers interacted directly with the prototype in a controlled usability testing session. No real taxpayer information was used in the usability testing session.”
The report found a 72% majority of taxpayers said they are either very interested or significantly interested in using an IRS-provided tool to prepare and file their taxes. “It also shows the IRS is technically capable of delivering direct file, but that doing so would require additional resources and add complexity to IRS operations,” said Werfel.
The report includes an independent analysis by the think tank New America and Professor Ariel Jurow Kleiman of Loyola Marymount University in Los Angeles, who evaluated the feasibility of an IRS direct file option.
“The third-party team found that a Direct File product could create opportunities to ease tax filing for Americans, but that success would require the IRS to address several challenges, including integration with state income tax filing, protecting data privacy and security, and providing adequate customer service,” said Ayushi Roy, deputy director of New America’s New Practice Lab and co-author of the IRS Direct File Third-Party Report, in a statement. “Our findings were based on a review of the IRS’s report as well as survey data and over 50 academic papers, reports and articles on tax administration. We also conducted 72 interviews with IRS and Treasury officials, private industry representatives and state tax agency officials between March and May.”
The IRS provided the Treasury Department with a final version of the report, and Treasury Secretary Janet Yellen and her leadership team directed the IRS to launch a direct file pilot to gather data to further assess the issues identified in the report before deciding on whether to deploy a full-scale direct file system. Werfel said that approach is consistent with best practices for new product launches in both the government and the private sector, where the transition from the research and development phase to a customer-facing system is done in an incremental manner to enable additional testing of hypotheses considered during the research and development phase. He assured reporters that the current system for preparing taxes, with both commercial tax prep software and professional tax preparers, won’t be going away anytime soon, at least while he’s running the agency.
“Under any scenario, let me emphasize that the foundational components will not change during my term as IRS commissioner,” he said. “Taxpayers will only have choices for how they file their taxes. They can use tax software. They can use a trusted tax professional. They can use a paper tax return. We’d rather they file it electronically, sure, but they have that choice. People should use the filing option that works best for them, for their personal and their financial situation. Under any scenario, the IRS cannot run the tax system alone. We rely on an extensive network of partners across tax professional groups, the software community, the payroll community and countless dedicated organizations that work directly with taxpayers. These groups are vital to helping the nation. This report changes none of that. The pilot we are proceeding with to test a new solution for taxpayers is just one part of our larger efforts to do better for taxpayers and the nation we serve.”
Under the direction of the Treasury Department, the IRS will launch the initial pilot program during the 2024 filing season to test the feasibility of taxpayers filing online directly with the IRS and to help inform development of tools for the IRS to improve service more broadly across the agency, said Laurel Blatchford, chief implementation officer for the Inflation Reduction Act at the Treasury Department.
“Filing taxes is expensive and time consuming for American taxpayers,” she added. “On average, individual taxpayers spend approximately eight hours and $140 preparing their taxes each year.”
Pass-through businesses and those who work in the gig economy tend to pay even more, she noted. “Dozens of other countries have provided free tax-filing options to their citizens, and American taxpayers who want to file their taxes for free online should have an acceptable option,” Blatchford said.
The IRS report found the majority of taxpayers support having an option to file their taxes for free directly with the IRS, she pointed out, and taxpayers perceive the IRS as authoritative, trustworthy and a safe place for their information, while some are interested in a direct file tool specifically because it would be built by the IRS. Cost is another major factor, and taxpayers would prefer a free option provided by the IRS. Taxpayers who prepare their own taxes, are younger or have limited English proficiency are more likely to be interested in filing their taxes directly with the IRS. The report’s initial cost analysis showed that a free-file option built by the IRS would cost less than $10 per return to provide and would be free to taxpayers. In contrast, simple electronic filing options currently available to taxpayers cost approximately $40.
“A potential direct-file software program could potentially save taxpayers billions of dollars annually,” said Blatchford.
In addition, a potential future direct-file program would help the IRS move toward the priorities outlined in its strategic operating plan, she added, including providing a free online option for taxpayers to file their returns electronically, thereby helping to eliminate paper backlogs. In the coming months, the IRS will need to work through some significant operational questions, including how to support and integrate a direct file federal program with state tax administrations, the potential complexity of the returns it would be able to process during the pilot test and how to ensure an optimal level of customer support. The IRS and the Treasury will provide updates on the direction of the pilot as these questions are answered.
If it moves forward, the program will be “providing taxpayers with the option of filing their taxes online directly with the IRS with the goal of making the IRS a world class customer service agency, with the ability for taxpayers to interact with the IRS in the way that works best for them,” said Blatchford, adding that can be on the phone, in person and online.
During the press conference, reporters asked if the Free File program would continue to remain available, and Werfel assured them it would be. “We remain strongly committed to ensuring that lower-income taxpayers can electronically file their federal tax return through the Free File Alliance or through other methods,” he said. “In fact, the IRS extended its relationship with the Free File Alliance through a memorandum of understanding that now takes it through 2025. This extension provides additional time for the IRS and the Free File Alliance to explore ways to improve the program, so we remain absolutely committed to that.”
The Free File Alliance includes a number of commercial tax software providers such as TaxAct and TaxSlayer, FreeTaxUSA, 1040Now, OLT and FileYourTaxes.com who offer various forms of tax prep to taxpayers who earn less than $73,000 in adjusted gross income, but there are often extra charges for state tax software. The two biggest tax software providers, Intuit’s TurboTax and H&R Block, no longer participate in the Free File program but they continue to offer free editions, although many taxpayers end up paying extra for more complex returns and state tax software. Cash App Taxes also offers free tax prep, but it too isn’t part of the IRS’s Free File program.The IRS already offers a Free File Fillable Forms option in conjunction with its Free File program. The extra $80 billion funding provided under the Inflation Reduction Act over 10 years will help enable the IRS to develop its own direct file system.
Werfel doesn’t think the IRS would need Congress to pass legislation allowing the IRS to offer a direct-file option as the IRS is already providing ways to file taxes for free over the phone and through the Free File program. However, some lawmakers questioned whether the IRS had that authority during a recent congressional hearing where he was asked about the expected findings of the report (see story).
“On the legal authority question, there is substantial precedent for the IRS providing assistance and advice to taxpayers to meet their tax filing obligations and complete their returns accurately, such as a telefile program, which allows taxpayers to file their tax returns by telephone,” said Werfel. “There are Taxpayer Assistance Centers in which the IRS employees provide in-person tax preparation services. And so there’s a whole host of different things and we believe this falls into the same category. Of course, if there are questions by members of Congress or oversight entities that believe that this situation is fundamentally different than the other situations I just described, then we want to hear from them and understand what their concerns are. With the issuance of this report, and the announcement of a limited pilot going forward, it provides an opportunity now to engage on any questions that stakeholders, including Congress, have about the go forward. If there are questions about the legal authority, I would love to hear what they are so we can look at it and investigate them.”
Senate Finance Committee chairman Ron Wyden, D-Oregon, doesn’t think the IRS needs additional legal authority to implement the system.
“In recent months, there’s been a new effort to quash any progress on direct free file by convincing lawmakers that Congress needs to pass legislation specifically giving the IRS authority to move ahead with it,” he said in a statement. “This is dead wrong. The IRS already has all the legal authority it needs, and anybody who says otherwise is doing the bidding of the tax software lobby. All Americans deserve a free and easy option that allows them to file their taxes directly online with the IRS, and I’m elated that the Inflation Reduction Act kicked off the effort that will finally make that a reality. The IRS has begun work on a prototype system, and I’m looking forward to seeing the results of their work.”
House Ways and Means Committee chairman Richard Neal, D-Massachusetts, thinks the program will encourage more taxpayers to take advantage of free tax prep options. “When 70% of taxpayers qualify for IRS’s current Free File services, yet less than 3% take advantage, it’s time for change,” he said in a statement. “Today’s report provides a framework for saving taxpayers time and money while giving them the experience they deserve.”
House Republicans are less enthusiastic about the prospects for the pilot program.
“Americans don’t want to give the IRS such sweeping control and authority, yet the Biden administration refuses to listen,” said House Ways and Means Committee chairman Jason Smith, R-Missouri, in a statement. “The announcement of a pilot program raises serious questions about how long the Biden administration’s decision to move forward on such a program has been in the works, whether the agency had any intention of following Congress’ direction that this study be conducted in an independent and impartial way, and whether the IRS is acting outside the law in establishing a program that Congress has not authorized.”
A separate poll from Navigator Research and the Economic Security Project found that 76% of Americans want free and simple tax filing, across party lines. Majorities of Democrats (88%), independents (69%), and Republicans (64%) support the IRS creating a simplified free tax filing tool directly on its website, according to the poll, and more than seven in 10 Americans across all income levels and age groups support the IRS offering the choice to file taxes for free directly on the IRS website.
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