IRS moves forward with free e-filing system in pilot program to launch in 2024

NEW YORK, NY (AP) -- A new report shows that most taxpayers would like to file their taxes for free directly with the IRS. This option will be tested in New York next year.

The IRS spent nine months studying if U.S. tax payers would like to see an electronic filing system that is free and run by the government. It's now getting ready to launch a test program.

For a long time, the prospect of a government-run online system for free tax filing has been discussed. The option is argued to make tax services more accessible and equitable for all taxpayers. Some big tax preparation companies have also resisted the idea.

IRS Commissioner Danny Werfel, and Treasury's Chief implementation officer Laurel Blatchford, confirmed Tuesday that the IRS will launch a pilot for the 2024 tax season to test a direct file' system, and to help the federal governments decide whether or not to implement it in the future.

Werfel stated that the public would have the opportunity to participate in the pilot program.

As part of funding received under the Inflation Reduction Act (the Democrats' flagship climate change and health care legislation that President Joe Biden approved last summer), the IRS was asked to investigate how to create a "direct file" system. The IRS was given nine months and 15 million dollars to report back on the implementation of such a program.

The IRS released a feasibility study on Tuesday. It outlines the interest of taxpayers in direct file. It also explains how it could be implemented, what its cost would be, and operational challenges.

Werfel, on a conference call with reporters, said that the IRS was technically capable of providing direct file but that it would add complexity and additional resources to IRS operations.

He added that the IRS will continue to offer its free eFile option for lower-income taxpayers. All income levels are still able to submit their tax returns via mail for free, although the processing of paper returns can take several months and the taxpayers still need to pay postage.

Blatchford noted that the average taxpayer spends $140 on preparing tax returns every year.

Initial cost analysis in the report shows that taxpayers would not pay anything for a pre-filed option provided by the IRS.

According to the study, direct file costs can range from $64 millions for 5 million users up to $249 for 25 million users, depending on usage and scope.

We believe that today's announcement represents a major step in revolutionizing the access to tax systems so they are easier and more fair. "A free and easy direct file service ensures that more American families receive the tax benefits to which they are entitled," Amanda Renteria CEO of civic technology nonprofit Code for America said in a press release.

Although supporters of the pilot program applauded it, critics expressed their skepticism that the IRS would be taking on both the roles of tax collector and tax preparation, arguing the new service might create a power balance between taxpayers, and the government.

The IRS has been accused of racial bias and historical disparities. In a Monday

Letter

Werfel, in a statement to the U.S. Senate confirmed that the IRS had found that audit rates for black taxpayers could be higher.

The big tax preparation companies have also millions to lose if this program is implemented. Intuit (the parent company of TurboTax) and H&R Block served more than 60 millions taxpayers last year.

H&R Block and Intuit did not immediately respond to a request for comment on Tuesday.

According to an Associated Press report, Intuit and H&R Block as well as other companies and advocacy groups that represent large tax preparation businesses and proponents of electronic free-file have spent $39.3 millions since 2006 lobbying on 'free file' and related issues. The federal law does not require lobbyists in the United States to break down their expenses into specific issues, so these amounts are not restricted to free-file.

Werfel acknowledged on Tuesday that there are concerns about a direct filing system, including operational challenges. However, Werfel maintained that taxpayers should choose the option that is most convenient for them, and that "the IRS cannot manage the tax system by itself."

Werfel stated that 'we rely on a vast network of partners, including tax professional groups, software communities, payroll communities and countless organizations dedicated to working directly with taxpayers'. This report does not change that.