The Internal Revenue Service is weighing whether to build its own free tax filing system and plans to launch a limited pilot program that will be available to some taxpayers next year during the 2024 tax filing season.
The announcement came Tuesday when the IRS released a cost and feasibility study about developing a free, electronic tax filing system.
The report was required by the Inflation Reduction Act, a sweeping tax and climate package passed by Democrats along party lines last year. It gave the IRS $15 million to fund a task force and conduct the study within nine months.
During this preliminary research phase, an internal prototype was created to help study how taxpayers would use the program, commonly known as Direct File. Surveys found that 72% of taxpayers would be interested in using a free, electronic tax filing service offered by the IRS.
The cost of running the program could range between $64 million and $249 million annually, the report said. The cost could vary widely depending on who would be allowed to use the new tax filing system.
“The report shows that a majority of taxpayers are interested in using an IRS-provided tool to prepare and file their taxes,” said IRS Commissioner Danny Werfel on a call with reporters.
“It also shows that the IRS is technically capable of delivering Direct File, but that doing so would require additional resources and add complexity to IRS operations,” Werfel added.
The agency has yet to decide who will be eligible for the pilot program. It could be limited to those below a certain income threshold or those with certain tax situations.
It will be up to the Treasury Department to decide whether to move forward with a larger-scale program after the pilot runs next year.
There’s an existing free filing service. It isn’t widely used
Currently, taxpayers who earn $73,000 or less can file their federal tax returns for free. About 70% of taxpayers fall in that category.
But that free filing service is not provided by the IRS. Instead, taxpayers must use a service from one of seven different private companies that make up an alliance known as the Free File Program.
The program started in 2002 and has gone through many iterations – but there has always been a low usage rate.
During the 2020 tax year, about 4.2 million taxpayers, or about 4% of those eligible, used the Free File program, according to a report from the Government Accountability Office.
Some Democratic lawmakers have pushed for an IRS-run free system, even more so after ProPublica published a series of articles in 2019 that said the private tax-filing companies made it hard for taxpayers to find their free filing options.
Two largest private providers of tax preparation and filing services have withdrawn from the Free File Alliance. H&R Block, which left in 2020, and Intuit, which left in 2021, together handled about 70% of returns filed through the Free File Program for the 2019 tax year, according to the Congressional Research Service.
TurboTax, which is owned by Intuit, is currently sending out checks to roughly 4.4. million people as part of a settlement of a lawsuit that alleged the company steered millions of low-income Americans away from free tax filing services.
But critics of a government-run tax filing program say the IRS shouldn’t play both the role of the tax preparer and tax collector.
Werfel said Tuesday that the Free File Program would continue to be available to low-income taxpayers next year while the IRS-run pilot program begins.
An overhaul at the IRS
The free federal tax filing program is just one of the many changes happening at the IRS after it received an influx of funding, totaling $80 billion over a decade, from the Inflation Reduction Act.
Generally, the funding is meant to support the agency in cracking down on tax cheats and providing better service to taxpayers. As a result of the improvements, the IRS is expected to collect more than $100 billion in new revenue over a 10-year period.
Biden administration officials have repeatedly said that taxpayers earning less than $400,000 a year won’t face an increase in taxes due to the new funding, though there is some uncertainty about how exactly the IRS can ensure this.
Republicans have been critical of sending so much money to the IRS and skeptical that the investment won’t lead to increased audits of hardworking Americans. In the GOP-controlled House, a bill passed earlier this year that would rescind most of the new funding, though it has no chance of becoming law.
The IRS is also working to improve taxpayer service. So far, the agency has hired 5,000 new customer service agents since the Inflation Reduction Act passed last year.
Werfel said last month that the IRS is now consistently answering between 80% and 90% of incoming calls, compared with just 17% last year. Wait time is also down. On average, callers are waiting about four minutes on average compared with 20 minutes last year.