IRS tests free e-filing system that could compete with tax prep giants
The Internal Revenue Service has quietly built its own prototype system to allow Americans to file tax returns digitally and free of charge, according to three current and former agency officials, essentially creating government software that could disrupt the tax-prep industry.
The system was developed by the IRS and U.S. Digital Service, the White House’s technology consulting agency. It will be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins, said the people briefed on the matter, who spoke on the condition of anonymity to discuss internal agency conversations.
Last year’s Inflation Reduction Act, one of President Biden’s chief legislative victories, included $15 million for the IRS to look into creating a direct filing program. The tax agency tapped the left-leaning New America think tank to study the matter and produce a report, which is expected this week.
Treasury Department representatives declined to comment Monday.
The IRS currently refers people seeking no-cost filing options to a consortium of companies that provide free e-filing for taxpayers below a certain income level. Though 70 percent of taxpayers qualify for those products, fewer than 3 percent of taxpayers use them, according to a Government Accountability Office report.
For a narrower range of taxpayers, industry giants Intuit TurboTax and H&R Block offer free products that the IRS does not officially endorse.
A free filing system offered directly by the federal government could upset a commercial tax prep market estimated by research firm IBIS World to be worth $14.4 billion this year.
The system of commercial programs for online filing has served taxpayers and the government well by many accounts. Roughly 9 in 10 individual tax returns were filed digitally in 2022, the IRS reported. The U.S. voluntary tax compliance rate – the proportion of filers who pay federal taxes accurately each year – of 85.1 percent is among the highest of developed economies, according to years of research in the U.S. and Europe.
But some experts say the private-public partnership also reflects the IRS’s technological deficits. Far smaller countries, including Estonia, Chile and Australia, offer government-backed digital filing services.
The Inflation Reduction Act granted the IRS $80 billion over 10 years to increase enforcement efforts on high-income earners, improve taxpayer services and modernize its technology. The Biden administration said the IRS needs the additional funds to catch up with sophisticated tax cheats and better serve low- and middle-income Americans entitled to a bevy of credits.
In April, when the IRS reported a spending plan to Congress for that money, Commissioner Daniel Werfel said the agency would consider a “question-based electronic service to prepare and file tax returns directly with the IRS.”
The agency plan also would allow taxpayers to solicit help from customer service representatives through secure online portals. That threatens to encroach on another area where tax prep companies try to differentiate themselves from the IRS by employing legions of accountants and other experts to serve filers in premium product lines.
Industry representatives have been outspoken to lawmakers and administration officials about the direct file program.
Intuit spent more than $1 million between January and March lobbying both House and Senate lawmakers on issues including “tax system integrity,” and “intellectual property protections,” according to disclosures.
H&R Block spent $720,000 over the same period on lobbying around various anti-poverty tax credits, “tax administration” and “Internal Revenue Service funding,” according to its disclosure paperwork.