The upcoming IRS initiative to pilot a new electronic free-file tax return system in the following year has sparked active engagement from both proponents and opponents. They are seeking to influence public opinion and Congressional decisions on whether the government should establish a permanent program to assist taxpayers in filing their taxes without relying on paid services to determine their owed amounts.
In May, the IRS released a report stating that a significant number of taxpayers express interest in filing their taxes directly with the IRS for free. To explore this further, the IRS announced plans to introduce a pilot program for the 2024 filing season, aiming to test a direct file system and evaluate its viability for a permanent implementation.
Proposed IRS Direct Filing System Amid Tax Preparation Concerns
Civil society organizations have recently formed a coalition to advocate for the implementation of a government-operated free-file program. Conversely, major tax preparation companies, including Intuit (the parent company of TurboTax) and H&R Block, have invested significant resources to vehemently oppose the proposal.
However, this proposal encountered an immediate threat of budget cuts from congressional Republicans. In June, Republicans on the House Appropriations Committee proposed a budget rider that would prevent funds from being used for the creation of a government-run tax preparation software by the IRS unless approved by a group of House and Senate committees. The rationale behind this move, as stated in the bill’s summary, was to “safeguard the IRS from an obvious conflict of interest where the tax collector becomes the tax preparer.”
A Government Accountability Report from April 2022 revealed that although 70% of taxpayers were eligible to use an existing free-file program, only 3% actually utilized the service. This program operates as a public-private partnership between tax software companies, offering free services to certain taxpayers outside of the IRS website.
While it is possible for anyone to prepare and mail their taxes for free, the complexity of the tax code has led nearly 50% of Americans to seek assistance from tax preparation companies. As a result, individual taxpayers spend an estimated average of $140 each year on tax preparation.
IRS Struggles with Funding and Opposition in Quest to Implement Direct Filing System
Despite being outspent in terms of financial resources, Susan Harley, the Managing Director of Congress Watch at Public Citizen, emphasized that they hold the moral high ground in supporting the free-file program over relying on third-party tax preparers.
Countries such as Germany, Japan, the U.K., and other Organization for Economic Cooperation and Development (OECD) nations already provide their taxpayers with some form of pre-populated tax document. Additionally, some countries utilize “tax agency reconciliation,” where taxpayers who choose to participate share basic employment status information with the government, and in return, the tax administrator sends them a pre-filled tax return with their calculated tax liability.
Research conducted by a group of experts from Treasury, Federal Reserve, and academia last year revealed that the IRS could potentially pre-populate 42 to 48% of all tax returns.
The IRS has already faced funding reductions since the passage of the Inflation Reduction Act, which was signed by President Joe Biden in August of the previous year. The act granted the agency $80 billion to modernize, hire more staff, and make progress toward the implementation of the free-file program.
However, House Republicans introduced a $1.4 billion reduction to the IRS in the debt ceiling and budget cuts package passed by Congress during the recent summer. In addition, as part of the debt deal, there was a separate agreement to divert $20 billion from the IRS to other non-defense programs over the next two years, as stated by the White House.