IRS will experiment with free online filing system

The IRS will launch a pilot program next year that will allow a small number of people to electronically file their tax returns directly with the agency.

Details are still being worked out, but the initiative announced Tuesday is designed to allow people to avoid having to pay companies like Intuit and H&R Block to do their taxes.

“Filing taxes is expensive,” said Laurel Blatchford, a top Treasury official.

“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 accessible option.”

The plan would put the agency in the tax prep business, something the industry is sure to fight vociferously on Capitol Hill.

Republicans are already lining up against the plan, fearing it could eventually lead to a system where the IRS fills out people’s returns for them, which they say is a conflict of interest since the agency also enforces tax laws.

The initiative also comes with plenty of still-unanswered questions.

It’s unclear, for example, if the IRS will be able to allow people participating in the program to also file their state taxes — and if they can’t, that will likely dampen enthusiasm for the “Direct File” initiative.

Also, the IRS does not always explain tax rules in easy-to-understand terms, and it will be competing against tax prep companies that have spent decades fine-tuning their software.

In 2021, the IRS set up an online portal to allow people to sign up for monthly Child Tax Credit payments, and the White House was so unhappy with it — calling it clunky — that it told the public to use an alternative one developed by an outside group.

The effort comes as the administration pushes for an overhaul of the agency with a one-time $80 billion cash infusion Democrats awarded the IRS last summer.

The pilot program is sure to become another nagging point of conflict with congressional Republicans, some of whom have questioned whether the agency has the legal authority to establish such an initiative.

An idiosyncratic part of the U.S. tax system is that, while the IRS wants people to file their returns online because they’re easier to process, it does not accept electronically submitted returns directly from the public.

Filers must go through private companies — although people can file directly with the agency for free so long as they do it on paper. Those below a certain income threshold — $73,000 for the 2022 tax year — can file online for free through an IRS partnership with some tax prep companies, though few take advantage.

Nonpartisan groups like the Government Accountability Office have said the IRS should create more free filing options for taxpayers. And in a report issued Tuesday, the administration said its polling indicates the public wants to be able to do their taxes with the agency.

“We think there will be excitement,” said Blatchford.

The pilot program is designed to figure out the kinks in such a program, and IRS Commissioner Danny Werfel said they are still sorting out the details of how it would work.

The agency doesn’t yet know how many people will participate in the pilot program, he said, or how they will be selected, and the department isn’t certain yet whether it will be able to accommodate people with complicated filings.

The department has developed prototype software to try to understand potential problems, Werfel said, who added the agency doesn’t anticipate filling out people’s returns for them as part of the program. It will be up to the Treasury Department to decide whether to expand it into fully fledged direct file initiative, Werfel said.

He rejected Republicans’ complaints that his agency doesn’t have the statutory authority to set up or fund such a program and said it could be financed out of the $80 billion lawmakers provided last year.

A permanent direct file program serving 25 million taxpayers would likely cost $249 million annually, the agency said.

There are a number of practical questions hanging over the effort.

The IRS faces more legal hurdles than do private tax companies in allowing filers to also do their state returns, and it’s unclear how those will be resolved. If those can’t be resolved and people are essentially forced to do their taxes twice — once with the IRS, another time with their states — they would be less likely to take advantage of the initiative.

And the IRS has tried, unsuccessfully, similar initiatives before.

Back in the 1990s, it created a free public filing system known as “Cyberfile,” only to pull the plug on the program the following year.

Said Werfel: “We’ve learned lessons.”

The tax prep industry ripped the initiative.

“The conclusions of this study ignore facts, common sense, and what we know from our decades of helping millions of Americans file their taxes — taxpayers don’t want the tax collector, assessor, auditor and enforcer also to be their tax preparer,” Intuit, maker of TurboTax, said in a blog post.

Former IRS Commissioner Charles Rossotti questioned whether the initiative is a good use of the agency’s resources, in part because it would require ongoing support for people with questions about filing their returns.

“The last thing the IRS needs is more phone calls,” he said in an interview.

It would be simpler, he argued, for the IRS to cover the fees people pay to use private filing software instead of developing their own competing system.

But Dave Kautter, another former IRS honcho, takes the opposite view, saying the plan would fill an important gap in the tax system.

“It is irrational that a taxpayer can’t file a tax return electronically directly with the IRS unless they go through a commercial software vendor,” he told POLITICO.