How would you like to file your taxes for free? IRS launching pilot program for free e-filing

Individual taxpayers spend on average $140 preparing their taxes each year. The Internal Revenue Service is planning to test a program that could cut those costs significantly. 

After nine months of studying the effects of a free, government-backed online tax filing system, the IRS said it is preparing to launch a pilot program next year. The test should help the federal government decide whether to implement a permanent government-run system that would compete with the likes of TurboTax and H&R Block. 

The e-file program “could potentially save taxpayers billions of dollars annually,” the Treasury’s Chief Implementation Officer Laurel Blatchford said Tuesday.

There are few details about how the pilot program will be structured, but IRS Commissioner Danny Werfel said members of the public will have the option to participate. 

What did the IRS’s study find?

The Inflation Reduction Act last year allocated $15 million to the IRS to study the costs, benefits and operational challenges of a “direct file” system. 

The majority of the more than 4,200 individual taxpayers surveyed for the report said they would be interested in using a free tax e-filing system from the IRS, with 72% saying they would be “very interested” or “somewhat interested.” Annual costs are expected to range from $64 million for 5 million users to $249 million for 25 million users.  

While implementing such a system would require ongoing funding, the report concluded that it should be considered for "customer experience improvement.”

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What happened to IRS Free File?

The IRS’s current free federal filing option, Free File, uses third-party software and is only available to households with an adjusted gross income of up to $73,000.

The IRS’s study notes that very few taxpayers use Free File. An audit conducted by the Treasury Inspector General for Tax Administration found just 2.4% of eligible tax filers in 2019 used Free File services.

The program has also been accused of being fraught with conflict because of its ties with private companies.

Intuit, the company behind TurboTax, was ordered to pay $141 million to customers in 2022 after an investigation found the company used deceptive tactics to steer low-income tax filers away from Free File and toward its own commercial products.  

Intuit and H&R Block left the Free File program at the end of the 2021 and 2020 tax seasons, respectively. 

Werfel noted that Free File will remain in place after the pilot program’s launch.

IRS free file options:Your 2023 guide to free tax prep services

Want to file your tax return for free?TurboTax opts out of major program

What are the tax-prep companies saying?

While supporters applauded the pilot program, critics have expressed skepticism about the IRS taking on the dual roles of both tax collector and tax preparer, arguing that the new service could create a power imbalance between taxpayers and the government.

There's concern about historic racial disparities and bias seen in the IRS's enforcement of tax laws. In a Monday letter to the U.S. Senate, Werfel confirmed the IRS found that Black taxpayers may be audited at higher rates.

Big tax preparation companies also have millions of dollars to lose if the program comes to fruition. Last year, more than 60 million taxpayers were serviced between Intuit, the parent company of TurboTax, and H&R Block.

An Associated Press analysis shows that Intuit, H&R Block, and other private companies and advocacy groups for large tax preparation businesses, as well as proponents in favor of electronic free file, have reported spending $39.3 million since 2006 to lobby on “free-file” and other matters.

Intuit spokesperson Derrick Plummer criticized the IRS's report and said it "cherry-picks data to support its flawed conclusion." He pointed to a February 2023 report from MITRE, an independent advisor to the IRS, that found only 12% of taxpayers said they would use a government-run system if state tax returns were not included. 

"An IRS direct-to-e-file system is redundant and will not be free – not free to build, not free to operate, and not free for taxpayers," Plummer said.

Another statement from H&R Block called the direct e-file pilot "a solution in search of a problem."

"With more than 30 organizations already offering free tax preparation, this pilot is unnecessary and faces significant barriers to providing comprehensive tax preparation services," the statement reads. "H&R Block remains committed to helping millions of Americans get the best outcome at tax time."

IRS to test free direct file option:IRS to test a limited pilot in 2024 for its own free 'Direct File' option

The Associated Press contributed to this report.

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