The IRS is looking at cutting out the middle man between taxpayers and the U.S. government.
The IRS and the Treasury Department announced Tuesday that the IRS will have a pilot program next year to allow some taxpayers to electronically file and pay their taxes directly to the agency.
The move could mark a major change in the way U.S. taxpayers deal with the revenue service as well as with third-party tax preparation software giants, such as Intuit and H&R Block. While taxpayers have been able to file for free in limited situations for two decades, they’ve had to use commercial portals to do so.
Those won’t be going away, IRS Commissioner Danny Werfel told reporters. “Direct file, whether in its pilot phase or whether a decision is made to go forward more broadly, will be just an option for taxpayers, among other options that taxpayers have,” Werfel said.
Instead, Werfel said, the initial phase will allow an unspecified but small number of taxpayers to use a prototype system the IRS has built to see how it performs, how taxpayers interact with it, and where changes might need to be made. After that, he said, a decision would be made whether to expand the program.
“Direct file, whether in its pilot phase or whether a decision is made to go forward more broadly, will be just an option for taxpayers, among other options that taxpayers have.”
The announcement of even the pilot program, though, is likely to stir up resistance on Capitol Hill and in the tax prep world. The IRS is one of the few government agencies that interacts with American citizens regularly. Almost 141 million returns had been filed from January through early May, according to the IRS, with 134 million of those filed electronically.
For tax prep giants like H&R Block and Intuit, who have the leading software packages that help individual income taxpayers calculate and file their IRS bills, the move may be seen as the opening salvo in a fight against their lucrative franchises. Intuit has recently ramped up its lobbying spending and argues the government has an inherent conflict of interest in aiding citizens in their tax calculations.
Both Intuit and H&R Block called the IRS 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. H&R Block remains committed to helping millions of Americans get the best outcome at tax time,” said a statement issued by H&R Block.
“Today, 100% of American taxpayers can file their taxes absolutely free of charge ― this is free for them and the government. 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,” said Intuit spokeswoman Tania Mercado.
Those arguments may find sympathetic ears on Capitol Hill among Republicans, many of whom have also said the IRS has had issues with taxpayer confidentiality and with managing IT projects.
Democrats hailed the decision. Rep. Richard Neal (D-Mass.), the top Democrat on the tax-writing House Ways and Means Committee, said, “When 70% of taxpayers qualify for IRS’s current Free File services, yet less than 3% take advantage, it’s time for change.”
The IRS decision was announced along with the release of a long-awaited report on the feasibility of direct filing. The report, required by the Inflation Reduction Act passed last fall, found 73% of taxpayers surveyed would be interested in using a “free IRS-provided online tool,” with 68% of tax prep software users saying they would consider switching to such a tool.
The report found some taxpayers would be interested in using a direct file system specifically because it would be built by the IRS, but others were concerned about why the IRS would offer the product and its potential implications for tax enforcement.
The costs to the IRS to put a direct file system in place would depend largely on how broadly it would be available, according to the report. A system that only 5 million taxpayers would be eligible to use would cost about $64 million a year, the report said, while one that 25 million taxpayers could use would cost $249 million.
Werfel said rollout details for the pilot programs, such as who or how many taxpayers would be eligible and how they would know if they were eligible, still need to be determined.
“Those are details that we have not yet finalized,” he said.
Werfel also said the agency’s track record on big technology projects has its rough spots, but not all of them could be blamed on the IRS as much as on stop-and-go funding.
That should not be a problem if the IRS uses Inflation Reduction Act funds for the direct filing project.
“We now can plan differently. So one of the factors that caused some of our challenges has been addressed,” he said.