The IRS is now taking steps to implement its pilot test of a free e-file system by holding talks with advocacy groups, Accounting Today reported.
The free direct-file system, to be introduced in January 2024, was developed by the IRS and the U.S. Digital Service, the White House’s technology consulting agency. It has been testing the software and will make it available to a small group of taxpayers then.
A 2022 study conducted by the IRS found that 72 percent of taxpayers would be either very interested or somewhat interested in using an IRS-provided online tool to prepare and file their taxes, the IRS’s Report to Congress on such a system reported.
Fifteen million dollars were allocated to the IRS by the Inflation Reduction Act (IRA) to report on the cost of the agency’s developing and operating a free, direct e-file tax return system, the Washington Post reported. A third-party report was issued by think tank New America.
To begin the process of putting the system into use, the Treasury Department's chief implementation officer for the Inflation Reduction Act, Laurel Blatchford, and IRS acting chief transformation officer Bridget Roberts held a roundtable discussion with civil rights and advocacy organizations last week, Accounting Today reported. The meeting discussed the need to make tax filing easier and less expensive for taxpayers, especially in underserved communities. Included in that discussion was taxpayer support for a free online filing option and the development of a pilot program for a direct file option during the 2024 filing season.
One challenge mentioned by the New America report would be integrating the IRS's direct-file system with those of other states.
"Some states are actually pretty far ahead of the IRS in creating their own direct-file systems," said Ayushi Roy, deputy director of New America's New Practice Lab and co-author of the IRS Direct File Third-Party Report. "There are 14 states around the country that already have their own direct-file system. It's very much not limited to more left-of-center states or anything like that. Kansas and Alabama, among other states, have their own direct-file system ahead of the IRS. I don't know that cooperation will be the challenge. It's more about the data interoperability that will be key."
States sometimes develop their own direct-file software or leverage tax software developed by outside companies, Accounting Today reported.
"The state will sometimes use off-the-shelf software that they will customize and then run by the state department of revenue itself, or the comptroller's office, and in other cases, the state will build their own software in-house, but either way it's a state-run operation," Roy said. "Like the federal direct file, it provides a free option for taxpayers of that state to be able to file their returns."
Currently, the IRS offers a Free File program for taxpayers whose adjusted gross income (AGI) is $73,000 or less, Accounting Today reported. The program is a public-private partnership between the IRS and the tax preparer and filing software industry companies; these companies provide free online tax preparation and filing for taxpayers who qualify. Seventy percent of taxpayers qualify for this program, but fewer than 3 percent use it, the U.S. Government Accountability Office reported in 2022.
The two biggest tax software providers, Intuit's TurboTax and H&R Block, no longer participate in the Free File program but they continue to offer free editions. Earlier this month, TurboTax began to pay restitution to more than 176,000 New Yorkers as a result of a May 2021 settlement for steering taxpayers eligible for its IRS free file program toward a TurboTax paid program.