After a months-long review, the Internal Revenue Service will test a free federal tax-filing pilot program, IRS and Treasury Department officials said Tuesday.
Though many details about the pilot program still need to be worked out, the upcoming test run could mark the start of a new, free alternative to paid preparers and tax software companies, including Intuit INTU,
During the last tax-filing season, people spent an average of $140 and approximately eight hours preparing their taxes, according to IRS estimates. Factor in business returns and that average tax-prep increased to $250.
The IRS received more than 134 million electronically-filed tax returns through early May, and over 62 million were self-prepared while more than 72 million came from tax professionals, statistics show.
IRS Commissioner Danny Werfel announced the upcoming pilot program on the heels of a new IRS study saying the agency might be able to pull off its own income-tax return filing platform, even though it would not be an easy lift or come cheap. (Werfel said the agency will still have to work out how state returns would get handled in the pilot program.)
The IRS is receiving $80 billion over a decade from last summer’s Inflation Reduction Act to upgrade services and step up high-end tax enforcement. Of that sum, $15 million was put aside to study whether the IRS could or should run its own filing option.
There’s consumer appetite for an IRS-run free filing choice and a prototype used by some consumers “exceeded their expectations in terms of ease of use and simplicity,” the study said.
If the IRS does decide to press ahead with a more widespread direct-filing system, it could cost between $64 million and $249 million annually, depending on variables such as the number of users, the study projected.
The upcoming pilot does not necessarily mean the start of a new IRS-run filing system, Werfel emphasized. The tax agency is just in testing mode — like any company testing a potential product’s functioning and demand, he said.
Tax-prep companies have criticized IRS free-filing proposal
Treasury Secretary Janet Yellen directed the IRS to launch the pilot program after reading the report, Werfel noted.
“Direct file — whether it’s in its pilot phase, or whether a decision is made to go forward more broadly than that — will be just an option for taxpayers,” Werfel said. That includes commercial tax-preparation software, he noted.
While the IRS determines how to implement the test run, it will likely need to prepare for criticism.
Tax preparation companies like H&R Block and Intuit, the owner of TurboTax, are opposed to the IRS getting into the arena of tax preparation. It’s a conflict of interest and inefficient for the IRS to collect Americans’ taxes, enforce tax laws and also prepare income tax returns, the companies have said.
“The report released by the IRS is not grounded in reality,” an Intuit spokesperson said. “The study ignores the harm a government-run system will have on vulnerable taxpayers and the true costs to taxpayers. The costs estimated in the study to build, operate, and maintain are laughable.”
At H&R Block, the company said the upcoming pilot “continues to be 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.”
Shares of Intuit closed approximately 1% lower Tuesday while shares of H&R Block closed about 3% lower. The Dow Jones Industrial Average DJIA,
Conservative-leaning advocacy groups have also opposed the prospect of the IRS getting into tax preparation, wary of overreach from an agency that is poised to receive billions of dollars from the Inflation Reduction Act. No Republicans voted for the legislation and the extra IRS funding was a focal point of GOP criticism.
Supporters who want the IRS to get into tax preparation counter that the companies’ opposition is fueled by worries about their bottom line.
The IRS already has a free-filing program, allowing people who make less than $73,000 a year to file their federal tax return for free. That program — a partnership with certain tax software companies — is underutilized, according to the IRS’ Taxpayer Advocate Service. The new pilot, if successful, could be rolled out to a greater number of taxpayers.
The existing free-file program is designed so 70% of taxpayers can use it, but only 4% of eligible taxpayers used it in 2021, according to a Government Accountability Office report last year. “Instead, many used a commercial website outside of the program, which may have charged taxpayers,” the watchdog office said at the time.
Intuit reached a $141 million settlement last year with attorneys general over allegations that TurboTax users were tricked into thinking they were filing for free when they ultimately had to pay. Intuit has said its tax-prep services have been clear to users, and settled the case without admitting wrongdoing.
Intuit and H&R Block used to be part of the IRS free filing program, but left in recent years.
IRS already offers free filing, but only for some taxpayers
On Tuesday, Werfel said the upcoming pilot program doesn’t change anything for the existing program. “The Free File Alliance and the free file approach is still very much in place,” he said.
The IRS study, which led to the agency’s decision to launch a free tax-prep pilot, said it’s uncertain how many people would use any IRS-run filing system, but it gauged possible demand from previous consumer surveys on the subject.
More than 80% of people who already prepared their own return said they would be “somewhat” or “very interested” in self-preparation tools from the IRS. In fact, more than half of people who used a paid preparer said they would be interested in IRS tools to do their own returns.
The IRS report cited a separate consumer survey that asked people to choose between an IRS-run filing system where users plugged in their numbers, a system where the IRS did all the work itself — similar to how tax returns are handled in countries such as the United Kingdom and Germany — and a free version of the existing commercial option.
In that scenario, 15% of people said they would opt for the proposed IRS-run tax-filing system, 37% said they would be happy for the IRS to handle the whole return without having to input the numbers themselves, while 48% said they would stick with their commercial software.
No one participating in the pilot next year should be expecting the IRS to do all the work itself with “pre-populated” returns, Werfel said.
“I do not envision, given the limited scope of the pilot, that that would be part of it,” he said.