Comprehensive IRS Free File System One Step Closer in Dems’ Bill

WASHINGTON — The flagship climate change and health care bill passed by Democrats and soon to be signed by President Joe Biden will bring US taxpayers one step closer to a government-run electronic tax filing system.

It’s something lawmakers and advocates have been seeking for years. It is frustrating for many Americans that they not only sometimes have to pay hefty tax bills, but also have to spend extra money on tax preparation programs or preparers because of an increasingly complex American tax system.

“It’s definitely something we need to do, and if the IRS has enough resources, it will,” Treasury Secretary Janet Yellen said during a Senate Finance Committee hearing in June.

And with the IRS set to receive nearly $80 billion through the so-called “Inflation Reduction Act,” the agency has the resources to develop new systems to help Americans pay their taxes. The legislation was passed by Congress on Friday.

Several hurdles stand in the way. Even in the best case scenario, it will probably take years to get a new, free system up and running. There is also a downturn in commercial tax preparation companies, who are questioning whether Americans want the IRS to prepare their taxes.

Perhaps this biggest hurdle is an agreement between the IRS and some commercial tax preparation firms, known as the Free File Alliance, that prevents the federal agency from creating its own free tax filing system. Basically, the IRS agreed not to create its own filing system if companies instead provided free services to taxpayers earning $73,000 or less.

However, this program has been marred with controversy, with commercial companies misrepresenting their services and low taxpayer participation rates.

The Government Accountability Office reported in April that while 70% of taxpayers were eligible for services through the Free File Alliance, only 3% of taxpayers actually use the service. The watchdog advised the IRS to find new free filing options before the alliance expires in October 2023.

With the funding in the bill, the IRS has the opportunity to create a new system.

Included is a provision that is allocating $15 million to the IRS to plan for a free instant e-file tax filing system. Those plans should be developed within nine months and would include cost estimates for setting up and operating a system. They would also need public input.

There are also legislative efforts to continue this effort.

sen. Elizabeth Warren, D-Mass., filed another bill in July called the Tax Filing Simplification Act that would require the IRS to create its own free online tax filing service and waive its partnership with private online tax preparation companies.

“I’ve been advocating a free tax filing system for years and now the IRS is about to have significant funding to modernize its IT systems, meaning it’s time to develop simplified filing tools enshrined in my Tax Filing Simplification Act Warren told The Associated Press.

“Americans spend too much time and money filing their taxes, and the IRS should adopt these proposals to help millions of Americans file taxes and claim refunds.”

In her appearance on the finance committee, Yellen called for a new system.

“There’s no reason in the world that a modern economy shouldn’t have a system that makes it easy for such a large group of taxpayers to file returns,” she said.

Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center, said, “If the IRS goes ahead with a free product, it could save lower-income families the money they used to spend on H.&R Block or TurboTax.”

“Tax preparation companies are notorious for tricking tax applicants into paying for services they should be getting for free,” Williamson said, “so a free IRS file service would be a very welcome move that would save Americans money.”

In 2019, ProPublica wrote about Intuit’s TurboTax and HThe efforts of &R Block Inc. to divert taxpayers from the federally supported free services for which they were eligible. And in May, New York Attorney General Letitia James reached a $141 million settlement with California-based Intuit Inc. in Mountain View, which had to pay refunds to some taxpayers.

Intuit withdrew from the Alliance in July 2021, stating in a blog post that the company could deliver its benefits without the limitations of the Free File Alliance. huh&R Block withdrew from the partnership in 2020.

“Most Americans don’t want the tax collector to double up as a tax preparer,” said Derrick L. Plummer, an Intuit spokesperson.

“The IRS already has a core mission to focus on, and creating a new system would cost billions of taxpayers and jeopardize the financial freedom of millions more,” he said. A spokesperson for H&R Block did not respond to an Associated Press request for comment.

Ideas for what a government-run free program might look like are already being studied.

Bruce Sacerdote, a Dartmouth economist, has researched systems in other countries where taxpayers don’t have to enter a lot of data on their electronic forms because the government has already done so.

“The IRS has huge amounts of information about wages and dividends,” he said, adding that a government-supported tax filing system “could be great.”

Such systems are used in Germany, Japan and other Organization for Economic Co-operation and Development countries that work together to develop policies that promote economic growth.

“As a taxpayer, there could be a big benefit to prepopulation,” he said. “Tax returns are extremely time consuming. Given all the information the IRS has about taxpayers, they can just send you a completed return.”