One Step Closer to Expanded IRS Free-File Electronic Tax Filing System

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

It’s something lawmakers and advocates have been looking for for years. For many Americans, it is frustrating that in addition to having to pay sometimes hefty tax bills, they also have to shell out extra money for tax preparation programs or preparers due to an increasingly heavy US tax system. more complex.

“It’s definitely something we should be doing, and when the IRS has adequate resources, it’s something that will happen,” Treasury Secretary Janet Yellen told a Senate Finance Committee hearing. in June.

And now that the IRS is on the verge of receiving nearly $80 billion from the so-called ‘Cutting Inflation Act’, the agency has the wherewithal to develop new systems to help Americans to pay their taxes. The legislation was passed by Congress on Friday.

Several obstacles stand in the way. Even in the best-case scenario, it will probably take years for a new free system to be up and running. There is also backlash from commercial tax preparation companies, who question whether Americans want the IRS to prepare their taxes.

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

This program, however, has been marred by controversy, with commercial companies misrepresenting their services and low rates of taxpayer participation.

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 finds new free filing options before the Alliance expires in October 2023.

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

Included is a arrangement which allocates $15 million to the IRS to develop plans for a free direct electronic tax filing system. These plans should be developed within nine months and would include cost estimates for the creation and administration of a system. They would also require public participation.

There are also legislative attempts to advance this effort.

Sen. Elizabeth Warren, D-Mass., in July resubmitted a bill called the Tax Filing Simplification Act that would require the IRS to create its own free online tax filing service and move away from its partnership with private online tax preparation companies.

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

“Americans are spending 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.”

During his Finance Committee appearance, Yellen called for a new system.

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

Vanessa Williamson, senior researcher at the Urban-Brookings Center for Tax Policy, said “if the IRS goes ahead with a free product, it could save low-income families the money they were giving to H&R Block or TurboTax”.

“Tax preparation companies are notorious for tricking filers into paying for services they should be getting for free,” Williamson said, “so a free IRS filing service would be a very welcome step that would help Americans to save money.”

In 2019, ProPublica wrote about Intuit’s TurboTax and H&R Block Inc. efforts diverting erring taxpayers from free federally funded services for which they were qualified. And in May, New York Attorney General Letitia James got a $141 million settlement with Intuit Inc., based in Mountain View, Calif., which had to compensate certain taxpayers.

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

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

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

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

Bruce Sacerdote, a Dartmouth economist, has looked at 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 on wages and dividends,” he said, adding that a government-backed tax filing system “could be a wonderful thing.”

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, pre-settlement could be very beneficial,” he said. “Declaring taxes takes a lot of time. Given all the information the IRS has on taxpayers, they might just send you a completed return.