IRS Direct File: New tax website is a test for free filing

The new Direct File program is the Biden administration’s big bet to disrupt this practice by establishing a free competitor to giants like Intuit’s TurboTax and H&R Block.

However, the direct file, These paid websites, which use a similar question-and-answer format, are very different from what some free tax software advocates are looking for. This doesn’t take advantage of the vast amount of financial information the IRS has about each taxpayer, such as W-2 wage statements. Some envisioned government platforms offering pre-filled returns to save users time and effort.

A 2022 study co-authored by economists from the Treasury Department and the Federal Reserve highlighted the potential of such platforms, suggesting the IRS has enough information to accurately tally about 45 cases. It was concluded that Determine tax return percentages without input from the taxpayers themselves.

Economist William Gale, director of the Brookings Institution’s Tax Policy Center, said many countries already have some form of pre-filled tax returns in place. “This is not flying car technology that only exists in people’s heads,” Gale said.

The underlying challenge is political and industry opposition. Republicans will likely oppose expanding the IRS’ powers to include Direct File, which is currently billed as a one-year pilot program. Just as the industry has lobbied against other tax simplification efforts, commercial tax preparation firms will similarly lobby against it.

Some lawmakers, including Sen. Elizabeth Warren (D-Mass.), have long pushed for a free IRS filing website, but Congress has never authorized Direct File. Instead, Democrats included a provision in the Anti-Inflation Act of 2022 that would allocate $15 million to study whether taxpayers want a government filing option and whether the government could create one.

The IRS spent some of that money on the study, which it submitted to Congress in May. The remaining budget was then supplemented with other funds and spent on building the platform. The company explains that this is essentially part of the research.

The workaround has angered Republican lawmakers, including House Ways and Means Committee Chairman Jason T. Smith (R-Missouri). “The Biden administration’s so-called ‘study’ on establishing a direct electronic filing system was a foregone conclusion designed to further their goal of bringing the IRS into every aspect of American life.” said in a statement.

Republican attorneys general from 12 states sent a letter to Treasury Secretary Janet L. Yellen last week asking her to end the program, arguing that the IRS should not have been allowed to open the site without direction from Congress. Ta. In addition to questioning the program’s legality, they also raised the issue that paid creators could lose business.

“Millions of Americans pay their taxes affordably by working with small businesses across their states, including both independent tax preparation services and local accountants,” they wrote. “The Direct File program needlessly threatens the livelihoods of thousands of small business tax professionals.”

In a report to Congress, tax authorities estimated that the government-built site would cost between $64 million (for about 5 million users) and $249 million (for about 25 million users) a year to operate. This is primarily due to customer service costs. But last month, IRS Commissioner Danny Wuerffel said it was “premature” to tally the total cost of building the site, noting that the IRS also relies on local workers. Other agencies are also participating in the project, including the General Services Administration and the U.S. Digital Agency.

An official with U.S. Digital Services spoke on condition of anonymity about the website before it went live, said the team has continued to grow since it started coding in May and now employs about 100 government employees and contractors. said he is working on the software.

Concerns about costs have also been raised internally. An IRS advisory committee also warned against creating your own tax platform in June. Rather, it would be more efficient for the IRS to prioritize publicizing its existing and underutilized “free file” option, another service that commercial tax preparation companies provide for free to low- and moderate-income taxpayers. , the report said. Only about 3% of eligible taxpayers use her Free File. One reason for this is that companies are steering more users away from free versions to paid options.

Tim Hugo, who runs the commercial software company Free File Alliance, said he was “perplexed” that the IRS would build its own site. “He has a free program here that he has been running for 21 years and costs nothing to the IRS, yet you end up spending a ton of money on his Direct File.”

However, many supporters say they don’t think it can significantly improve the existing Free File program and want to promote Direct File as a new option. Tax software companies “have had an opportunity for years to actually provide Americans with a free and reliable way to pay their taxes.” [with Free File], and they failed,” said Igor Volsky, executive director of the advocacy group Groundwork Action. His organization plans to buy advertising to promote Direct File in the states where it debuts.

In its first version, Direct File will be available in 12 states, covering more than 40 percent of U.S. taxpayers. However, many taxpayers in these states will be ineligible. For example, approximately one in five households This applies to 1 in 10 self-employed or taxpayers. Few people are excluded based on income. The program allows individuals with wages up to $200,000 or couples with wages up to $250,000. However, if you buy health insurance on the government marketplace, buy virtual currency, or claim certain credits, such as child care credits, you may be exempt. .

IRS officials expect hundreds of thousands of taxpayers to use the new Direct File website, but that’s just a fraction of the more than 140 million households filing tax returns. It has said.

In a presentation to journalists in January, agency officials showed a map of all the questions the site might ask taxpayers, totaling more than 1,000 data points. Expanding to cover more tax situations means expanding that map. Pre-populating taxpayer information will also pose another type of challenge.

Davidson Gillette, a professor at East Carolina University who has studied pre-filled tax returns in other countries, said the biggest hurdle is the U.S. practice of joint filing, which allows the government to figure out who owes how much. He said that he thinks it is making things more difficult. “It’s unclear whether the IRS will be able to withstand that additional burden with its funding levels,” he said.

One lesson may be a California program about 20 years ago that sent pre-filled tax returns to some households. Critics of Direct File point to this experiment as a cautionary tale. Almost 80 percent of taxpayers who received pre-filled returns chose not to use them, and the effort was stalled by fierce opposition from the tax preparation industry.

The project was led by Stanford University tax law professor Joseph Bankman, best known as the father of now-disgraced crypto mogul Sam Bankman Freed. Despite the experiment’s response rate, he still supports the idea on a national scale.

“The value for almost all taxpayers would be not having to track W-2s or 1099s,” Bankman told The Washington Post. But Direct File doesn’t do that, he noted. “If you just give people an alternative to TurboTax, a lot of people will say, ‘I’ll keep using TurboTax.'”