The IRS recently announced they will be testing a free, agency-run online tax return filing tool during the next filing season, following extensive research and testing.
The IRS currently has limited options for online self-filing tools and is restricted to taxpayers with an adjusted gross income (AGI) of $73,000 or less. Other options include mailing in returns, which accounts for 70% of the IRS’s total processing costs, or using an outside source, such as commercial software or a paid preparer. These outside options typically come at a high cost to taxpayers – the average taxpayer will spend approximately $140 per year on return preparation.
Response to the IRS Direct File Pilot
Surveys on the pilot program produced positive reviews and feedback in regards to taxpayer interest, expectations of the tool, and trust in the IRS to handle sensitive information. The IRS conducted these surveys directly with taxpayers through the IRS 2022 Taxpayer Experience Survey (TES) and through online surveys with survey analysis company MITRE.
Reasoning for the Program
Based on research, the IRS determined taxpayers face substantial time and financial burdens when filing returns. Without a free-filing option, taxpayers often turn to the least expensive options, like paper filing or commercial software.
- Paper-filed returns still account for 8% of all returns filed and are more than 26 times more expensive for the IRS to process than e-filed returns.
Commercial software has also proven to be problematic for taxpayers, as the low advertised cost entices taxpayers to sign up for services only to be steered towards far more expensive upgrades. In a 2022 settlement, Intuit was ordered to pay $141 million to 4.4 million people across the country who were generally low income taxpayers eligible for free filing services, but were misled by Turbo Tax’s deceptive marketing.
Current tax software providers are lobbying heavily against the program, claiming it is “wholly redundant and nothing more than a solution in search of a problem,” said Rich Heineman, spokesperson for Intuit. However, the research conducted shows the free file program could provide benefits to currently underserved taxpayer populations, including younger taxpayers and those with limited English skills (LES). The IRS also estimates that the tool will likely be used predominantly by individuals who already self-prepare their returns.
Impact to Paid Preparers
Paid preparers are not as likely to be affected as the commercial software providers, with only 18% of taxpayers surveyed who already use a paid-preparer indicating they would be “very interested” in an IRS-provided tool.
However, paid preparers should take heed of the results from the May 16th IRS Report to Congress. The report shows that taxpayer’s interest in Direct File comes down to their confidence in self-preparation and their trust in who is handling their sensitive information. Direct File is not expected to have any pre-populating returns and it is predicted to be used primarily by individuals with simple returns that do not qualify for Free File due to their AGI. Those who are self-employed or have more complicated returns often value the trust and expertise of their return preparers to minimize the risk of audit due to errors.
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