The Internal Revenue Service (IRS) is launching a pilot program called IRS Direct File in a dozen states, including Massachusetts and New Hampshire, where residents will have the option to prepare and file their federal tax returns online for free. This program is intended as a government alternative to commercial tax preparation services like Intuit’s TurboTax, which often charge fees for their services.
IRS Direct File is targeted towards taxpayers with standard wage and Social Security income who are eligible for common tax credits. However, it cannot handle more complex tax returns, such as those with itemized deductions or income from gig economy or business activities, according to the IRS.
Massachusetts Democrat Warren expressed support for the initiative, emphasizing the importance of making tax preparation free and accessible to all taxpayers. He argued that government initiatives like Direct File should prioritize serving people rather than benefiting large corporations.
However, companies like Intuit and H&R Block criticized the IRS program, asserting that it is unnecessary because there are already free tax preparation services available from various providers, including themselves and nonprofit organizations. Intuit spokesperson Derrick L. Plummer described Direct File as a “thinly veiled scheme” that will cost taxpayers billions of dollars, arguing that free tax filing options are already accessible to all Americans, regardless of income level or tax complexity.
Some congressional Republicans have argued the IRS is overstepping its authority, and the Direct File initiative could be short-lived if the party wins the White House this November.
“This pilot program is simply a way to expand the power of the IRS that no one asked for, especially considering Americans already have numerous options for filing free tax returns,” House Ways and Means Chairman Jason Smith, a Missouri Republican, said in written statement Friday. “From the beginning, the Biden Administration tipped the scales in favor of a direct file program that the American people did not want or need.”
Smith and other Republicans charged that a feasibility study authorized by the Inflation Reduction Act of an IRS tax preparation system was slanted to support such an initiative. In addition, 13 Republican state attorneys general wrote to Treasury Secretary Janet Yellen in January urging her to end what they called an “unnecessary and unconstitutional initiative.” They said there was “an obvious conflict of interest when the IRS acts as tax preparer, filer and auditor” and the program threatened the businesses of small tax preparers.
Smith, whose committee has oversight of the IRS, said he looked forward to working with those attorneys general “to stop this bureaucratic grab in its tracks.”
The IRS study, released last year, found that individual taxpayers spent about eight hours and $140 preparing their taxes each year. An IRS survey of 4,219 taxpayers found that 70 percent said they would choose a free IRS program over a commercial product that cost $80. When specifically told that the IRS initiative wouldn’t help with filing a state tax return, 59 percent of the respondents said they still preferred the government program. The top reason cited was “filing taxes should be free.”
The study found the annual cost could range from $64 million for a program that 5 million people use and covers simple tax situations to $249 million for a broader one with 25 million users and more complex tax returns. But a report five months later by the Treasury Department’s Inspector General for Tax Administration said the survey was conducted in a way that might have overstated public interest in the program and the IRS did not provide any documentation to support its cost estimates.
Warren said the IRS is within its authority to catch up to changing technology to serve the public.
“Republicans are criticizing the IRS for entering the late 20th century,” she said. “The real Republican complaint is that there are a couple of very large and powerful corporations who don’t want to see their business drained away, because the American taxpayer can have a better filing experience for free than these companies are offering for a fee.”
The other states participating in the pilot program are Arizona, California, Florida, Nevada, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming. IRS Commissioner Danny Werfel has said the agency will use the information it gathers from the pilot to determine the future of the program.
For now, the IRS is focused on fine-tuning Direct File in response to feedback, Adeyemo said. The program already has been operating in what amounts to beta testing for some users and off to a great start so far, he said.
“We’ve been doing a lot of testing to make sure that we get it right,” Adeyemo said. “And what we’ve heard … is that people have been impressed by both the ability to get asked the right questions and for this to go quickly — and impressed by the price, which is zero.”