The IRS Makes Progress Towards Its New Free Tax Filing System

The IRS Makes Progress Towards Its New Free Tax Filing System

The IRS Makes Progress Towards Its New Free Tax Filing System.The IRS is set to launch a pilot program for a new electronic free-file tax return system in the following year, triggering a lively debate between proponents and opponents.

The IRS Makes Progress Towards Its New Free Tax Filing System

The aim is to assess the feasibility of a permanent program that would enable taxpayers to file their taxes directly with the IRS, eliminating the need for paid tax preparation services.

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IRS Pilot Program for 2024 Filing Season

In May, the IRS released a report indicating that a substantial number of taxpayers expressed interest in filing their taxes directly with the IRS at no cost. To delve deeper into this possibility, the IRS announced plans to introduce a pilot program during the 2024 filing season. The goal is to test a direct file system and determine its suitability for a permanent implementation.

Advocacy and Opposition

Civil society organizations have united to advocate for the establishment of a government-operated free-file program. On the other hand, major tax preparation companies like Intuit (the parent company of TurboTax) and H&R Block have invested significant resources to vehemently oppose the proposal.

Congressional Budget Cuts and Concerns

Congressional Republicans posed an immediate threat to the proposal by suggesting budget cuts. In June, Republicans on the House Appropriations Committee proposed a budget rider that would prevent funds from being used for the creation of a government-run tax preparation software by the IRS, unless approved by a group of House and Senate committees. Their concern revolves around safeguarding the IRS from any potential conflict of interest where the tax collector becomes the tax preparer.

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Low Utilization of Existing Free-File Program

According to a Government Accountability Report from April 2022, while 70% of taxpayers were eligible to use an existing free-file program, only 3% actually utilized the service. The current program operates as a public-private partnership between tax software companies, offering free services to certain taxpayers outside of the IRS website.

Complexity of Tax Code and Taxpayer Expenses

The complexity of the tax code has led nearly 50% of Americans to seek assistance from tax preparation companies. As a result, individual taxpayers spend an estimated average of $140 each year on tax preparation.

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Funding Challenges for the IRS

Despite funding reductions, the IRS received $80 billion from the Inflation Reduction Act, signed by President Joe Biden in the previous year, to modernize, hire more staff, and progress towards implementing the free-file program.

However, House Republicans introduced a $1.4 billion reduction to the IRS in the recent debt ceiling and budget cuts package passed by Congress during the summer. Furthermore, as part of the debt deal, there was an agreement to divert $20 billion from the IRS to other non-defense programs over the next two years, as stated by the White House.

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International Examples of Pre-Populated Tax Returns

Countries like Germany, Japan, the U.K., and other Organization for Economic Cooperation and Development (OECD) nations already provide their taxpayers with pre-populated tax documents or utilize “tax agency reconciliation,” simplifying the tax filing process.

Potential for Pre-Populated Tax Returns in the U.S.

Research conducted by experts from Treasury, Federal Reserve, and academia suggests that the IRS could potentially pre-populate 42 to 48% of all tax returns, streamlining the tax filing process for many Americans.

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