The IRS is testing a system that would allow taxpayers to file federal tax returns for free online directly with the agency, with a pilot program launching for some filers next year.
Known as Direct File, the pilot program will begin during the 2024 filing season, following recent testing and a feasibility report, as authorized by the Inflation Reduction Act in 2022.
Direct File would cost an estimated $64 million to $249 million per year, depending on the number of filers and complexity of returns, according to the report.
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"The report shows that a majority of taxpayers are interested in using an IRS-provided tool to prepare and file their taxes," IRS Commissioner Daniel Werfel told reporters on a call Tuesday.
Nearly three-quarters of taxpayers expressed interest in a free IRS-provided filing system, with high popularity among younger filers, those with limited English proficiency and do-it-yourself taxpayers, according to a 2022 survey cited in the report.
Pushback from the tax prep industry
While some Democrats and consumer advocates have pushed for a direct filing system for years, there has already been pushback from Republicans and the tax preparation industry.
"The IRS direct e-file pilot set to start in January 2024 continues to be a solution in search of a problem," a spokesperson for H&R Block said in a statement. "With more than 30 organizations already offering free tax preparation, this pilot is unnecessary and faces significant barriers to providing comprehensive tax preparation services."
Free File Alliance Executive Director Tim Hugo has also criticized the IRS plan. "Free File has been provided at zero cost to the federal government for over twenty years; thus, it is baffling that Treasury and the IRS want to pay tens — and even hundreds — of millions of dollars annually to create an inferior filing option for the American taxpayer," he said.
It is a watershed moment for the tax system.Mark Eversonvice chairman at Alliantgroup
And while similar systems have been implemented in other countries, there are lingering concerns about cybersecurity and taxpayer compliance.
"It is a watershed moment for the tax system," said Mark Everson, a former IRS commissioner and current vice chairman at Alliantgroup. "And I think that the government has to proceed with great caution."
Taxpayers will 'always have choices'
Currently, taxpayers with $73,000 adjusted gross income or less for 2022 can use Free File, a public-private partnership between the IRS and Free File Alliance, to file federal returns for free. But the program hasn't been widely used. Roughly 70% of taxpayers qualify for Free File, but only 2% used it during the 2022 filing season, according to the National Taxpayer Advocate.
Despite the low participation rate, Werfel said the IRS remains "strongly committed" to a variety of filing options for low-income filers, including Free File, which has extended its IRS partnership through 2025.
"Taxpayers will always have choices for how they file their taxes," Werfel said on the Tuesday call. "They can use tax software. They can use a trusted tax professional. They can use a paper tax return. We'd rather they file electronically, sure, but they have that choice."