WASHINGTON– Passed by Democrats and soon to be signed into law by President Joe Biden, the flagship climate change and health care bill will bring U.S. taxpayers one step closer to a government-run electronic tax filing system with free files.
It’s something lawmakers and attorneys have been seeking for years. It is frustrating for many Americans that due to an increasingly complex US tax system, they not only have to pay sometimes hefty tax bills, but also have to shell out additional money for tax preparation programs or tax consultants.
“It’s definitely something we should do, and if the IRS has the resources, it will happen,” Treasury Secretary Janet Yellen said at a Senate Finance Committee hearing in June.
And now, with the IRS set to receive nearly $80 billion through the so-called “Inflation Reduction Act,” the agency has the resources to develop new systems to help Americans pay their taxes. The law was passed by Congress on Friday.
Several hurdles stand in the way. Even in the best-case scenario, it will likely take years for a new, free system to get up and running. There is also resistance to business tax preparation from corporations who question whether Americans want the IRS to prepare their taxes.
Perhaps that biggest hurdle is an agreement between the IRS and a couple of commercial tax preparation firms known as the Free File Alliance that prevents the federal agency from creating its own free tax filing system. In short, the IRS agreed not to create its own filing system if companies would instead offer free services to taxpayers making $73,000 or less.
However, this program has been the subject of controversy due to trading companies misrepresenting their services and low taxpayer participation rates.
The Government Accountability Office reported in April that while 70% of taxpayers were eligible for services through the Free File Alliance, only 3% of taxpayers actually use the service. The watchdog recommended the IRS find new free signup options before the alliance expires in October 2023.
With funding in the bill, the IRS has an opportunity to create a new system.
Included is a provision allocating $15 million to the IRS to plan for a free direct e-file tax filing system. These plans would have to be developed within nine months and would include cost estimates for creating and maintaining a system. They would also require public input.
There are also legislative attempts to advance these efforts.
Senator Elizabeth Warren, D-Mass., introduced another bill in July called the Tax Filing Simplification Act that would require the IRS to create its own free online tax filing service and break away from its partnership with private online tax preparation companies .
“I’ve been pushing for a free tax filing system for years, and now the IRS is on the verge of receiving significant funding to modernize its IT systems, which means it’s time to develop simplified tax filing tools outlined in my Tax Filing Simplification Act.” are,” Warren told The Associated Press.
“Americans spend too much time and money filing their taxes, and the IRS should adopt these proposals to help millions of Americans file taxes and apply for refunds.”
When she appeared on the finance committee, Yellen called for a new system.
“There’s no reason on earth that a modern economy shouldn’t have a system that makes it easy for such a large group of taxpayers to file their returns,” she said.
Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center, said, “If the IRS goes ahead with a free product, it could save lower-income families the money they used to pay H&R Block or TurboTax.”
“Accounting firms are notorious for making taxpayers pay for services they should be getting for free,” Williamson said, “so a free IRS filing service would be a very welcome move that would save Americans money.”
In 2019, ProPublica wrote about TurboTax from Intuit and H&R Block Inc.’s efforts to steer taxpayers away from the government-sponsored free services they qualify for. And in May, New York Attorney General Letitia James secured a $141 million settlement with Mountain View, California-based Intuit Inc., which had to pay some taxpayers compensation.
Intuit withdrew from the alliance in July 2021, stating in a blog post that the company could offer its benefits without the restrictions of the Free File Alliance. H&R Block withdrew from the partnership in 2020.
“Most Americans don’t want the tax collector to also act as a tax preparer,” said Derrick L. Plummer, a spokesman for Intuit.
“The IRS already has a core job to focus on, and creating a new system would cost billions of taxpayers’ dollars and threaten the financial freedom of millions more,” he said. A spokesman for H&R Block did not respond to an Associated Press request for comment.
Ideas are already being explored for what a government-run free files program might look like.
Bruce Sacerdote, an economist from Dartmouth, has studied systems in other countries where taxpayers don’t have to enter a lot of data on their electronic forms because the government has already done so.
“The IRS has tremendous amounts of information on wages and dividends,” he said, adding that a government-backed tax reporting system “could be a wonderful thing.”
Such systems are used in Germany, Japan and other Organization for Economic Cooperation and Development countries, which work together to develop strategies to promote economic growth.
“As a taxpayer, preallocation could be of great benefit,” he said. “The tax return is extremely time-consuming. Given all the information the IRS has on taxpayers, they could just mail you a completed tax return.”