Tax Return form 1040 with USA America flag and dollar banknote, U.S. Individual Income.

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If you’re fed up with expensive tax filing services, we have good news. The IRS is developing its own e-filing pilot program that would let taxpayers submit returns directly to the government for free, potentially saving Americans billions of dollars a year. The agency’s announcement comes after it released a feasibility report that found that the majority of Americans would be interested in a free, government-run system.

Apart from the direct file program’s 2024 launch date, details remain hazy. Here’s what we know so far.

It Could Make Tax Filing More Equitable

The IRS reports that the average individual filer spends $140 on their taxes every year. A huge chunk of that money goes to corporations like Intuit (the company behind TurboTax), which have worked tirelessly to stamp out attempts to make tax filing free and easy.

A free government filing system accessible to everyone would eliminate the need for these costly, often predatory services.

“We believe today’s announcement is a significant step toward revolutionizing access to the tax system so that it is easier and more equitable,” Amanda Renteria, CEO of civic tech nonprofit Code for America, said in a statement. “A free and simple direct file service will ensure that more families in America receive the tax benefits they are eligible for.”

Notably, the majority of Americans can already file their taxes for free online thanks to a public-private partnership called Free File, though it's limited to Americans who make an adjusted gross income of $73,000 or less. Taxpayers can also send their returns in the mail for free (besides the cost of postage).

IRS Taxpayer Survey 2022Photo credit: 2022 Taxpayer Experience Survey

Taxpayers Will Still Have a Choice

The IRS Commissioner Danny Werfel emphasized that taxpayers won’t be limited to the new direct file option.

"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,” Werfel said on a conference call with reporters.

Tax Preparation Companies Aren’t Happy

The government’s announcement is a nightmare for tax preparation companies like Intuit and H&R Block, as a direct file system would eat into their profits.

"A direct-to-IRS e-file system is wholly redundant and is nothing more than a solution in search of a problem," Rick Heineman, a spokesman for Intuit, said in a statement. "That solution will unnecessarily cost taxpayers billions of dollars and especially harm the most vulnerable Americans."

But the IRS report contradicts Heineman's statement. The agency estimates that the direct file program would range in cost between $64 million and $249 million, depending on the scope of the program and how many taxpayers use the service. The IRS could also recover a significant portion of its budget if paper filers switched to the new system, as paper returns account for 70% of the agency's processing costs.

Heineman also fails to note that Intuit has campaigned to make filing for free more difficult. Cumulatively, the company has spent $25.6 million on lobbying since 2006, and last year, it paid $141 million to settle a complaint that it lured customers in with its free tax preparation services, only to steer them to expensive upgrades.

The Bottom Line

As it stands, private companies charge taxpayers for a service that’s free in many countries, profiting off their unfamiliarity with a complex system. For that reason, the IRS pilot program is a step in the right direction. That said, it's worth remembering that details are still few and far between.

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