IRS Set to Initiate Complimentary Tax Filing Pilot Program in 2024 Tax Season

The Internal Revenue Service (IRS) is considering developing its own complimentary tax filing system and plans to initiate a pilot program accessible to a select group of taxpayers during the 2024 tax season.

This information was disclosed on Tuesday when the IRS presented a study assessing the cost and viability of establishing a free electronic tax filing system.

The study was necessitated by the Inflation Reduction Act, an extensive tax and climate measure ratified by Democrats without Republican support last year. The Act allotted $15 million to the IRS for the formation of a task force and the execution of the study within a nine-month timeframe.

During this initial phase of investigation, an in-house model was developed to help analyze taxpayer interaction with the Direct File program. Polls revealed that 72% of taxpayers expressed interest in a free electronic tax filing service provided by the IRS.

The report indicated that the program’s operational cost could fluctuate between $64 million and $249 million per year. This cost differential is largely dependent on the demographics of taxpayers who would be permitted to use the new tax filing system.

IRS Commissioner Danny Werfel stated in a press call, “The report shows that a majority of taxpayers are interested in using an IRS-provided tool to prepare and file their taxes.” He added, “It also shows that the IRS is technically capable of delivering Direct File, but that doing so would require additional resources and add complexity to IRS operations.”

The agency is yet to determine the eligibility criteria for the pilot program. It may restrict the service to those with income below a certain level or those with specific tax circumstances.

Following the pilot program’s execution next year, it will be the Treasury Department’s responsibility to decide on the feasibility of expanding the program on a larger scale.

While a free filing service does exist, its usage is limited

At present, taxpayers earning $73,000 or less have the ability to file their federal tax returns at no cost, which encompasses approximately 70% of all taxpayers.

However, this complimentary filing service is not facilitated by the IRS. Rather, taxpayers are required to use a service provided by one of the seven private companies that constitute the Free File Program alliance.

Established in 2002, the program has seen various modifications, but consistently low utilization rates have persisted.

For the 2020 tax year, a mere 4% of eligible taxpayers, roughly 4.2 million individuals, took advantage of the Free File program, as stated in a report by the Government Accountability Office.

Democratic legislators have increasingly called for a free IRS-operated system, particularly after ProPublica issued a series of articles in 2019 accusing the private tax-filing firms of obscuring free filing options for taxpayers.

Two of the largest private tax preparation and filing service providers have exited the Free File Alliance. H&R Block departed in 2020, and Intuit followed suit in 2021. Combined, these two companies were responsible for about 70% of the returns filed through the Free File Program for the 2019 tax year, as per the Congressional Research Service.

TurboTax, a subsidiary of Intuit, is currently issuing settlement checks to approximately 4.4 million individuals in response to a lawsuit claiming that the company diverted millions of low-income Americans away from free tax filing services.

However, critics argue that it would be inappropriate for the IRS to simultaneously act as the tax preparer and the tax collector.

On Tuesday, Werfel confirmed that the Free File Program will remain accessible to low-income taxpayers next year, concurrent with the launch of the new IRS-led pilot program.

A major revamp is underway at the IRS

The free federal tax filing program is one of the numerous adjustments happening within the IRS in the wake of receiving a substantial funding boost of $80 billion over ten years from the Inflation Reduction Act.

Generally, this funding is intended to enhance the agency’s ability to detect tax fraud and to improve services for taxpayers. As a consequence of these enhancements, the IRS anticipates an additional collection of over $100 billion in revenue over a decade.

Officials from the Biden administration have consistently stated that taxpayers earning under $400,000 annually will not experience a tax increase due to the additional funding. However, there remains some ambiguity regarding how the IRS will ensure this.

Republicans have expressed concerns over allocating such a large sum to the IRS and harbor doubts that this investment won’t lead to increased audits of diligent Americans. A bill was passed earlier this year in the Republican-controlled House aiming to retract the majority of the new funding, though its chances of becoming law are virtually non-existent.

In addition to this, the IRS is striving to upgrade taxpayer services. So far, the agency has employed 5,000 new customer service agents following the passage of the Inflation Reduction Act last year.

Last month, Werfel stated that the IRS is now regularly addressing between 80% and 90% of incoming calls, a significant improvement from just 17% last year. The average waiting time has also decreased, with callers now waiting around four minutes compared to last year’s average of 20 minutes.