Can the government make filing taxes online easier? A free IRS-run system is being studied.
Medora Lee, USA TODAY
6 min read
Everyone dreads tax season because completing and filing your taxes can be complicated, time-consuming and costly. In an effort to ease the burden, the Internal Revenue Service will resurrect the idea of providing all consumers with the option to file their taxes electronically for free using government-backed software.
The Inflation Reduction Act, signed into law by President Joe Biden on Aug. 16, provided $15 million to the IRS to study how the IRS could implement such a program, how much it might cost and how Americans would view it. The report, which must include the input of an independent third party, is due to Congress within nine months of the bill’s passage.
If the IRS determines it's feasible and worth its time and money to develop its own e-filing platform, all taxpayers, regardless of income level, could eventually file federal taxes for free online directly to the IRS.
The IRS currently offers free federal filing called Free File, but it's only for households with adjusted gross income of up to $73,000 and uses third-party software that guides users through the forms with simple questions and makes all the math calculations needed to complete the filing. Few users use Free File because they either don't know about it, understand it or are prodded into paying to file their taxes, the government says.
“Our tax filing system is a mess,” said U.S. Sen. Tina Smith, D-Minnesota ,in a July statement advocating for a free IRS version of e-filing. “The only people who think it’s working are the private software companies that make millions taking advantage of its complexity.”
Why can’t IRS just expand Free File?
Free File is an alliance with private companies, which some politicians say makes the program fraught with conflicts. In May, New York Attorney General Letitia James secured $141 million from Intuit, owner of TurboTax, for “deceptive digital tactics to steer low-income consumers toward its commercial products and away from federally-supported free tax services.”
Intuit and H&R Block left the Free File program at the end of the 2021 tax season and end of 2020 tax season, respectively.
Another problem is few eligible people use it, partly because it’s confusing, complex and horribly marketed by the IRS, according to Treasury Inspector General for Tax Administration in February 2020. In April, the Government Accountability Office reported that about 70% of taxpayers were eligible, but less than 3% use it.
GAO recommended, among other things, the IRS develop other free filing options but the IRS didn’t agree.
How could consumers benefit from a free IRS e-filing system?
Proponents of an IRS e-filing system say consumers would save money, time and be better protected from fraud.
In July, Senator Elizabeth Warren and 22 colleagues introduced the Tax Filing Simplification Act, which includes an IRS-developed free, online tax preparation and filing service directly to the government. She said it would cut down the 13 hours and $240 the average taxpayer spends filing taxes.
“Our current system is so confusing that filers purchase unnecessary third-party programs, forcing them to share their sensitive information and leaving them vulnerable to fraud,“ said Senator Richard Blumenthal of Connecticut when the bill was introduced. “Americans deserve access to simple, free tax preparation and filing services.”
Would consumers use a government-backed e-filing system?
Politicians think so, but it’s not clear what taxpayers would do, some say.
“Because the IRS would own the program, people may trust them more than private firms,” Alex Muresianu, Tax Foundation policy analyst, said. “On the other hand, the current free file isn’t heavily used so maybe there won’t be much of a difference.”
Also, “for decades, independent studies and polls on IRS tax preparation have shown that taxpayers do not want and are unlikely to use a government-created filing system because of the inherent conflict of interest,” Derrick Plummer, Intuit spokesperson, said. “Americans don’t want the tax collector and enforcer to also serve as the tax preparer.”
Ultimately, it may be more than just the mode of filing taxes that would lure users. “Benefits of this system are somewhat contingent on simplification of actual tax code,” Muresianu said.
Would an IRS e-filing system be antiquated by the time it's developed and launched?
For the 2020 tax year, more than 90% of individual tax returns were filed electronically, the IRS said. Though the IRS doesn't break out what percentage of those were filed via mobile apps, data from digital trends research firm Sensor Tower shows huge growth in tax filing apps downloads.
TurboTax and MyBlock are the two most downloaded mobile tax filing apps in the U.S. this year, Sensor Tower says. TurboTax downloads showed 1,630% growth in the first 8 months of this year to 5 million from 289,000 in the same period in 2014, while MyBlock grew 110% to 1.3 million.
TurboTax said 7 million of its customers did their taxes on a mobile device last year. They can fully complete their taxes on a mobile app or mobile browser and snap and upload more forms than any other tax software that lets you take photos of your tax forms.
And many other firms already allow people to download an app to complete their forms on mobile devices. For example, Jackson Hewitt Online allows clients to prepare their tax return on a mobile device or upload all their documents to their personal and secure MyJH account to make their meeting easier with their tax professional, said Mark Steber, Jackson Hewitt's chief tax officer.
That's a small slice of the hundred million-plus individual tax returns filed last year, but shows that the future may be headed mobile. The IRS currently has its own free IRS2Go mobile app, but people can only use it to check refund status, make a payment or get tax help.
Would IRS e-filing really be free?
The IRS’ e-filing would be free for all taxpayers once it’s developed, but meantime, this could cost years of taxpayer money, critics note.
“The IRS already has a core mission that it needs to focus on, and creating a new system for something already free today would cost billions of taxpayer dollars,” Plummer said.
“It sounds like a pretty big project to me, but I’m not familiar with what that means in concrete terms,” Muresianu said. “Hopefully, this $15 million study will provide some answers.”
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
