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IRS to run free Direct File pilot in 2024

IRS electronic tax filing

The Internal Revenue Service announced last week that during filing season 2024 it will run a pilot program in which some taxpayers will be able to file their returns directly with the tax agency for free.

Such no-cost, direct filing has been the tax holy grail.

There would be no private software middleman, as is now the case for Free File. All of us could just go to the IRS website and file our taxes. There would be no cost, regardless of our income or filing situation complexity.

And unlike the IRS' current Free Fillable Forms, there would be computer software to do the calculations.

Popular among some on Capitol Hill: Some members of Congress have long been on the IRS-only free file train. So have the Government Accountability Office, some in the academic community, and taxpayer/consumer advocacy groups.

So has the National Taxpayer Advocate's office, which called for such a program back in the early 2000s. Erin Collins, the current Taxpayer Advocate, reiterated that position in her January 2023 annual report to Congress.

"Most U.S. adults are legally required to file federal income tax returns, which are essential to determining the amount of their liabilities and obtaining refunds. Taxpayers have a right to expect that this process will be as easy and straightforward as possible, and the IRS has an interest in facilitating it, because the U.S. tax system relies on self-assessment and voluntary compliance for the collection of revenue," wrote Collins.

"Enhancing this capacity while developing an IRS-run direct e-file option could take a creaky system still managing to produce good results and create a comprehensive e-file system that would benefit both taxpayers and the IRS. This transformation would improve the taxpayer experience, remove barriers to tax filing, improve the timeliness of refunds, and further voluntary compliance," Collins added.

Filers on board, too: A lot of taxpayers also agree. A survey of taxpayers last year conducted by the MITRE Corporation for the IRS found there generally is interest in having the tax agency do the filing job directly.

Sixty-eight percent of taxpayers who do their own returns using commercial software said they would be very (24%) or somewhat (44%) likely to switch to the IRS-only option.

Taxpayer survey 2022 MITRE IRS only software
Source: IRS Publication 5788, IRS Report to Congress on an IRS-run direct e-file tax return system

IRS Direct File report to Congress cover-200Congressional directive, finally: This general support for an IRS run filing option finally got a legislative mandate. The Inflation Reduction Act included a provision directing the IRS to evaluate the feasibility of providing taxpayers a free, voluntary, IRS-run electronic filing system referred to as Direct File.

The result is IRS Publication 5788, IRS Report to Congress on an IRS-run direct e-file tax return system. The May 16 report, which is the first of this weekend's Saturday Shout Outs, has two main parts.

The first focuses on taxpayers' opinions, expectations, and level of trust around a Direct File tool. The graphic above is from the report.

The next section explores the costs, benefits, and operational challenges of the IRS building and deploying Direct File.

There also is a section where, as again required by the Inflation Reduction Act, an independent third-party provides an analysis of a potential IRS Direct File system. That perspective is offered in Appendix B by d New America and Professor Ariel Jurow Kleiman.

Since this is a Shout Out, I'll let you peruse the report at your leisure. But I wanted to share this interesting graphic from Appendix B on the IRS' history of public and private filing options.

IRS Direct File Appendix B graphic

Not so fast: While the IRS plans to offer a Direct File option next year, don't get too excited yet. It will be a pilot program, meaning participation will be limited.

The pilot will allow the IRS to gather more information and further hone the evidence base before any decision is made whether to make Direct File more widely available, noted IRS Commissioner Daniel Werfel in a letter to Treasury Secretary Janet Yellen that accompanied the public release of the report.

"Best practice for new product launches in both government and the private sector requires the transition from research and development (R&D) to customer-facing be done in an incremental manner to enable additional testing of hypotheses considered during the R&D phase," noted Werfel.

As for the pilot, the IRS is not releasing details yet. It hasn't said how many people will be able to participate, how they will be selected, how complex of a return the prototype software can handle, or whether state tax returns will be part of the process.

UPDATE: In response to a Twitter comment about the federal state filing connection, most of the states that collect income tax do offer free e-filing to their residents, but it's a separate process. You have to file your federal return, then manually enter the necessary info from there into your state return via the state's online option. More work, but free.

Even if the trial run is a success, I suspect the IRS will take the third-party analysts' conclusion to heart:

"[T]he feasibility of the IRS to successfully build a Direct File product depends critically on their ability to maintain this initiative as a leadership priority, start with limited scope, expand over time, and address each of the aforementioned imperatives at each stage of design and implementation."

Bottom line, it will be a while before most of us can use Direct File even if or when the IRS, Treasury, and Congress ultimately determine it's a valid, worthwhile, and cost-effective option.

So, don't fire your tax professional or delete your previous tax software filing data from your PC. And if you've been using Free File, that option will still be around, too.

More views of IRS Direct File: As mentioned, the IRS report is just one of multiple shout outs this Saturday.

If you prefer an overview of the IRS report, check out IRS Will Offer Free Online Tax Prep for Some Taxpayers in 2024 by Richard Rubin, The Wall Street Journal's U.S. tax policy reporter. That link will let non-subscribers read the article.

Michelle Singletary, personal finance advice columnist for The Washington Post asks and answers How should an IRS direct-file program work? Think user-friendly. She also points out (pay attention Representatives and Senators!) that if the agency doesn't get financial support for the technology and customer service it needs, the system will fail. Again, this link is also for non-subscribers.

Another take on the Direct File announcement comes from Yahoo Finance's IRS to launch its own free tax-filing service in pilot program next year piece by Rebecca Chen, who before becoming a reporter was an investment tax CPA.

Finally, for the Capitol Hill perspective, you can check out the opposing perspectives of the Senate Finance Committee (SFC) chair and Ranking Member.

Democratic SFC Chairman Sen. Ron Wyden of Oregon supports the effort, saying in a release, "All Americans deserve a free and easy option that allows them to file their taxes directly online with the IRS, and I'm elated that the Inflation Reduction Act kicked off the effort that will finally make that a reality. The IRS has begun work on a prototype system, and I’m looking forward to seeing the results of their work."

Republican SFC Ranking Member Sen. Mike Crapo of Idaho, however, isn't so optimistic, noting in his statement, "Having the IRS act as tax preparer, tax collector and tax enforcer raises significant conflicts of interest, would incur billions of dollars in development costs, and would expose exponentially more taxpayer information to misuse or abuse, providing hackers and identity thieves yet another IRS outlet to exploit."

The political party split is also reflected on the tax-writing House Ways and Means (WM) Committee.

The thoughts of Missouri Republican and WM Chairman Rep. Jason Smith are clear in the headline of his official statement: Report on Direct E-File Program Confirms Biden Administration Always Intended to Make the IRS America’s Tax Preparer, Filer, and Auditor. "Americans don't want to give the IRS such sweeping control and authority," said Smith.

WM Ranking Member and Massachusetts Democrat Rep. Richard E. Neal's statement characterized the IRS report as "a framework for saving taxpayers time and money while giving them the experience they deserve."

Again, these pieces offer a look at what might be ahead for us filers. But any Direct File is years away, with intervening elections and subsequent agency appropriations speeding up or slowing down the effort.

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