It’s something lawmakers and advocates have been pushing for for years. For many Americans, it is frustrating that in addition to having to pay sometimes hefty tax bills, they also have to spend additional money on tax preparation or preparation programs due to an increasingly complex US tax system. “It’s definitely something we need to do, and when the IRS is adequately resourced, it’s something that will happen,” Treasury Secretary Janet Yellen said at a Senate Finance Committee hearing in June. And now that the IRS is set to receive nearly $80 billion through the so-called “Cut Inflation Act,” the agency has the wherewithal to develop new systems to help Americans pay their taxes. The legislation passed Congress on Friday. Several obstacles stand in the way. Even in a best-case scenario, it will likely take years to get a new, free system up and running. There is also a push from commercial tax preparation firms, which question whether Americans want the IRS to prepare their taxes. Perhaps that biggest obstacle is an agreement between the IRS and some 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 the companies provided free services to taxpayers with $73,000 or less. This program, however, has been marred by controversy, with commercial companies misrepresenting their services and low rates of taxpayer participation. The Government Accountability Office in April reported 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 that the IRS find new free filing options before the Alliance ends in October 2023. With the funding in the bill, the IRS has the opportunity to create a new system. Included is a provision granting $15 million to the IRS to make plans for a free direct electronic filing tax return system. These plans will have to be developed within nine months and will include cost estimates for setting up and running a system. They would also require public input. There are also legislative efforts to advance this effort. Sen. Elizabeth Warren, D-Mass., reintroduced a bill in July called the Tax Filing Simplification Act that would require the IRS to create its own free online tax filing service and move away from working with private electronic companies tax preparation. “I’ve been pushing for a free tax filing system for years, and now the IRS is on the verge of major funding to modernize its IT systems, which means it’s time to roll out simplified filing tools set forth in my Act tax return simplification,” 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 claim refunds.” In her appearance before the Treasury Committee, Yellen called for a new system. “There’s no reason in the world why a modern economy shouldn’t have a system that makes it easier for such a large group of taxpayers to file their returns,” he said. Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center, said “if the IRS moves forward with a free product, it could save lower-income families the money they were paying H&R Block or TurboTax.” “Tax preparation firms are notorious for tricking taxpayers into paying for services they should be getting for free,” Williamson said, “so a free IRS file service would be a very welcome step that would save Americans money.” In 2019, ProPublica wrote about the efforts of Intuit TurboTax and H&R Block Inc. to mislead taxpayers away from federally supported free services for which they qualify. And in May, New York Attorney General Letitia James secured a $141 million settlement with Intuit Inc. based in Mountain View, California, which had to pay restitution to certain taxpayers. Intuit withdrew from the Alliance in July 2021, stating in a blog post that the company could provide its benefits without the restrictions of the Free File Alliance. H&R Block pulled out of the partnership in 2020. “Most Americans don’t want their tax collector to double as their tax preparer,” said Derrick L. Plummer, a spokesman for Intuit. “The IRS already has a core mission to focus on, and creating a new system would cost billions of taxpayer dollars and jeopardize the financial freedom of millions more,” he said. An H&R Block representative did not respond to an Associated Press request for comment. Ideas for what a government-run free files program might look like have already been considered. Bruce Sacerdote, a Dartmouth economist, has looked at systems in other countries where taxpayers don’t have to enter much data on their online forms because the government already does. “The IRS has enormous amounts of information about wages and dividends,” he said, adding that a government-backed tax filing system “could be wonderful.” Such systems are used in Germany, Japan and other Organization for Economic Co-operation and Development countries that work together to develop policies that promote economic growth. “As a taxpayer, there could be a big benefit to pre-population,” he said. “Filing taxes is extremely time-consuming. Given all the information the IRS has on taxpayers, they could just send you a completed return.”
