The IRS said Tuesday that it could create its own electronic direct-file system that would allow many taxpayers to bypass expensive companies such as TurboTax and complete their returns for free — but said it will take an infusion of manpower and money to get it done.
The tax agency said it’s already built a prototype that can work on a mobile device, handle multiple languages and streamline the filing process.
The prototype won rave reviews from testers who had gone in fearing the worst from a government, but came away pleasantly surprised by how easy it was to use, saying it “exceeded their expectations,” the IRS said.
A significant majority rated the IRS version as good as, or better than, commercial tax software already on the market.
Democrats praised the IRS study, saying it should pave the way for the Treasury Department to get a system up and running soon, and to defang the commercial tax preparation companies.
“Between tricking Americans into accepting unnecessary charges and lobbying relentlessly against reforms that would simplify tax filing, the big tax software companies are some of the world’s most sophisticated pickpockets,” said Sen. Ron Wyden, Oregon Democrat and chairman of the Senate Finance Committee.
He said the IRS has the authority to implement direct file without needing approval from Congress.
But Republicans said the IRS’s $15 million feasibility study was cooked from the beginning when the Biden administration picked a “left-wing think tank” to run the study.
Rep. Jason Smith, Missouri Republican and chairman of the House Ways and Means Committee, said giving direct-file powers to the IRS would add to an already overbearing agency’s control over Americans’ wallets.
“Americans don’t want to give the IRS such sweeping control and authority, yet the Biden administration refuses to listen,” he said.
Mr. Smith also questioned the development of the prototype, saying it suggested the Biden administration had been working on the idea well before last summer’s budget-climate bill gave them the go-ahead.
Tax preparation companies such as TurboTax have lined up against changes, too. The Center for Responsive Politics said Intuit, TurboTax’s owner, has spent a record amount on lobbyists since the start of 2022.
The IRS, in its report, said the average American spends $140 and takes eight hours to complete an annual tax return.
“A potential Direct File option could directly benefit taxpayers by making tax filing a simpler and less expensive process,” the agency said.
It said the chief hurdle to direct file is having enough manpower and money to keep the system up-to-date. A constantly changing tax code means the system must be continually tweaked — and that means more money.
That’s a tough ask for an agency that just got $80 billion in the budget-climate bill, despite howls of protest from the GOP.
The IRS also acknowledged some hurdles to Americans being ready to turn over their tax preparation to the tax agency itself.
One objection was that the IRS prototype still required taxpayers to enter their income and withholding information from their W-2 and 1099 forms.
“IRS already knows your tax information. So why wouldn’t I be able to login, put in, say, my [SSN], and then half this information is already filled, and then I just need to put in corrections, you know?” one person told the analysts that conducted the study.
Indeed, given a choice between a system where taxpayers manually enter their data and one in which the IRS puts in the information ahead of time, a “larger share” picked the IRS option.
“These results suggest that taxpayer interest in a potential Direct File tool is likely to be greater if it includes the capability to pre-populate returns with tax information,” the IRS said.
• Stephen Dinan can be reached at sdinan@washingtontimes.com.
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