IRS is testing a free "Direct File" program that could compete with tax-prep giants
The IRS is working on its own version of a free electronic tax-filing system that could compete with tax-prep programs from the likes of Intuit's TurboTax and H&R Block. The agency is rolling out a pilot program in early 2024, when it will invite some taxpayers to test out the program, the IRS and Treasury officials said on Tuesday.
The pilot program will assess the complexity of taxes that could be handled through such a program, noted IRS Commissioner Daniel Werfel on a press call to discuss the plan. The development of a direct-file program stems from last year's Inflation Reduction Act, which included $80 billion in funding for the agency and directed the IRS to look at the feasibility of such a system.
Americans spend a lot of time and money every year on preparing their taxes, paying more than $11 billion to tax prep companies, accountants and others to get their annual filings ready to send to the IRS. The development of a free, direct e-file system is aimed at easing the financial and time burdens placed on taxpayers, officials said.
"A potential future free tax file could save taxpayers billions a year annually," Laurel Blatchford, chief implementation officer for the Inflation Reduction Act at the Treasury Department, said on the call Tuesday.
Right now, she added, taxpayers pay about $40 for simple electronic filing options. Meanwhile, taxpayers with more complicated taxes can pay hundreds of dollars for accountants or other experts to prepare their annual returns.
Shares of tax-prep companies slid on Tuesday, with TurboTax owner Intuit slipping $4.80, or more than 1%, to $422.69. H&R Block shares dipped $1, or 3%, to $30.10.
Currently, the IRS offers a free-file program through partnerships with tax-prep companies, but it's only available to low- and some middle-income taxpayers. To qualify, a taxpayer must have adjusted gross income of less than $73,000.
The IRS has extended its partnership with tax-prep companies in the Free File Alliance through 2025, Werfel noted on the call. He also stressed that the agency remains "strongly committed to make sure lower-income taxpayers can file their federal returns through the Free File Alliance or other methods."
But only a sliver of taxpayers take advantage of the Free File program, with the U.S. Government Accountability Office finding that just 4% of taxpayers used the program in the 2021 tax year.
"Instead, many used a commercial website outside of the program, which may have charged taxpayers," its report noted.
The reason for its low rate of use could be due to "confusion" since many tax-prep companies advertise their paid services while omitting mention of the Free File program, the GAO said.