Some taxpayers will have the option to file their tax returns directly with the IRS next year

The IRS seeks to cut out the middleman between taxpayers and the US government.

The IRS and Treasury Department announced Tuesday that the IRS will conduct a pilot program next year designed to allow some taxpayers to file their taxes electronically and pay them directly to the IRS.

The move could mean a big shift in how U.S. taxpayers interact with the IRS, as well as with third-party tax-prep software giants like Intuit and H&R Block. While for two decades taxpayers have been able to file tax returns free of charge in limited cases, they have had to use commercial portals to do so.

These will not go away, IRS Commissioner Danny Werfel told reporters. “Direct filing, whether in the pilot phase or whether a decision is made to take a broader approach, will only be an option for taxpayers, among other options that taxpayers have,” Werfel said.

Instead, Werfel said, the initial phase will allow an unspecified but small number of taxpayers to use a prototype system created by the IRS to see how it works, how taxpayers interact with it, and where changes may need to be made. After that, a decision will be made about expanding the program.

“Direct filing, whether in the pilot phase or if a decision is made to take a broader approach, will be just one option for taxpayers, among other options that taxpayers have.”

– IRS Commissioner Danny Werfel

However, even the announcement of the pilot program is likely to face opposition on Capitol Hill and in the tax-preparation world. The IRS is one of the few government agencies that regularly interacts with American citizens. From January to early May nearly 141 million tax returns were filed. according to IRS134 million of these were submitted electronically.

For tax-prep giants like H&R Block and Intuit, which have the leading software packages to help individual income taxpayers calculate and file their IRS bills, the move could be seen as the opening salvo in the fight against their lucrative franchises. Intuit recently increased its lobbying expenses and argues that the government has an inherent conflict of interest when it comes to helping citizens with their tax calculations.

That argument could resonate with Republicans on Capitol Hill, many of whom have also said the IRS has had problems with tax secrecy and with the management of IT projects.

The IRS decision was announced together with the release of a long-awaited report about the feasibility of direct filing. The Inflation Reduction Act-required report passed last fall found that 73% of taxpayers surveyed would be interested in using a “free online tool provided by the IRS,” and 68% of tax preparation software users said they would consider switching to consider such a tool.

IRS employees work at a processing facility in Austin, Texas, in June 2022.
IRS employees work at a processing facility in Austin, Texas, in June 2022.

Matthew Busch for the Washington Post via Getty Images

The report noted that some taxpayers would be interested in using a direct file system, particularly because it would be created by the IRS. However, others were concerned about why the IRS would offer the product and the potential impact it would have on tax enforcement.

The cost of setting up a direct filing system for the IRS would depend largely on how widely it would be available, the report said. A system that just 5 million taxpayers could use would cost about $64 million a year, the report said, while a system that 25 million taxpayers could use would cost $249 million.

Werfel said the launch details for the pilot programs, such as who or how many taxpayers would be eligible and how they would know if they were eligible, have yet to be determined.

“These are details that we have not yet finally clarified,” he said.

Werfel also said the agency’s track record of big tech projects has its rough edges, but not all of them are as much the fault of the IRS as they are of stop-and-go funding.

That shouldn’t be a problem if the IRS is using funds from the Inflation Reduction Act for the direct filing project.

“We can plan differently now. So one of the factors that caused some of our challenges has been addressed,” he said.

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