The Internal Revenue Service has quietly built its own prototype system to allow Americans to file tax returns digitally and free of charge, according to three current and former agency officials, essentially creating government software that could disrupt the tax-prep industry.
The system will be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins, said the people briefed on the matter, who spoke on the condition of anonymity to discuss internal agency conversations. It was developed by the IRS and the U.S. Digital Service, the White House’s technology consulting agency.
Last year’s Inflation Reduction Act, one of President Biden’s chief legislative victories, included $15 million for the IRS to look into creating a direct filing program.
Treasury Department representatives declined to comment Monday.
“There’s something very important about the fact that even beyond making it easy and beyond making it free, this is something you could do directly with your government,” said Gabriel Zucker, associate policy director for tax benefits at the advocacy group Code for America, which has constructed its own tax filing prototype.
The IRS currently refers people seeking no-cost filing options to a consortium of companies that provide free e-filing for taxpayers below a certain income level. Though 70 percent of taxpayers qualify for those products, known collectively as IRS Free File, fewer than 3 percent of taxpayers use them, according to a Government Accountability Office report.
For a narrower range of taxpayers, industry giants Intuit TurboTax and H&R Block offer free products that the IRS does not officially endorse.
Other filers can complete “Free File Fillable Forms,” digital versions of hard-copy IRS paperwork, without professional guidance.
The tax agency tapped the left-leaning New America think tank to study a direct filing system and produce a report, which is expected this week.
IRS Commissioner Daniel Werfel had previously told lawmakers that the IRS would consult Congress after the think tank made its recommendation and had not yet determined whether to pursue its own software program. But if the IRS already has a prototype before the New America report has been released, “this suggests a pre-determined outcome and flies in the face of previous commitments Commissioner Werfel made to publicly consult Congress on a potential free-file solution, and for the IRS to not act without explicit legal authority,” said Sen. Mike Crapo (Idaho), the top Republican on the Senate Finance Committee.
A free filing system offered directly by the federal government could upset a commercial tax-prep market estimated by the research firm IBIS World to be worth $14.4 billion this year.
“No matter the outcome of direct file, Free File is here to stay,” said Tim Hugo, executive director of the Free File Alliance industry group.
The system of commercial programs for online filing has served taxpayers and the government well by many accounts. Roughly 9 in 10 individual tax returns were filed digitally in 2022, the IRS reported. The U.S. voluntary tax compliance rate — the proportion of filers who pay federal taxes accurately each year — of 85.1 percent is one of the highest among developed economies, according to years of research in the United States and Europe.
But some experts say the private-public partnership also reflects the IRS’s technological deficits. Far smaller countries, including Estonia, Chile and Australia, offer government-backed digital filing services.
The Inflation Reduction Act granted the IRS $80 billion over 10 years to increase enforcement efforts for high-income earners, improve taxpayer services and modernize its technology. The Biden administration said the IRS needs the additional funds to catch up with sophisticated tax cheats and better serve low- and middle-income Americans entitled to a bevy of credits.