IRS to pilot free tax prep system in January

The Internal Revenue Service is reportedly planning to try out its own direct-file tax software with a limited group of taxpayers by next tax season.

The Washington Post reported Monday that the system was built by the IRS and the U.S. Digital Service, a technology consulting agency that works for the White House. The agency has been quietly testing the software before opening up a pilot test in January to a small set of taxpayers. The IRS is expected to release a report this week on the viability of offering its own direct-file free tax prep system in accordance with a provision of the Inflation Reduction Act requiring such a report. The think tank New America has been enlisted to research and write the report.

The article cited three current and former IRS officials as confirming the existence of the prototype system.

Samuel Corum/Bloomberg

The IRS's new commissioner Daniel Werfel was asked about the upcoming report during a congressional hearing in late April but declined to preview the findings (see story).

"We're issuing a report by congressional mandate in mid-May and that will walk through a lot of the issues," said Werfel. "One of the goals that we have at the IRS is to increase the options that taxpayers have to engage with us. If they want fully digital, they should have fully digital. If they want to do it on paper, we're not thrilled with that, but we have to meet taxpayers where they are. And if they want to come directly to the IRS versus working through a third party, we now have the opportunity to study that and tell Congress what the implication of that is. As a guiding principle, the more workable options, the better. But because Congress asked and has legitimate questions about the issues associated with the direct file program, we're going to answer them and then I'll come back in mid or late May and then we can talk through what the report says."

The IRS already offers a Free File Fillable Forms option in conjunction with its Free File program. The Free File Alliance includes a number of commercial tax software providers such as TaxAct and TaxSlayer, FreeTaxUSA, 1040Now, OLT and FileYourTaxes.com who offer various forms of tax prep to taxpayers who earn less than $73,000 in adjusted gross income, but there are often extra charges for state tax software. The two biggest tax software providers, Intuit's TurboTax and H&R Block, no longer participate in the Free File program but they continue to offer free editions, although many taxpayers end up paying extra for more complex returns and state tax software. Cash App Taxes also offers free tax prep, but it too isn't part of the IRS's Free File program.

Lawmakers such as Sen. Elizabeth Warren, D-Massachusetts, have pressed the IRS over the years to offer its own free tax software. Last month, she and Sen. Tom Carper, D-Delaware, led 29 other senators in a letter to IRS commissioner Werfel, urging the agency to simplify the tax process and broaden access to free e-filing options. 

"A key objective of the IRS should be to improve the taxpayer experience and make the process of filing income taxes simpler and more efficient. Better, more accessible e-filing tools can improve taxpayer compliance, minimize unintentional errors, and help taxpayers claim refunds quickly," they wrote. "As you know, the recent investments in the IRS under the Inflation Reduction Act present a unique opportunity to show how the agency can work better for the American people, and we strongly urge you to prioritize expanded access to simple, free e-filing options as part of this effort. Ultimately, the fairness and fiscal stability of our nation relies on an equitable tax system, and this moment presents a unique opportunity to deliver on this goal. By addressing the challenges that have plagued the Free File program and expanding the ability for taxpayers to access low-cost e-filing tools, we can reduce the tax filing burden on American families, cut costs and improve the efficiency of the IRS, and ultimately help restore confidence in the integrity of our tax system. We look forward to your report on direct e-filing in May. If the report concludes that such a system is feasible, we urge you to roll it out as quickly as possible."