Most Americans want to pay the taxes that they owe, but the process of filing a federal income tax return is more complicated, expensive, and time consuming than it needs to be. A public Direct File option—a tool that would allow individuals to file their tax returns online directly with the IRS—could make paying taxes much faster, easier, and less costly. Such a tool was recently proposed as part of a comprehensive plan to modernize the IRS; however, some in Congress are trying to block this development, to the benefit of private software companies and at the expense of ordinary tax filers.
No-cost Direct File is part of a larger effort to modernize the IRS, but Republican members of the House Appropriations Committee seek to block the proposal
The Inflation Reduction Act of 2022 reversed more than a decade of disinvestment by providing $80 billion to boost tax enforcement and modernize the IRS. Prior to this investment, lawmakers had cut inflation-adjusted funding for the IRS by 23 percent, leaving the agency with antiquated technology systems and struggling to meet the demands of an increasing population and expanding workload. Importantly, the Congressional Budget Office projected that additional funds would generate significantly more revenue—a net of $180.4 billion—than the cost of the additional investment. Recent research suggests that the return on investment could be much larger, with every $1 spent auditing taxpayers above the 90th income percentile generating more than $12 in revenue.
However, since assuming control of the House of Representatives, the House Republican caucus has sought to reverse the investment in tax administration. In one of their first legislative actions, they voted to rescind the funding provided by the Inflation Reduction Act on a party line. Subsequently, as part of the agreement to avoid default over the debt limit, Congress voted to impose caps on discretionary spending, which includes funding for the IRS, and to claw back a portion of the new investment. Now, the Republican-led House Appropriations Financial Services and General Government Subcommittee is pushing both to impose deeper funding cuts and to limit the IRS’ authority to implement a no-cost public Direct File system.
Direct File would simplify tax filing and save tax filers money
72%
of survey respondents said they would be “very” or “somewhat” interested in using an IRS-hosted tool
As part of the effort to modernize the IRS through the Inflation Reduction Act, Congress directed the agency to assess and report on the feasibility of establishing a free direct efile system. In April 2023, the IRS released a
Strategic Operating Plan to guide the use of the additional funds, and in May, pursuant to a requirement of the legislation, the IRS released a feasibility study on Direct File. The
report evaluated various approaches for developing an IRS-managed tool and surveyed tax filers’ interest in using a public Direct File system. Based on the report’s overwhelmingly positive findings—72 percent of those surveyed said that they would be “very” or “somewhat” interested in using an IRS-hosted tool—the agency announced plans to implement a
Direct File pilot program in 2024 to begin to save taxpayers money and build a foundation for a more ambitious IRS-run electronic filing system in the future.
Currently, the average taxpayer spends 13 hours and $250 each year preparing a federal tax return. Tax filing is one of the most common interactions Americans have with the government and accounts for approximately 71 percent of the federal paperwork burden annually. Yet barriers to filing prevent some households from filing at all and thus cause them to miss out on benefits provided through the tax code as well as potential refunds in the event that too much money has been withheld from their paycheck. A Direct File system could lighten this unnecessary cost and time burden. Publicly run Direct File systems have long and successful track records internationally, with 36 countries—including Germany, Japan, the United Kingdom, and Chile—recognizing that while the government requires people to pay the taxes they owe, it shouldn’t require that people pay to do so. A 2005 and 2006 California pilot program successfully demonstrated the potential for such a system and saved both the state and tax filers money.
As proposed, the new tool would allow taxpayers to electronically prepare and file their tax return directly with the IRS. The initial pilot program for the 2024 tax filing season would cover basic tax returns, and the system would ultimately provide a voluntary, free, and helpful option for a large share of the 91 percent of Americans with fairly simple tax situations.
The initial pilot program for the 2024 tax filing season would cover basic tax returns, and the system would ultimately provide a voluntary, free, and helpful option for a large share of the 91 percent of Americans with fairly simple tax situations.
Tax preparation companies place profits over people
Despite bipartisan support, efforts to create a free, publicly run Direct File program have a long history of opposition from the tax software preparation industry. Tax prep companies negotiated to allow low-income taxpayers to file free on their platforms in exchange for the IRS not creating a no-cost, public system. Yet once the IRS dropped efforts to establish its own system, firms engaged in deliberate efforts to suppress participation in the privately managed Free File program. These efforts resulted in just 3 percent of filers using the program in 2020, in contrast to the 70 percent of taxpayers who estimates suggest were eligible to do so.
Private vendors have also been accused of upselling, directing households eligible for free tax filing to paid systems through seemingly deceptive advertising. These efforts recently culminated in a $141 million settlement between Intuit and all 50 states and Washington, D.C. Potentially manipulative practices also resulted in a Federal Trade Commission lawsuit alleging deceptive marketing practices such as hiding free filing options from search engines. Private software companies have stepped up efforts to block Direct File, as demonstrated by an uptick in lobbying spending, fearing that the IRS’ proposal will reduce demand for their products and diminish their profits.
A free Direct File program would have many benefits
The evidence is clear that a free Direct File program would help Americans in several ways. First, filing directly with the IRS would save taxpayers money. Right now, Americans spend $13 billion per year on tax preparation, money they could use for other purposes, such as groceries or rent. Under the IRS proposal, tax filers could continue to choose to pay for private tax preparation. However, the option of a free Direct File tool could be especially attractive to households with simple taxes, which are disproportionately lower income and racially diverse.
Direct File also has the potential to reduce mistakes and improve tax compliance. Historically, tax preparers with physical storefronts have targeted ZIP codes with higher rates of filers eligible for the earned income tax credit (EITC), in an effort to profit from low- and moderate-income filers. However, tax returns submitted by an unenrolled paid preparer have relatively high error rates, especially for individuals eligible for the EITC. A Government Accountability Office review of tax returns for 2006 to 2009 found that paid preparers had a higher error rate—60 percent—than self-prepared returns, and the IRS Taxpayer Advocate Service has detailed problems with unenrolled preparers. An online tool, coupled with a robust customer service initiative, could improve accuracy while ensuring that families receive the benefits they are eligible for.
A public Direct File system could also expand access to meet the needs of taxpayers who aren’t currently served by existing private systems, such as by providing mobile compatibility and tools in languages other than Spanish, features not currently required of privately provided free filing options. The system could also be designed to help ensure that families eligible for benefits, such as the EITC and the child tax credit (CTC), receive what they are owed. These efforts would help non-English-proficient, rural, and newly eligible households, who are less likely to claim credits they are eligible for. One experiment with a well-designed, simplified tool was associated with a fivefold to eightfold increase in expanded 2021 CTC claims by households that typically did not file a tax return. That research identified the most significant barrier to traditional tax filing as the requirement to report income. However, because the IRS has income data from other sources for tax filers whose incomes come from wages and salaries, a Direct File program could minimize this obstacle.
Conclusion
The IRS can reduce the hassle of tax filing—and help Americans save money—with a Direct File system. An efficient, quick, and simple government service has bipartisan support from the majority of Americans and can ensure that taxpayers receive the benefits and refunds they are eligible for. Through a pilot program, essential data can be collected and processes can be refined, paving the way for a more efficient and fairer program. Those interested in protecting the status quo and the interests of private companies are blocking the development of a commonsense service that could put money back in the pockets of everyday Americans.