Biden admin announces plans for IRS direct file system

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The IRS is going high-tech, and it could make filing taxes a lot easier

The IRS is due for a high-tech makeover, and while most of Americans are already filing taxes online, there’s still a long way to go to bring the agency into the 21st century.

The Biden administration is rolling out a free government-managed tax filing system, the Internal Revenue Service (IRS) announced Tuesday.

As part of the announcement, the IRS released a final report — ordered by the Inflation Reduction Act (IRA) — laying out potential options for a system allowing taxpayers to file tax returns directly with the IRS free-of-charge without using a third-party service. After reviewing the report, Treasury Secretary Janet Yellen ordered the IRS to move forward with a pilot direct file system to test the program, officials said.

"The approach directed by the U.S. Treasury is consistent with best practices for new product launches in both the government and the private sector where the transition from research and development to customer-facing is done in an incremental manner to enable additional testing of hypotheses considered during the research and development phase," IRS Commissioner Danny Werfel told reporters on a call Tuesday.

"Taxpayers will always have choices for how they file their taxes. They can use tax software. They can use a trusted tax professional. They can use a paper tax return," he continued. "People should use the filing option that works best for them, for their personal and their financial situation. And under any scenario, the IRS cannot run the tax system alone."

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Internal Revenue Service Commissioner Danny Werfel testifies during a Senate Finance Committee hearing on April 19. (AP Photo/Mariam Zuhaib)

Werfel added that, if the IRS were to eventually implement the direct file program following the pilot, the software would be just one of many options available to taxpayers.

Laurel Blatchford, a Treasury Department official tasked with overseeing IRA implementation, told reporters during the call Tuesday that the IRS would roll out the pilot program during the 2024 filing season.

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"Filing taxes is expensive and time-consuming for American taxpayers," Blatchford said. "On average, individual taxpayers spend approximately eight hours and $140 preparing their taxes each year. Taxpayers with income from a business or those who work in the gig economy pay even more." 

"Dozens of other countries have provided free tax filing options to their citizens and American taxpayers who want to file their taxes for free online should have an accessible option," she continued. "IRS' report released today found the majority of taxpayers support having the option to file their taxes for free directly with the IRS."

However, the report's public opinion findings were based, in part, on a study conducted late last year by the nonpartisan MITRE Corporation which showed direct file was relatively unpopular among Americans compared to private software or a system where the IRS automatically files returns for taxpayers.

A nonpartisan study recently conducted found that just 15% of Americans would use an IRS direct e-file system even if it was able to prepare state returns and provided the same functionality as a free commercial software. (Chip Somodevilla/Getty Images)

The MITRE study found just 15% of Americans would use an IRS direct e-file system even if it was able to prepare state returns and provided the same functionality as a free commercial software. In that scenario, 48% preferred the current software they use and 37% would use a system in which the IRS automatically filed individuals' taxes for them.

In another scenario where state returns aren't included, just 12% of taxpayers would use the IRS direct e-file option while 60% would opt for a commercial software.

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"Between tricking Americans into accepting unnecessary charges and lobbying relentlessly against reforms that would simplify tax filing, the big tax software companies are some of the world’s most sophisticated pickpockets," Senate Finance Committee Chairman Ron Wyden, D-Ore., said in a statement Tuesday.

"All Americans deserve a free and easy option that allows them to file their taxes directly online with the IRS, and I’m elated that the Inflation Reduction Act kicked off the effort that will finally make that a reality," he continued. "The IRS has begun work on a prototype system, and I’m looking forward to seeing the results of their work."

Senate Finance Committee Chairman Ron Wyden, D-Ore., applauded the IRS announcement Tuesday, saying "Americans deserve a free and easy option that allows them to file their taxes directly online." (Drew Angerer/Getty Images)

The IRA, passed and signed into law in August 2022, mandated that the IRS hire an independent third-party to analyze "the overall feasibility, approach, schedule, cost, organization design, and Internal Revenue Service capacity to deliver" a government-run direct e-file tax return system. 

The IRS announced in February that it would contract New America Foundation — a left-wing think tank funded by nonprofits founded by liberal billionaires Bill Gates, George Soros, Mike Bloomberg and Eric Schmidt — to study the hypothetical system. House Ways and Means Committee Republicans blasted the IRS at the time for hiring a partisan group.

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"It’s alarming that the Biden IRS has not come forward and been transparent about MITRE’s independent findings, when the Inflation Reduction Act itself calls for a truly non-partisan, independent, third-party review of the feasibility, the cost to develop and operate such a system, the IRS capacity to run such a system, or taxpayer opinions on the matter," House Ways and Means Committee Chairman Jason Smith, R-Mo., previously told Fox News Digital.

"Instead, the Administration handpicked a think tank with ties to the liberal wing of the Democrat party that has already advocated for this bureaucratic expansion," Smith continued. "Can we really trust the IRS to file Americans’ taxes for them in a fair and impartial way when it already stacks the deck towards a predetermined conclusion to gain more power?"