IRS Launches Free E-File Tax Return System to Compete with Private Tax-Prep Firms
The Internal Revenue Service (IRS) has announced launching Direct File, a free e-file tax return system currently available in 13 states as part of a pilot program. The move marks a significant shift in the tax preparation landscape and how Americans will pay their taxes.
The biggest tax-prep firms, including Intuit and H&R Block, are expected to see the IRS as a threat because the system is free, according to Richard Kaplan, a U.S. tax policy expert and law professor at the University of Illinois Urbana-Champaign.
For years, the IRS has partnered with private tax software companies through the Free File Alliance to offer free online tax preparation and e-filing on its website. However, the program has faced challenges, with H&R Block and Intuit leaving the alliance after nearly two decades.
According to a report from the Government Accountability Office, only 4% of eligible taxpayers used Free File during the 2021 tax season, despite 70% being eligible for it. The new Direct File system is expected to be more expansive and user-friendly and could become the preferred tax payment method.
President of the Taxpayers’ Federation of Illinois, Carol Portman, believes that ease and accessibility in filing taxes determine good tax policy. Many taxpayers surveyed also confessed to feeling more comfortable sharing their personal information directly with the IRS than with a third-party tax service.
However, the IRS faces resistance from major tax-prep companies such as Intuit and H&R Block. In a blog post last year, Intuit criticized the IRS attempts, stating that “taxpayers don’t want the tax collector, assessor, auditor, and enforcer also to be their tax preparer.”
H&R Block Chief Government Relations Officer Tom Gannon said Americans prefer existing third-party private systems, and the IRS should focus more on improving existing taxpayer services rather than creating new ones. Similarly, Intuit spokesperson Tania Mercado was also critical of the new IRS program, stating that “the direct file scheme is a solution in search of a problem, and this half-baked solution is not ‘free’ and could end up wasting billions of taxpayer dollars.”
The Direct File pilot program will provide valuable insights into how the system can be improved. The IRS survey found that 68% of taxpayers would be either “very likely” or “somewhat likely” to switch to a free IRS-provided direct filing service.
The Direct File system offers many benefits, including ease of use, accessibility, and data security. It represents a significant step forward for the IRS in its efforts to modernize and streamline the tax preparation process. The success of the Direct File pilot program will determine whether the IRS can compete with private tax-prep firms in the future.
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