The IRS pilot of a direct file service is a reasonable next step to revamping what many call an inefficient program. Formed in 2002, the existing free file program is a partnership between the IRS and various commercial tax preparation companies that provides free online tax preparation and e-filing through the IRS website.
Approximately 70% of taxpayers are eligible to use the free file program. According to the National Taxpayer Advocate’s 2022 annual report to Congress, the program has been woefully underutilized as evidenced by being used by only 2% of eligible taxpayers.
An improved free system has the potential to benefit both taxpayers and the IRS. The question is whether the IRS can make direct file intuitive for taxpayers to use, as well as ensure ready access to the credits and refunds to which they are entitled. Easy access to taxpayer data may lessen the number of IRS mismatch notices that are issued each year.
A more accessible system also may reduce the number of paper-filed returns. According to the IRS, 8% of taxpayers paper file returns at a cost to the government of $7.33 per return, compared with 28 cents for an e-filed return. If the IRS can address the complexities of the existing program and streamline the taxpayer experience, it’s reasonable to expect more taxpayers will use it. If more taxpayers are willing to give direct file a try, that is likely to equate to an increase in compliance and return accuracy, quicker refunds, and a decrease in paper filings and processing costs for the government.
Whether the program can be sustained from a funding standpoint is an important consideration. Sustained funding is needed to maintain sufficient levels of customer support and contribute to year-over-year improvements at the same pace as other technology advances.
Ralph Waldo Emerson said: “Build a better mousetrap, and the world will beat a path to your door.” While direct file may provide an improved option for taxpayers with straightforward returns, it’s not a magic bullet to improve the taxpayer experience.
Fortunately, the pilot of direct file is well aligned with the strategic priorities of the newly formed IRS Taxpayer Experience Office—expanding digital services, providing a seamless experience, and meeting the needs of underserved communities. It’s also complementary to IRS efforts to improve technology, ensure data security, and maximize data utility in its 2023-2031 strategic plan.
Development of a direct file system doesn’t mean that taxpayers will stop using commercial tax preparation companies. Not all taxpayers are alike, so the ability to have a choice makes sense. Also, sophisticated taxpayers with more complex filings will still look to their tax advisers for customized guidance.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Miri Forster is a partner and national leader with EisnerAmper’s tax controversy and dispute resolution practice group. She advises public and private corporations, partnerships, and high net worth individuals on a wide range of technical and procedural issues.
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