It’s Time for Government to Build a Free Digital Tax Filing Service

We have a once-in-a-generation opportunity to help millions of people get benefits by reimagining and rebuilding the tax filing system

America’s patchwork tax filing system is broken. Tens of millions of families in America spend hundreds of dollars a year on tax prep assistance, just to fulfill the basic legal obligation of filing a tax return. Millions more—the families with the lowest incomes in our country—find it too hard and expensive to file a return, preventing them from receiving thousands of dollars in benefits distributed through the tax system. Closing the tax benefits coverage gap could set many of those families on a path towards greater financial stability.

There’s a clear way to do that: the Internal Revenue Service (IRS) could provide a free, easy-to-use digital tax filing service. Direct file would be a common-sense, good-government, non-partisan measure for an agency with an $80 billion modernization budget—an agency that has already taken incredible strides toward reaching families with low incomes in recent years. 

The time for direct file is now

We have a once-in-a-generation opportunity to reimagine and rebuild the tax filing system. 

For years, two significant obstacles prevented the IRS from running a digital tax filing service. First, the IRS was legally barred from building such a tool. In 2001, the IRS explored the possibility of creating a free online tax filing service, but without the internal resources to make it happen, the IRS created a partnership with private tax prep companies: the Free File Alliance. The companies would provide free tax filing services to about 70% of the country. The IRS, in exchange, would not compete with the companies by offering its own free digital tax filing service. 

While well intentioned, the Free File Alliance has not been an effective solution for getting people the tax filing help they need. Less than 3% of eligible families have used Free File, and various governmental probes have determined the program is not working. The two largest companies in the Free File Alliance—H&R Block and Intuit (the maker of TurboTax)—both left the program in 2020 and 2021, respectively. In 2019, the program MOU was amended, allowing the IRS to build its own tool. 

We have a once-in-a-generation opportunity to reimagine and rebuild the tax filing system. 

In the past year, government actors like the Government Accountability Office and the National Taxpayer Advocate have called on the IRS to develop additional options for taxpayers to file for free. This idea has enjoyed support from Democrats and Republicans alike over the years, and last week, 31 Senators called for the IRS to prioritize creating more free filing options. Across government, people agree: the time for change is now. 

Then, last year, Congress resolved the second obstacle the IRS has faced in building a direct file service. For decades, the IRS has been starved of resources, leaving it barely able to maintain its current operations, let alone improve. This finally changed when the Inflation Reduction Act (IRA) included an $80 billion generational investment in modernizing the IRS.

Now, in just a few weeks, the IRS will release a hotly anticipated report with its view on the feasibility of building such a tool. We are hopeful this report will finally mark the beginning of a much-needed change.

A vision for free, trustworthy digital tax filing

An IRS-run digital tax filing service would be a web application where Americans can file their tax returns directly with the IRS, rather than through an intermediary. Though it would be available to all tax filers, it would be designed and optimized to serve those populations most left out of the current system—families with low incomes who cannot afford tax assistance and are leaving thousands of dollars in critical benefits on the table. We know from our own work with GetCTC that a free and easy tax filing service can be transformational for these families.

At first, the IRS tax filing service might look a lot like other filing options. But as the product matures, the IRS is uniquely positioned to make its tool easier for filers than a tool run by an intermediary—while also streamlining processing on the back end. 

The IRS is the custodian of taxpayer data—including information from W-2s and prior year tax returns—which it can use to reduce burdens on filers and prevent errors in filing. The IRS can integrate a filing tool with its tailored customer service operations—both those in-house, and those in the community, like Volunteer Income Tax Assistance (VITA) sites. The IRS can run targeted outreach campaigns to bring people into the tax system—supported by partnerships with other federal agencies.

Want to see what an IRS-run direct file tool could look like? We explored the possibility in our prototype of a prospective IRS tool.

An IRS tool would always have one critical advantage: it would be, always and unambiguously, completely free. A free tool from an official government agency—one that is mobile-first, available in multiple languages, and easy to use—would help encourage people with low income to file taxes and finally receive the tax benefits they are due. We know from our work that families with low incomes in the tax filing gap would rather get their information directly from the IRS than from an intermediary

But above all, as the IRS Commissioner told the Senate Finance Committee this month, “the main benefit is options.” Most taxpayers, we suspect, will continue to use private services—because they are accustomed to them, because their complex tax situations require more hands-on assistance, or for any reason they please. An IRS filing service would be complementary; it is not intended to replace private tax prep. It is intended to serve those for whom the current system does not work and be a straightforward option for tens of millions of people with simple tax situations.

An IRS filing service would be complementary; it is not intended to replace private tax prep. It is intended to serve those for whom the current system does not work and be a straightforward option for tens of millions of people with simple tax situations.

A government that serves people

Cynics say the IRS will botch this effort, that government can’t take on exciting new projects to directly serve people. To this we can say conclusively, these skeptics are watching old tape. Over the last decade, Code for America has partnered with agencies across the country, working shoulder to shoulder with governments to serve people, showing that government can work in the digital age. We have seen immense progress as agencies from Mississippi to Minnesota have made it faster and easier to access benefits.

More to the point, we’ve seen it right here at the IRS. In the last few years, at the height of a global pandemic, the IRS distributed hundreds of billions of dollars of critical social assistance, implementing new initiatives to do so—new simplified filing rules for households with low incomes, automated payments in partnership with other federal agencies, unprecedented direct outreach to millions of Americans outside the tax system, and much more. Just weeks ago, the IRS released a ten-year Strategic Operating Plan, with dozens of initiatives to fundamentally overhaul how the agency serves people, in ways large and small. This is an agency ready and able to make big changes.

Direct file isn’t a huge project. It’s a doable project. Take it from us; we launched a streamlined tax filing service in a matter of months in 2021. But it’s one that has the potential to be the linchpin of a multifaceted effort to bring the IRS into the 21st century, making it the tax and benefits administrator this country deserves. We believe in a government that proudly serves people, and we are excited to see the IRS take on the challenge.

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