IRS chief pitches new tax-filing system
IRS Commissioner Danny Werfel visited Chattanooga on Thursday to pitch a new way to directly file federal taxes online for free.
Tennessee is one of 12 pilot states participating this tax season in the IRS program — part of a vision Werfel laid out for an agency now bolstered by desperately needed funding he said will allow it to streamline the tax-filing process and effectively enforce tax law against wealthy individuals and businesses that skirt it.
Users of the direct file system on IRS.gov — which, like tax software from H&R Block and TurboTax, allows people with simple tax returns to file them directly by answering a series of questions online — have thus far totaled around 50,000, he said, a tiny fraction of the 19 million he estimated are eligible to use the service within the pilot states in its inaugural tax season.
But in an interview at the Chattanooga Times Free Press office Thursday, Werfel said at this early stage, he’s mostly concerned with producing an effective product and getting good feedback on it. He added that about half of all tax returns are generally filed in the final two weeks before Tax Day, April 15, so far more users will all but certainly come aboard.
The idea for a system to directly file taxes for free online with the government is not new. Many countries do it. In some places, all a taxpayer must do is look at a filled-out form form furnished by the tax authority and modify it or give it the OK.
For more than two decades in the U.S., however, private industry has lobbied to keep the IRS from implementing its own direct file system.
As Werfel tells it, tax preparation companies made an
agreement with the federal government to offer a free tax filing software to lower income Americans, who are less likely to be able to afford an accountant and often have simpler tax returns.
And given that the new IRS offering only handles simpler tax returns, the initial version of the free direct file service offered by the IRS is not much different from that which many private companies already offer.
Yet reporting by news outlets like ProPublica has shown TurboTax and other firms haven’t lived up to their promises to offer free taxes to lower income taxpayers, and government regulators have in recent years agreed.
In January, the Federal Trade Commission ruled that TurboTax’s parent company, Intuit, has misled consumers by marketing products as “free” even though most consumers had taxes that were too complicated to qualify for the free service. Having been misled, the agency argued, users would use and invest time in TurboTax only to later learn they had to pay to upgrade to complete the tax filing process.
In recent years, there have been increased calls for the IRS to produce its own tax-filing system, Werfel said, though these efforts have faced resistance from industry — the company behind TurboTax has called it “half baked” and a “solution in search of a problem” — and Republican lawmakers who argued it would cede too much power to the IRS by making it America’s tax preparer, filer and auditor.
“Americans don’t want to give the IRS such sweeping control and authority,” said U.S. Rep. Jason Smith, R-Missouri, in a statement last year.
THE FUTURE
Asked whether the IRS direct file service would ever be usable for those with more sophisticated taxes, like independent contractors or people with income from investments, Werfel said such a prospect would be considered when this tax season is over and his agency can review how the initial rollout went.
Asked whether the service would ever prepopulate tax returns — the IRS already has much of the information people manually enter when they prepare their return — Werfel said he could imagine such a thing in the future but added some people are wary of the possibility, and he would want to make any such changes iteratively with the public, explaining the capability and seeing what people think.
“I don’t want to surprise people,” he said.
In his journey this week across Tennessee, from Knoxville to Memphis, Werfel, who became IRS commissioner in early 2023, is pitching a new dawn for a massive federal agency that he said finally has — for now, at least — the funds it needs to do its job of effectively administering and enforcing the U.S. tax law approved by Congress.
Under-funding has plagued the agency since 2010, Werfel said, undermining its ability to adapt to meet the demands of a financial world that was growing more complex, in which multinational companies sheltered money abroad and the cryptocurrency industry launched.
Held together as though with duct tape, the agency chugged along, but its audit rates were “anemic” Werfel said, creating a permissive atmosphere for tax cheats. And, especially when during the pandemic, backlogs at the IRS could make it infuriating for ordinary Americans to interact with.
Then came the Inflation Reduction Act, the federal legislation that infused the IRS with tens of billions of dollars, allowing it to catch up and to modernize, Werfel said.
He said the agency has used the funds to grow its staff, clear up backlogs and invest in basic technologies like the direct file service, among other things, to improve the tax experience of ordinary people.
Meanwhile, he said, he has pursued his mandate from his boss, Treasury Secretary Janet Yellen, to focus his newly bolstered enforcement apparatus on the richest Americans and corporations who push tax avoidance strategies over the legal line — or in some cases, evade their tax responsibilities on purpose.
Werfel said such enforcement work helps everyone else because companies playing by the rules should not have to compete with those that cheat. As for most Tennesseans, he said, filing their taxes is simply in their best interest: On average, 8 in 10 taxpayers in the state, he said, are owed a refund.