A direct-file tax return system run by the IRS: It can happen

For years, people have wondered why the IRS, which already has a lot of our tax information, can’t generate a prefilled return, making it easy and free for all taxpayers to file electronically.

After all, individual taxpayers spend about eight hours and $140 preparing their taxes each year, according to the IRS.

Dare we dream that one day there might be an option to direct-file your federal return, saving you time and money? That time may soon come. What if the IRS created a robust, intuitive, free file system for everyone, regardless of income?

The agency has released a report detailing the feasibility of a free, voluntary, IRS-run electronic filing system. Dubbed “Direct File,” the platform could allow taxpayers to bypass commercial taxpayer companies. The Inflation Reduction Act authorized the agency to investigate the implementation of such a program, and a pilot run is planned during next year’s tax season. Don’t get excited yet. While the idea is long overdue, there’s a lot that has to fall into place before a direct-filing system is implemented and adopted by taxpayers.

As part of a task-force examination of the potential for such a system, the agency asked taxpayers what they wanted. A significant majority (72 percent) said they were very or somewhat interested in using a free IRS-provided tool to prepare and file

their returns.

People want to deal directly with the IRS. And they want an easier process.

“I am a big believer in paying taxes, but the enormous stress I’m incurring with my family, it’s not worth it, right?” said one survey participant. “I really wish things were much simpler.”

People also want a free service.

To be sure, there are already two basic, free filing options.

There’s the agency’s Free File Fillable Forms. But that electronic interface is so rudimentary that it’s unusable for many people trying to navigate tortuous tax rules. It’s designed to be the electronic equivalent of paper forms, so you need to be comfortable filling out tax forms and schedules without software help. There are limited basic calculations and no step-by-step guidance, and it doesn’t support state tax filing.

In addition, taxpayers whose incomes fall below a certain threshold can use the Free File program provided by the IRS and delivered by private companies. But that program is woefully underutilized. Although about 70 percent of taxpayers are eligible for Free File, less than 3 percent use it, according to the Government Accountability Office.

What the agency is proposing now is more substantial than what’s currently available.

“No one should have to pay for the privilege of preparing and filing their tax returns,” Nina E. Olson, executive director of the Center for Taxpayer Rights, said in a recent blog post.

Olson served as the independent national taxpayer advocate for 18 years and has long pushed for a direct-file system. She quips that returns shouldn’t be “a commercial product like potato chips or an airline ticket.”

“I don’t care how much or how little taxable income you report,” Olson wrote. “The government has an obligation to provide a method for you to prepare and file your tax returns without having to pay someone to help you.”

When asked how important it is for an IRS-run e-file system to be user-friendly, the overwhelming majority (75 percent) said very important.

As much as taxpayers loathe having to pay to prepare their tax returns, any attempt by the government to take over this herculean task needs a rampedup customer service component, especially tech support, Olson said in an interview.

IRS Commissioner Danny Werfel agrees on that point, telling Treasury Secretary Janet L. Yellen in a recent letter that the “IRS is technically capable of delivering Direct File, but . . . doing so would require additional resources and add complexity to IRS operations.”

In its study of a direct-file program, the IRS produced some annual cost estimates that are likely to create a battle in Congress.

The report pointed out that customer support — which “would be critical to the success of any Direct File option” — is “a major cost driver.”

The annual costs “may range from $64 million (assuming 5 million users and a narrow scope of covered tax situations) to $249 million (assuming 25 million users and a broad scope of covered tax situations),” according to the IRS report.

“That’s chump change,” Olson said.

The hopes are high for better customer service with a directfile program. The task force estimated certain tasks might be outsourced to minimize the impact on existing IRS callcenter agents. But complex calls would be routed to existing IRS agents.

“For Direct File to be viable in the long term, it would require continued funding to meet these service goals while maintaining resources for other valuable IRS services and programs,” the IRS report said.

Another challenge is incorporating the filing of state income taxes. People want to file their federal and state returns at the same time.

The direct-file system shouldn’t be a matter of whether it should happen but how soon. But it has to come with the technology and commitment to superior customer service, or it will fail.

“IRS already knows your tax information,” one survey participant said. “So why wouldn’t I be able to log in, put in, say, my [Social Security number], and then half this information is already filled, and then I just need to put in corrections, you know?”

That’s an ideal tax world.