Direct eFiling: A Revolution in Tax Preparation

After many years of obstruction by the tax prep industry, the IRS is finally taking steps toward rolling out a direct efiling program.

The idea has been around for a long time: direct efiling of tax returns with the IRS. It would eliminate the middleman — TurboTax, H&R Block, or other providers — and get your return directly into the IRS system. After many years when the tax prep industry prevented the IRS from doing so, the effort is now underway.

How would you benefit?

The availability of a direct efile system would be a tremendous boon to taxpayers.

  • The system would be voluntary. Stick with your current provider if that’s what you prefer.
  • The price to use the system will be a nice round number: $0.
  • You won’t need to provide sensitive information to a third party.
  • You won’t need to fend off attempts to sell you services you don’t need.
  • The IRS may be able to “pre-populate” your return with information it already has from filings made by your employer or investment firm.

Major issues

One of the major questions is whether the IRS system will prepare only federal returns, or will also handle state filings. This feature will affect taxpayer acceptance of the system in states that require their own returns. Building out a system for state returns would be a serious undertaking, particularly if it addresses complexities such as allocation of income when someone changes their state of residency.

We know a tax lawyer who refused to let his clients change their state of residency any day other than January 1.

Another issue that will affect acceptance of the program is availability of an option to pre-populate the return, using information the IRS receives in electronic form from employers, investment firms and other reporting entities. For many taxpayers, this data would be all that’s needed to prepare the return.

Current status

The Inflation Reduction Act called for a feasibility study. This has been completed and a report submitted to Congress. Shortly afterward, the Treasury directed the IRS to move ahead with a pilot program.

The goal is to have a pilot program ready for the coming tax season. It’s too early to know the scope of this pilot or exactly what will happen next. Also, we have to expect a last-ditch effort by the tax prep industry and their allies to derail the program.

Who hates the idea

Opposition to this effort has come mainly from Republicans, and from conservative commentators. They’ve had a hard time coming up with coherent objections, though.

The Wall Street Journal quoted Jason Smith, Republican chair of the House Ways and Means Committee, saying “Americans don’t want to give the IRS such sweeping control and authority.” Which Americans does he mean? The ones who would like the program enough to participate voluntarily? Or the ones who choose not to participate, and are unaffected by the program’s existence?

The Journal’s editorial board voiced its disapproval. They chided the IRS for failing to employ a “neutral investigator” in creating its feasibility study. Yet Congress did not ask the IRS to do so. The agency complied with the requirement to use an independent third party, which did not have to be a neutral investigator.

The Journal proceeded to misrepresent results of a survey on taxpayer attitudes toward such a program. “Americans hate this idea,” they declared. “A mere 37% of tax filers with simple returns would use an IRS tax preparation service.”

That’s not at all what the survey found. Participants were asked to imagine they needed to prepare a simple return, with a choice of three services, all of which are free: (1) use software offered by a company, (2) use similar software offered by the IRS, or (3) use a “return-free” system where the IRS prepares and files the return for you, using W-2 and 1099 information from the employer.

The result: only 48% would stay with software offered by a company, even when it was free. That’s a strong vote of confidence for the proposed program, the exact opposite of an indication that Americans hate the idea. It appears that the editorial board of the Journal hates it enough to mislead its readers.

The 52% who were prepared to use services offered by the IRS were divided between 15% who preferred to enter their information on the return and 37% who liked the “return-free” idea. The editors plucked the latter figure from the survey and pretended this was the number who would use an IRS tax prep service.

A news article about the IRS effort reports that the survey found “a majority of people who already use tax software to file their returns would likely switch to an IRS-run tool.” Kudos to the Wall Street Journal for putting accurate information in the news article that contradicts its own editorial.

According to one estimate, Americans spend a total of 1.7 billion hours, and $33 billion preparing individual tax returns.

ProPublica article

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