Every year, U.S. individual taxpayers spend billions of dollars on tax preparation. For low-income workers, tax preparation costs can take a big bite out of their refund checks. One study found that median tax preparation costs for low-wage service sector workers equaled 7% their tax refunds. For the 2024 tax season, some taxpayers will have a new filing option: free tax software provided by the IRS.
Although the tax forms themselves are available for free, most taxpayers need support to correctly determine their tax liability. Nowadays, most taxpayers—the IRS estimates 94%—use third party tax software to file their returns. For over twenty years, the IRS has worked with the tax software industry to make this software available for free to taxpayers in targeted income ranges. Unfortunately, this voluntary program, known as Free File, has failed to reach most eligible taxpayers. In 2020, about 70% of taxpayers were eligible for at least one Free File option, but less than 3% of eligible taxpayers took advantage of these services.
For years, many in the tax community have argued that taxpayers should have the choice to file their taxes using free tax preparation software provided by the federal government. Moreover, taxpayers themselves have expressed strong interest in a direct filing option. In evaluating the likely impact of a direct file program, the IRS surveyed a representative sample of taxpayers. Over 70% of them said they would be interested in a direct file option, and 68% of taxpayers said they were “somewhat likely” or “very likely” to switch to IRS-provided, free-tax preparation software.
In May, the IRS released its study of the feasibility of direct file and announced that it would be moving forward with a pilot direct file program. The pilot will target a limited set of taxpayers. If the pilot proves successful, the IRS could expand the program to serve a larger population of taxpayers with more complex filing needs. Moreover, the IRS report noted the importance of other functionality, like pre-populating tax information, that would make tax filing even simpler. While it does not appear that pre-population will be available as part of the 2024 pilot, it is exciting that the IRS highlighted these opportunities for further improving the tax filing experience.
The direct file pilot project is a major step forward for the IRS, and the tax community should continue to watch this program as more information on the program is rolled out.