Finally, Americans could soon ‘direct file’ taxes online without a middleman

Most Americans want to pay the taxes they owe. Few Americans enjoy preparing their taxes and paying companies to help them. And, right now, millions of Americans are paying companies to file their taxes when they should have access to easy and free ways to do so. 

The Treasury Department just announced a potentially game-changing initiative to pilot a free, direct tax filing system next year. If this pilot is successful, many taxpayers will be able to fill out and file their tax returns with the IRS, rather than only having the option to rely on software developed by private companies. Though it will not involve “pre-filled returns” using the information the IRS has — an option that is worth considering over the long-term — this is a meaningful step towards providing millions with a free and easy option to file their taxes after years of failure relying only on private companies.

The challenges in the current tax filing landscape result from decisions made by Treasury and the IRS decades ago, decisions that now deserve to be revisited. In the 1990s, the IRS decided not to pursue its own “direct file” software and to rely only on private companies (though, for a few years, the IRS did offer taxpayers the option to file directly via telephone). To provide low- and middle-income families with an option to use private software for free, the IRS worked with a coalition of private companies to launch “free file” in 2003, offering the prospect of privately developed software that still would give many Americans a free and easy way to file their taxes.

However, the “free file” coalition failed to achieve that goal. Of the over 100 million households eligible for free file, only 4 percent participated in the tax year 2020, according to the Government Accountability Office (GAO). GAO notes in the same report that most other taxpayers likely had to pay to file. As the Treasury Department has said recently, there is the potential to save taxpayers billions of dollars with a free option that reaches those intended.

Over the years, the free file program has been plagued by a lack of awareness among taxpayers, and the companies themselves sometimes undermine the program. Intuit — the owner of Turbotax — reached a $141 million multistate settlement for deceptive practices involving hiding the actually free product and then up-selling customers to a paid product when they were eligible for the free one. And, now, the two largest providers in this already small program — Intuit and H&R Block — have left it.

The GAO itself recommended that the IRS develop additional free options for filing, and the National Taxpayer Advocate, an independent office within the IRS, has called for a free direct file option. It is notable that even 14 U.S. states ranging from California to Alabama offer direct file options for state taxes. Now is an opportunity to integrate with and build on these efforts.

And there is considerable interest among the public in a free file option when asked: 72 percent of tax filers said they were very interested or somewhat interested in such a tool, the IRS reported last week.

At the same time, there are real challenges to be faced. An independent report by the New America Foundation and Professor Ariel Jurow Kleiman laid out critical technical and operational issues that the IRS should address in developing direct file. Among the many important ones is integrating the product with state tax filing, given that 41 states require income tax filing similar to federal filing. Additionally, just as with private software offerings, the IRS should also seek to iterate and improve its direct file system over time, starting with the filers who have the simplest returns and expanding over time to offer the option to more filers. 

Some claim that the IRS doesn’t have the legal authority to pursue direct file. As the Tax Law Center has explained, this is simply incorrect. The current system for filing was created by the IRS under a broad grant of authority for Congress, and that grant of authority clearly encompasses changing the method the IRS created by offering a direct file option.

And, an option is exactly what it would be. Americans would continue to have the ability to file using private companies. The potential here is for an alternative that is free and easy and avoids millions of Americans paying for filing services when they shouldn’t have to.

David Kamin is professor of Law at New York University School of Law and serves as faculty co-director of the Tax Law Center at New York University School of Law. Kamin served as deputy assistant to the President and deputy director of the National Economic Council under President Biden 2021-2022. Michael Kaercher is senior attorney advisor and director of the Climate Tax Project at the Tax Law Center at New York University School of Law.