The IRS is finally developing a free-file system — but these key pieces are missing
Internal Revenue Service tax forms are displayed in Feb. 2019. (AP Photo/Keith Srakocic, File)
Earlier this month, the IRS published a free file report that, most notably, shared that the agency would be piloting a free filing program directly to the IRS starting next year. This is a step in the right direction: Despite 70 percent of Americans qualifying for Free File, only 3 percent do, and policy changes can significantly increase these rates. As the report points out, filing taxes can take 8 hours and cost $140 on average. That cost is too high. Americans need better options to file their taxes.
For this to be a truly viable option, the IRS will need to think even bigger. As the Direct File program takes shape, learning from taxpayers will be paramount.
An effective solution must include state coverage
The report focuses exclusively on federal tax filing. While federal filing is a great place to start, 41 states (plus Washington D.C.) require an additional state tax return. The report mentions that, “Even when the IRS option was explicitly described as offering no support for filing a state return, 59% of taxpayers preferred the IRS option, with ‘filing taxes should be free’ consistently cited as the top reason.” While taxpayers are rightfully excited by a free tax program, many may be surprised to learn they also have to file a state return elsewhere — and that the state return may cost an additional fee.
For the Direct File program to reach its goals of providing an accessible and affordable filing program for the majority of Americans, it will have to include state filings as well. But building state filing is a complicated: each state has a unique tax code, with unique credits and complexity. That means creating state filing engines can take a significant amount of time. Regardless, it’s important to do so, as each state filing can help Americans get access to essential refund dollars. The Direct File program will only see a sliver of its potential impact if it has a federal-only scope of work.
User experience is just as important as cost
Translating interest into successful filings is easier said than done. This is supported by survey data in the report that shows that only 24 percent of respondents said they were very likely to switch to a new program. To overcome inertia, taxpayers need to know that a solution is trustworthy and offers a significantly better user experience. The IRS has the potential to create a best-in-class product by automatically uploading W-2s and 1099s that the government already has. The Task Force should consider why 48 percent of respondents said they would still file with private providers, even given that unique benefit.
It takes a confluence of factors to convince taxpayers to switch to a different system, including cost, quality of product, ease of use, and innovative offering. The Task Force has scoped out a product that hinges on one leading factor: cost. While cost is important, taxpayers need more. Direct File should be easier to use than other, private options.
User testing matters
Despite being one of the most pervasive American experiences, filing taxes is an incredibly personal endeavor. Each person has a unique financial footprint whose taxes can be affected by a myriad of factors: does the filer have dependents, are they filing single or joint tax returns, do they qualify for certain credits, are they a W-2 or 1099 worker, do they have investment income, are they in school? These are just a few examples, and the list goes on.
It’s exciting to know that the IRS has already built a Direct File prototype, which “provided the Task Force with a deeper understanding about the type of support that taxpayers want and expect from the IRS.” However, the prototype, which is not shown or further detailed in the report, was shown to only 14 users to get feedback before publishing — hardly a significant number. While this is all a step in the right direction, the Task Force will need to expand its user testing in order to get a representative sample of the American taxpayer’s experience, in order to ensure that this is a viable solution for every American tax filer.
New tax filing options are limited without simplifying parts of the tax code
I firmly believe that the IRS has a unique opportunity to make tax filing easier for all Americans. Alongside better products and systems, the best thing we can do to help tax filers — in particular low-income filers — is simplify overly complex parts of our tax code.
Let’s take the Earned Income Tax Credit (EITC) as an example. The EITC helps low- to moderate-income workers and families get a tax break. To find out whether or not you are eligible, you must wend your way through a complicated variety of “tables” on the IRS website. It’s unreasonable to expect American taxpayers to understand these overly complex requirements, and leads to stress and confusion for families who are already struggling. Simplifying the qualification criteria for credits and increasing the explainability of these credits will go a long way toward helping taxpayers.
As I look ahead, I am optimistic about the future of a Direct File program. The U.S. system is at its best when its citizens have options, both public and private. If the IRS can learn and adapt, U.S. taxpayers and the government will reap the rewards.
Gavin Nachbar is co-founder and CEO of Column Tax, a platform whose mission is to democratize access to tax and finance advice using modern solutions.