When Congress passed the Inflation Reduction Act in 2022, lawmakers didn’t just give the IRS a big funding infusion. They also directed the agency to look into something that has evaded the United States for decades: creating a system for Americans to file their taxes directly with the government electronically for free, rather than going through tax preparers, who often skim money off of their returns.
The IRS has submitted a report to Congress evaluating the feasibility of a free IRS-run filing system and has even created a prototype. In early 2024, a few taxpayers will participate in a pilot project to file their taxes for free with the government.
While not all the details have been released, it’s clear that this will both be a step in a new direction and go nowhere near as far as what many other countries do. Among the 59 countries that responded to an OECD survey, over 80 percent pre-fill returns, including Chile, Denmark, Estonia, Finland, and Spain. In these countries, the government does most of the work for its taxpayers, collecting information it already has—payroll numbers from W2 forms, interest income reported by banks—and pre-filling returns. Taxpayers then review them and either sign off or dispute the numbers. Those with more complex situations can use a pre-filled return as a starting point to add in missing information.
Since 2019, for example, people in New Zealand who earn a salary, wages, or income from a financial institution don’t have to do anything on their taxes. The tax agency pre-populates their information into a form and determines whether they are owed a refund or owe the government a payment. We’ve also tried that here. In 2005 and 2006, California conducted a pilot program in which it sent completed returns to residents with simple tax situations, and they were given the option to either file the forms or do their own. It was so successful that the state made it widespread in 2007, and by 2012 more than 88,000 residents used it. But the lobbying efforts of the tax-preparation industry, including Intuit, which makes TurboTax, and H&R Block, killed it.
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Residents loved California’s return-free program. In a survey conducted by the Stanford law professor Joseph Bankman, positive comments flooded in. “One said, ‘Finally the government is doing something to make my life better for a change,’” Bankman told the Los Angeles Times. “Almost all the comments had the words ‘thank you.’ People were thanking the government for taking something that drove them crazy and improving it.”
The US is among the 18 percent of countries that make people track down all their financial information on their own and feed it into pages and pages of forms. It took American taxpayers a collective 2 billion hours to do their individual tax returns in 2022. On average, each taxpayer will pay $240 and spend 13 hours filing taxes. That eats up nearly 10 percent of the average federal refund.
Given the complexities of the tax code and the paperwork, many people outsource the process to tax preparers. While there are supposed to be free options, which could be used by about 70 percent of taxpayers, less than 3 percent do, in part because tax-preparation companies have hidden that option. When the IRS told companies they couldn’t hide the free-file option anymore, Intuit and H&R Block left the program altogether.
The IRS is consistently ranked at or near the bottom of federal agencies. But if it started doing more of the work for us, that could change people’s minds—not just about the IRS but about the whole government. Making bureaucracy less frustrating improves people’s sense that the government works for them.
The IRS could accurately fill out tax returns for about half of filers—and as many as 80 percent of the lowest-income filers—requiring them to do nothing at all. That would save 40 percent of taxpayers nearly $2 billion in tax-preparation fees and give them back 225 million hours each year.
But private industry stands in the way. Tax-preparation companies have spent $39.3 million since 2006 fighting “free file,” and Intuit and H&R Block have increased their lobbying this year as the IRS gets serious about alternative options. They’ve won before, stymieing multiple bipartisan efforts to create a simpler system. But with the new pilot program rolling out, Americans will finally get a taste of a better way to do their taxes.