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Thursday September 28, 2023

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Senators Advocate Expanded IRS Tax Software

In an April 25, 2023-letter, over 30 Democratic Senators urged IRS Commissioner Daniel Werfel to consider expanding the e-filing system. The letter requested that expansion include the development of tax software operated and maintained by the Internal Revenue Service (IRS).

The letter emphasizes that the IRS should make the tax filing process simpler and more efficient. If taxpayers had accessible e-filing tools, fewer errors would be made and refunds more quickly. The Inflation Reduction Act provided additional funding to the IRS. The Service should use a portion of this funding to reduce the burdens of tax filing.

On average, Americans spend $250 and devote 13 hours each year to filing taxes. While the IRS has created a Free File Program, the usage rate is extremely low. The National Taxpayer Advocate notes that 70% of taxpayers qualified for Free File, but only 2% of Americans used the program in 2022.

Most taxpayers file using more expensive options or simply fail to file their returns. The two decades of Free File experience show that many taxpayers still are not benefiting from the Earned Income Tax Credit or the Child Tax Credit. The Free File program does not meet accessibility standards on mobile devices and offers limited use of foreign languages. The Governmental Accounting Office states the "IRS is not managing the potential risks of relying on the Free File program as the way it helps taxpayers file for free online."

Therefore, the Senators advocated for the IRS to consider the recommendation of the National Taxpayer Advocate to offer a government-run e-filing system. There have been studies by the Treasury Department and Federal Reserve that indicate millions of Americans could use government-filing software. An estimated 12 million non-filers missed out on $8.5 billion in refunds in 2019. Government e-filing software could minimize filing errors, improve tax system fairness and save the IRS money and processing time.

A high priority for the Senate Committee on Finance is reducing barriers to filing. The additional IRS funding is designed to help make filing easier. The IRS notes in its strategic operation plan that "many other tax authorities have rolled out the ability to file taxes directly for free as part of their digital transformations."

The Treasury Department stated, "a viable Direct File option would ease the burden on many taxpayers." Treasury Secretary Janet Yellen appeared before the Senate Finance Committee and promised a direct filing program is "something that will happen."

Given the challenges of the Free File program, the Senators opined that it is important that the IRS move forward with a plan to transition to a direct e-filing system. The Senators urged the IRS "to roll it out as quickly as possible."

Editor's Note: A tax software system is a major project. It involves a sophisticated effort to design the user interface. With the complexity of the tax system, it is feasible to prepare a system for those Americans who take the standard deduction, but it will be quite difficult to build a complete software system for those who itemize deductions. While many other countries have built e-filing systems, this is a major challenge for the IRS.

Published April 28, 2023
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