IRS weighs creating a government-run tax-prep option

The Biden administration is considering creating a government-run alternative to TurboTax and H&R Block, drawing resistance from Republicans and companies fearing a loss of business.

Democrats and consumer advocates have been pushing for the Internal Revenue Service to offer free online tax filing on its website, particularly for people with straightforward returns. Their core argument: Tax-preparation companies charge middle-income Americans for what advocates think should be a free public service.

The companies, meanwhile, are boosting lobbying spending and leaning on lawmakers to fight a change that could shrink their revenue, and they are emphasizing free options already available for taxpayers. They see the changes under consideration as a first step toward an even bigger threat in which the IRS could use information it gets from employers and other sources to prepare a first draft of taxpayers’ returns for them. 

The IRS is due to release a report this week on a possible Direct File system—think TurboTax but on the agency’s website—and the Biden administration will then decide whether to pursue it. 

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"This is a service that I think the government ought to provide," said Kitty Richards, a progressive tax expert and former Treasury official. "It’s problematic that we instead provide it through these private corporations that prey on people and extract profits from taxpayers that are just fulfilling that civic duty."

Tax-prep companies say they already provide free services, including filing of many federal returns, though taxpayers often pay for state tax preparation or other products. People with incomes under $73,000 can also use the IRS Free File program, which provides access to private software. TurboTax and H&R Block no longer offer services through Free File, but companies such as TaxAct and TaxSlayer do. Last year, Free File served just 3% of roughly 100 million eligible taxpayers. 

Ticker	Security	Last	Change	Change %
INTU	INTUIT INC.	678.70	+28.10	+4.32%

"A direct-to-IRS e-file system will be redundant, and it will not be free—not free to build, not free to operate and not free for taxpayers," said Derrick Plummer, a spokesman for Intuit, which owns TurboTax. 

The IRS and Treasury Department have said little ahead of the report’s release. 

"Delivering world-class service means taxpayers will be able to seamlessly interact with the IRS in the ways that work best for them on the phone, in-person and online," said Ashley Schapitl, a Treasury spokeswoman. She said the report is an important part of modernizing the IRS and understanding taxpayers’ preferences. 

Many countries already offer versions of the options the IRS is studying. A 2022 study co-written by Treasury economists found that the U.S. could accurately fill out nearly half of individual tax returns using information it already has from employers and elsewhere. 

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That step, which would go beyond what the IRS is currently considering, would be a real threat to the tax-preparation industry, which is trying to stop the IRS from getting close. Intuit’s lobbying spending rose 18% in the first three months of 2023, compared with the same quarter a year earlier. H&R Block increased its lobbying costs by 29% over the same interval. 

Ticker	Security	Last	Change	Change %
HRB	H&R BLOCK INC.	56.87	+0.32	+0.57%

After adding 5,000 employees to answer phone calls this year, the IRS is working on steps to improve tax administration. That includes scanning more paper returns so refunds go out faster and bolstering taxpayers’ online accounts so people can respond to notices without mailing letters. 

Those initiatives wouldn’t be as visible to most Americans as letting them file simple tax returns on the IRS website, said Natasha Sarin, who worked on IRS issues at the Treasury Department earlier in the Biden administration. 

"It’s just hard to come up with something that feels as big as a government free file," she said, without endorsing a particular path. 

The IRS first considered creating such a system more than 20 years ago as it accelerated electronic tax filing, which is more cost-efficient than paper. But it chose to rely on the private sector instead. 

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Last year, lawmakers gave the IRS $80 billion to improve tax administration and enforcement. Alongside that, Congress directed the tax agency to again study creating its own online tax-filing portal, effectively revisiting that decades-old choice.

Republicans are unlikely to give the IRS more cash, so IRS Commissioner Danny Werfel would probably have to redirect existing resources if the administration decides to pursue the idea.

"I’m not quite sure why trying to tackle this concept in the near term would be beneficial to the IRS, and more importantly to the American taxpayers," Rep. Darin LaHood (R., Ill.) said to Mr. Werfel during an April hearing. "Don’t you think the e-file effort could lead to the IRS biting off more than it could chew?"

The tax-prep industry and conservative groups say taxpayers should worry about scenarios in which the government helps to complete forms and audits them. That argument is unlikely to sway Democrats and IRS officials as they consider the more modest step of building an online filing system. Questions for their review include what is technically feasible, what the IRS can afford and whether the benefits are worth the political fight. 

The IRS could efficiently build and maintain a simple portal for people with wage income, the standard deduction, and the earned-income and child tax credits, said David Kautter, who was acting IRS commissioner in 2017 and 2018. Going beyond that would be a tougher call, he said.

The IRS would have several other challenges in implementing direct filing. It might need more taxpayer service representatives to answer queries and troubleshoot problems. Any IRS offering might have trouble competing with private companies in states with income taxes where taxpayers need to file a second form anyway. 

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The initial changes the IRS is studying would be little threat to the tax-preparation companies, which have invested in easy-to-use software, customer service and marketing, said Kartik Mehta, a research analyst at Northcoast Research who monitors Intuit and H&R Block. 

"They both have solid business models. I guess what could break it is if the IRS said we’re going to take all this information and create your tax return," Mr. Mehta said. "Even then, I’m not sure that the U.S. taxpayer is willing to take the IRS’s word for that."