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1 1 (May 7, 2024)

handle is hein.crs/govepbc0001 and id is 1 raw text is: IRS Direct File Program: An Overview The assessment and collection of federal taxes owed depend on the level of taxpayer compliance with tax laws and regulations. Two factors shaping this compliance are the cost and ease of preparing and filing a tax return. Electronic filing (e-filing) provides benefits to taxpayers and tax administrators like the IRS. The main benefits to taxpayers are faster delivery of refunds and resolution of filing errors. For the IRS, processing costs are much lower than they are for paper returns. E-filing rates for federal individual income tax returns now exceed 90%. The IRS offers certain taxpayers three options for free e- filing. One option is the IRS-run Free File program, which allows lower-income taxpayers to e-file free of charge through the websites of participating tax software companies. Another option is the Volunteer Income Tax Assistance (VITA) grant program, in which the IRS partners with local community organizations to help low- income individuals, disabled individuals, and persons with limited English proficiency e-file their returns free of charge. The third option is the Tax Counseling for the Elderly program, which provides free tax preparation and filing for taxpayers 60 years of age and older. Historically, the IRS had not offered taxpayers the option of filing directly through a secure portal on its website, an option known as direct-file (DF). Such an option first became available as a pilot program for a limited number of taxpayers during the 2024 filing season. This In Focus discusses how the pilot DF program came to be, how it operated, and whether the IRS may offer it (or something similar) again in the future. Evoutdon of RS rect-F e Optdon Arguably, the IRS's efforts to create a DF system began with the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206, RRA98). The act directed the IRS to develop and implement a plan to achieve an e-filing rate of 80% for individual tax returns by 2007, with input from the private sector. The act also required the IRS to develop procedures for implementing a return-free filing system for tax years beginning after 2007. Nothing came of the second requirement, except for a report the IRS issued in 2003 that focused on the additional resources the IRS would require to create and operate such a system and changes in federal tax law that would facilitate taxpayer use of such a system. The first directive initiated a process that seems to have culminated in the 2024 DF pilot program. The process began with a 2001 directive from the Office of Management and Budget to the IRS to expand e-filing as part of a broader push by the George W. Bush Administration to expand the range of online federal government services. In 2002, the IRS elected to reach this goal through a partnership with a number of commercial tax software firms to provide free online tax preparation and filing to lower- income taxpayers through a program called Free File. At the start of the program, member companies agreed to provide free e-filing to eligible taxpayers through their online platforms, and the IRS agreed not to develop its own DF system. This commitment lasted until 2019, when it was dropped from the memorandum of understanding governing the year-to-year operation of the Free File program. Critics of the program had been pushing for the IRS to develop its own DF tool in part because of concerns about Free File. They said the program had achieved its main objective of substantially boosting e-filing among lower-income taxpayers. Several 2019 reports noted that eligible taxpayer usage rates had largely remained between 3% and 4%, the IRS invested little in promoting the program, and there was evidence that some member companies had sought to increase revenue by diverting Free File-eligible taxpayers to their paid filing services. Congressional interest in an IRS free DF tool appears to have grown since 2019. The Inflation Reduction Act of 2022 (IRA, P.L. 117-169) provided the IRS with $15 million to create a DF task force and deliver a report to Congress by May 16, 2023, that included the opinions of an independent third party. IRS Taskforce Report The IRS task force report addressed two topics: (1) taxpayer opinions, expectations, and level of trust for an IRS-run DF system and (2) the cost of developing and operating such a system under different levels of taxpayer income and tax return complexity. To assess taxpayer opinions of a hypothetical free IRS- provided online tool, the IRS task force reviewed the results of two recent taxpayer surveys and interviewed 14 taxpayers about their experiences using an IRS-built prototype of a DF system. The survey results indicated that over 70% of taxpayers would be very or somewhat interested in using an IRS-run DF tool. The task force also found that taxpayer interest in such a tool varied with (1) the percentage of taxpayers who regarded the IRS as a legitimate provider of such a service; (2) the availability of concurrent filing for federal and state income tax returns; (3) the availability of prefilled returns; May 7, 2024

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