Internal Revenue Service (IRS) Commissioner Danny Werfel stated this week that the IRS plans to launch a pilot program to allow taxpayers to direct e-file tax returns in 2024.

The Inflation Reduction Act (IRA) allocated $15 million to study the possibility of creating a Direct File tax return system. The IRS worked with New America think tank to conduct a review. The New America review stated it is possible to build an e-file system, but it "depends critically on their ability to maintain this initiative as a leadership priority, start with a limited scope and expand the system over time."

The Department of Treasury chief implementation officer for the IRA is Laurel Blatchford, stated on May 16 that, "filing taxes is expensive and time-consuming for American taxpayers. Dozens of other countries have provided free tax planning options to their citizens, and American taxpayers who want to file their taxes for free online should have an accessible option."

The IRS plans to use the U.S. Digital Service to build a system. Commissioner Werfel stated the IRS "will now be able to expand the amount of people that are interacting with such a prototype in order to further answer questions and provide more insight into whether a full-scale solution should be pursued."

The IRS Direct File system may be able to pre-populate returns with tax information. This may not be part of the pilot program but is a long-term goal.

There was both support and opposition for the Direct File solution. Senate Finance Committee Chair Ron Wyden (D-OR) indicated his approval. He noted the review "confirms that the overwhelming majority of Americans want the IRS to provide a free voluntary option to file their taxes directly online." Wyden explained the concept of a government Direct File program has been in existence for many years. However, Finance Committee Ranking Member Mike Crapo (R-ID) was not as positive. He noted that the IRS should "not act without explicit legal authority."

A major consideration is the cost for development of the direct file system. The initial IRS estimate was an annual operating cost of $64 million to $249 million. While the Department of Treasury stated a "future direct file program could potentially save taxpayers billions of dollars annually," members of Congress were concerned that the annual cost would be in excess of the initial projection.

Commissioner Werfel stated the IRA funds would be sufficient to start the Direct File program, but that he would be discussing funding with Congress for a "full-scale" system.

Many taxpayers in past years use commercial software from members of the Free File Alliance. Understandably, the commercial companies are concerned that the IRS program would compete with them. One large tax-preparation company spent $44 million lobbying Congress during the past two decades to oppose the Direct File option.

Groundwork Action representative Igor Volsky stated the Direct File system "is a strong step forward in the fight for free and simplified tax filing services and a clear rebuttal to big online tax preparers, their lobbyists, and their conservative allies who are committed to keeping tax-filing in America costly and difficult."

Editor's Note: Your editor does not take a position on the merits of developing a Direct File system. This information is offered as a service to our readers.