Congress Again Considers Free IRS Income Tax Filing System

The legislation would direct the IRS to create software that would
allow any taxpayer to prepare and file their individual income tax
return beginning in the tax year 2023.

U.S. Senator Elizabeth Warren is leading fellow Democrats in renewing
a push for the IRS to create its own free tax-filing services and move
away from its current private partnership, whose services only a slim
portion of taxpayers use.

Warren, D- Mass., put forward a bill that would mandate the IRS create
its own free, online program for preparing and filing tax returns and
expand taxpayers’ access to their own tax-related data held by the
agency. California Democrats Brad Sherman and Katie Porter led the
introduction of a House version of the measure.

The legislation would direct the IRS to create software that would
allow any taxpayer to prepare and file their individual income tax
return beginning in the tax year 2023. The agency would also have to
allow taxpayers with fairly straightforward returns — those who don’t
take any above-the-line deductions, itemize their deductions, or
receive income as a sole proprietor of business, for instance — to
elect that Treasury prepares their tax return beginning in the 2023
tax year.

The IRS would have to create a program for taxpayers to securely
download third-party-provided return information and IRS-held data
related to their individual tax bills.

The bill would require a program by March 1, 2023, allowing taxpayers
who don’t have to file tax returns to claim refundable tax credits.
The provision aims to expand a sign-up tool for the child tax credit
to nonfilers who can access other tax benefits like the earned income
tax credit, which is open to low-income workers.

The measure would also bar the Treasury secretary from entering into
any new agreements that would restrict the federal government’s right
to provide services or software for preparing and filing taxes.

A fact sheet from the bill’s sponsors points to problems with the IRS
Free File program, which currently aims to offer free tax preparation
to 70% of taxpayers by partnering with private tax preparation firms.
The lawmakers argued that the program is underused, often confuses
taxpayers into paying for services, and fails to adequately protect
taxpayer data. In the last two years, major online tax platforms H&R
Block and Intuit’s TurboTax withdrew from the program.

Only 2.8% of all individual tax returns filed in fiscal 2021 were
submitted through the Free File program, according to IRS data.

The bill picked up co-sponsors since its last introduction in 2019 and
now has 22 Democratic senators signed on.

Warren has sought to tie the issue to Democrats’ push for a budget
reconciliation bill. Senate Majority Leader Charles E. Schumer, D-
N.Y., and Sen. Joe Manchin III, D- W.Va., are in talks in the hopes of
agreeing to a package broadly including pieces to lower prescription
drug costs, incentivize clean energy production and increase taxes on
the wealthy and corporations.

The latest Senate version of the legislation included about $80
billion over a decade for the IRS largely intended to boost its
ability to go after uncollected taxes and raise federal revenue in the
process. It also included $15 million for the IRS to study the
feasibility of creating a free, direct online tax return system.

When Treasury Secretary Janet L. Yellen appeared before the Finance
Committee in June, Warren pressed her for a commitment the IRS will go
further and build its own free filing system if Congress delivers the
$80 billion cash infusion.

Yellen pointed to more pressing priorities like working through a
massive backlog of tax returns, but agreed the IRS would take up the
issue when it’s “adequately resourced.”

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