Filing taxes is hard. A new IRS program could change that.
As the mid-April tax deadline fast approaches, many U.S. taxpayers will turn to professionals or pay to use software. The fear of making a mistake or missing out on one of the deductions in the sprawling tax code is very real.
But does filing in the United States have to be so hard?
Why We Wrote This
It takes Americans more than a billion hours, collectively, to prepare their tax returns. A new IRS program could help certain filers.
In dozens of countries, most taxpayers don’t need to file a return. Governments withhold taxes during the year and send out information for taxpayers to review and approve.
This tax season, help could be on the way for certain filers. The Internal Revenue Service is rolling out Direct File, a free alternative to software such as Intuit’s TurboTax. Although the pilot program has its critics, advocates see it as a step toward simplifying tax season.
Individual taxpayers in the United States collectively spend 1.7 billion hours each year getting their returns ready. As the mid-April tax deadline approaches, it seems fair to ask: Does filing have to be this hard?
Given the difficulty of deciphering complicated rules and the fear of making a mistake or missing out on a deduction, many people turn to professionals or pay to use software. But this tax season, help could be on the way for certain taxpayers. The Internal Revenue Service is rolling out Direct File, a free alternative to software such as Intuit’s TurboTax. Although the pilot program has its critics, advocates see it as a step toward simplifying tax season.
Why is filing taxes so complicated?
Why We Wrote This
It takes Americans more than a billion hours, collectively, to prepare their tax returns. A new IRS program could help certain filers.
A 2022 paper found that the IRS could complete nearly half of Americans’ individual tax returns using data it already has on wages, unemployment benefits, interest, dividends, capital gains, and more.
But the IRS doesn’t know everything, especially when it comes to eligibility for certain tax breaks and credits. The study found that pre-populated returns would be most accurate for filers who are single, have no dependents, don’t qualify for credits or deductions, and have less than $100,000 in wages.
Critics say the tax preparation service industry also has a stake in keeping the process too hard for many taxpayers to navigate alone. The industry, with revenue estimated at $13.9 billion in 2023, employs nearly 270,000 people. Since 2006, Intuit has reportedly spent $25.6 million on government lobbying, and H&R Block, another provider of tax software, has spent $9.6 million.
How does Direct File work, and what are its pros and cons?
The goal is to give taxpayers a free, easy option for filing directly to the IRS, without going through a third party. The idea has been around for years but got a boost from $15 million earmarked in the Inflation Reduction Act to explore its feasibility.
For now, Direct File is available to residents in 12 states: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming. It works similarly to the software offered by Intuit and H&R Block, with questions that guide users through the process, plus real-time chat support from IRS representatives. But Direct File isn’t currently available to gig workers and those who itemize deductions, earn income from retirement accounts, or make more than $200,000 individually or $250,000 as a couple. And state tax returns must be completed separately.
In late January, 13 Republican attorneys general wrote to Treasury Secretary Janet Yellen opposing Direct File. “American taxpayers do not want to invite the proverbial fox into the hen house,” they wrote. “There’s an obvious conflict of interest when the IRS acts as tax preparer, filer, and auditor.”
How have other countries simplified the tax-filing process?
In dozens of countries, most taxpayers don’t need to file a return. Governments withhold taxes during the year and send out information for taxpayers to review.
“Rising Income Tax Complexity,” Youssef Benzarti and Luisa Wallossek
“You just have to look it over, make corrections, or accept it, and you’re done,” says Joel Slemrod, an economist at the University of Michigan. As of 2021, some 33 of the 38 countries in the Organization for Economic Cooperation and Development fully or partially pre-populate tax returns.
In Spain, 70% of taxpayers receive a pre-filled return, and half make no changes. In the United Kingdom, most taxpayers don’t need to file a tax return at all under an exact-withholding system.
