At a recent hearing before the Senate Appropriations Committee, IRS Commissioner Doug Shulman heard from senators that the agency ought to provide taxpayers with its own free online tax software.
Shulman was testifying about the IRS’s annual budget, but towards the end of the hearing, a pair of senators suggested the idea. “We can eliminate the middle man,” said Sen. Dick Durbin, D-Ill., according to
His fellow home state lawmaker, Sen. Mark Kirk, R-Ill., had first suggested the idea, and estimated that such a program would cost the IRS about $20 million to $30 million to create. “That an American doesn’t pay TurboTax, doesn’t pay H&R Block, simply logs onto the IRS Web site, fills out their taxes in an accurate, complete way in which the software is handling all of the complexity, and the amount of time spent complying with federal law drops like a rock,” he said.
However, Shulman was apparently cool to the idea, responding, “I don’t think it’s that simple.”
Of course, the IRS already offers its Free File service, which it operates in partnership wih a group of tax software companies like Intuit, Block and 2nd Story Software, who are part of the Free File Alliance. In recent years, the IRS has lowered the eligibility requirements for Free File, allowing taxpayers with an adjusted gross income of $58,000 or less to qualify.
For those with even larger incomes, a couple of years ago the IRS introduced Free File Fillable Forms, which allows taxpayers to go online and fill out the forms directly. The Fillable Forms option, however, doesn’t include the interactive interview process found in most consumer tax software that takes users step-by-step through a return. The taxpayer has to know which forms to fill out and what information should go in them. The forms will do a few simple math calculations, but it won’t try to offer suggestions about how to handle your mortgage interest deductions, for example. A couple of tax seasons ago, I briefly tried out the Fillable Forms option and found it frustrating to use, so I ended up once again with TurboTax Online.
Still, it is surprising that Shulman would be lukewarm to the idea of developing such a system. After all, he recently described in at least two speeches his vision for a next-generation tax system that would allow taxpayers to go online and have their tax forms essentially filled out by the IRS. The system would use the information reports it had received from the 1099s, W-2s, and K-1s that third parties had already filed with the agency (see
However, in that system too, the IRS would still have a place for the commercial tax software vendors. “The vision is relatively straightforward,” Shulman said back in April. “The IRS would get all information returns from third parties (W-2s, 1099s, etc) before individual taxpayers filed their returns. Taxpayers or their professional return preparers could then access that information, via the Web, and download it into their returns, using commercial tax software. Taxpayers would then add any self-reported and supplemental information to their returns, and file the returns with us. We would embed this core third-party information into our pre-screening filters, and would immediately reject any return that did not match up with our records.”
Generally, the IRS has preferred to work with the commercial tax software industry on improving their products so it can increase tax compliance and reduce the volume of paper returns. CCH Small Firm Services president Jeff Gramlich, said, “There is no concern about them getting into the tax prep business.”
His company is one of the largest providers of tax prep processing services, and it was asked by the Senate Finance Committee recently to write a one-page white paper about what happens to the tax prep industry when tax legislation is delayed, as it was last December with the Bush tax cuts extension. He recalled getting a phone call from the IRS on February 11, just a few days before it was set to finally allow tax practitioners to file itemized tax returns and a number of delayed tax forms, urging him not to let all the tax forms be filed at the same time. The IRS was concerned that its systems might be overwhelmed by millions of pent-up tax returns.
Still, it’s not too big a leap to imagine a time when the agency might eventually provide its own tax software online, especially if it’s prodded by Congress to do so. The unpredictable efforts at tax simplification and tax reform in Congress might even veer off in this direction. When President Obama was campaigning for office in 2008, he had suggested that the IRS set up an online system that would allow taxpayers to file their taxes in five minutes. We’re still a long way off from that day, but clearly there is demand for a way to make the tax prep process less burdensome, for taxpayers and tax practitioners alike.
