Earlier this month, the IRS published a
For this to be a truly viable option, the IRS will need to think even bigger. I left my job in 2021 because I saw that our tax-filing system is fundamentally broken, and technology could create a better product that reaches underserved populations. I have spent the past two years learning the tax code in and out and building a solution with our team at Column Tax from the ground up.
As the Direct File program takes shape, learning from taxpayers will be paramount. I've been fortunate enough to talk and learn with a wide range of taxpayers over the last year. I'd like to share some of the lessons we've learned directly from taxpayers while building and launching a tax product.
First, the report focuses exclusively on federal tax filing. While federal filing is a great place to start, 41 states (plus Washington, D.C.) in the U.S. also require an additional state tax return. The report says, "Even when the IRS option was explicitly described as offering no support for filing a state return, 59% of taxpayers preferred the IRS option, with 'filing taxes should be free' consistently cited as the top reason." While taxpayers are rightly excited by a free tax program, most would be surprised to learn they have to file an extra state return elsewhere and the state return may cost an additional fee.
For the Direct File program to reach its goals of providing an accessible and affordable filing program for the majority of Americans, it will have to include state filings as well. In our experience, building state filing is a complicated and critical part of building a best-in-class tax filing product. Each state has a unique tax code, with unique credits and complexity. Most importantly, each state filing can help Americans get access to essential refund dollars. In our experience, creating state filing engines can take a significant amount of time. The Direct File program will only see a sliver of its potential impact if it has a federal-only scope of work.
Second, translating interest into successful filings is easier said than done. This is supported by survey data in the report that shows that only 24% of respondents said they were very likely to switch to a new program. To overcome inertia, taxpayers need to know that a solution is both trustworthy and offers a significantly better user experience — that feedback arose time and time again in user research. The IRS has the potential to create a best-in-class product by automatically uploading W-2s and 1099s that the government already has. The task force should consider why 48% of respondents said they would still file with private providers, even given that unique benefit.
In our experience building tax products, it takes a confluence of factors to convince taxpayers to make the "switch" to a different product. These factors include cost, quality of product, ease of use and innovative offering. The task force has scoped out a product that hinges on one leading factor: cost. While cost is important, our user research has shown that taxpayers need multiple factors to make the switch on a product as important as tax filing.
Furthermore, 86% of respondents expect the Direct File product to be easier to use than private software. From our research, we found that ease of use is the number one factor in selecting where to file taxes.
Despite being one of the most pervasive American experiences, filing taxes is an incredibly personal endeavor. Each person has a unique financial footprint whose taxes can be affected by a myriad of factors: Does the filer have dependents, are they filing single or joint tax returns, do they qualify for certain credits, are they a W-2 or 1099 worker, do they have investment income, are they in school? These are just a few examples, and the list goes on.
It's exciting to know the IRS has already built a Direct File prototype, which "provided the task force with a deeper understanding about the type of support that taxpayers want and expect from the IRS." However, the prototype, which is not shown or further detailed in the report, was shown to only 14 users to get feedback before publication.
This is all a step in the right direction. In our experience, user testing has been the most valuable source of feedback in building a tax product. In order to scale up, the task force will need to expand its user testing in order to get a representative sample of the American taxpayer's experience. For example, we've had hundreds of thousands of taxpayers use our product. That's the most valuable source of learning we've had. Effective user testing will be critical to ensure that this is a viable solution for every American tax filer, and meets all the different criteria that users judge a solution by.
I firmly believe the IRS has a unique opportunity to make tax filing easier for all Americans. Alongside better products, the best thing we can do to help tax filers (in particular low-income filers) is by simplifying overly complex parts of our tax code.
Let's take the Earned Income Tax Credit as an example. The EITC helps low- to moderate-income workers and families get a tax break. Based on my experience talking with taxpayers, I know it's unreasonable to ask American taxpayers to understand these overly complex requirements that can lead to stress and confusion for families when they are trying to claim their refund.
Simplifying the qualification criteria for credits and increasing the explainability of these credits will go a long way toward helping taxpayers. Adding things like more straightforward credit eligibility criteria, along with better tax filing products, will double the impact for tax filers.
As I look ahead, I am optimistic about the future of a Direct File program. The U.S. system is at its best when there are great public and private options. Choice is a cornerstone of what makes our country great, and people need more (and more affordable choices). I am looking forward to seeing how the IRS adapts as it learns more directly from taxpayers in testing ahead.
