(NewsNation) — This year, Americans in several states will get the opportunity to try a new way of filing their taxes: Directly, on the Internal Revenue Service‘s website.
But they’ll still need to fill out their wage information as they would if using another service such as TurboTax, raising the age-old question: If the IRS knows how much I owe (or will get back), why doesn’t it just automatically file my taxes?
The question was the subject of a 2022 study that underscored the need for a government-run filing system and concluded the IRS could correctly tally about 45% of tax returns without information from taxpayers themselves.
The answer as to why it doesn’t already do that is a bit complicated.
Lack of funding
If the IRS wants to create its own permanent filing portal offering prefilled returns, it will need money to do so.
The Direct File program available this tax season is a one-year pilot program launching in 12 states that was never actually authorized by Congress. Instead, the Inflation Reduction Act allocated $15 million for the aforementioned study, and the IRS used a portion of those funds to build the platform, which it describes as part of the study.
That move angered Republicans, some of whom sent a letter to Treasury Secretary Janet Yellen last week urging her to shut down the Direct File program.
The agency’s overall funding is under constant threat of cuts. Last year’s debt ceiling and budget cuts deal between Republicans and the White House resulted in $1.4 billion rescinded from the agency’s original $80 billion allocation through the Inflation Reduction Act. Congress also passed a separate agreement to take $20 billion from the IRS over the next two years and divert those funds to other nondefense programs.
The IRS estimates it could cost between $64 million and $249 million per year to run its own system, depending on the number of users, according to the Washington Post.
An IRS advisory committee also cautioned in June 2023 against the creation of a permanent program, instead advocating for increased publicity about the agency’s current Free File program, which offers resources on how to file taxes for free using commercial companies’ software.
Competition from commercial companies
The direct file idea is also not viewed favorably by the commercial tax prep software firms that have made billions of dollars charging people to use their software.
Tania Mercado, a spokesperson for Intuit, the company that makes TurboTax, said the program could end up wasting billions of taxpayer dollars when there are already free tax preparation options available.
She called it “a thinly veiled scheme where billions of taxpayer dollars will be unnecessarily used to pay for something already completely free of charge today.”
However, some consumers have previously complained about commercial companies charging for software even after advertising it as free.
Intuit was recently the subject of a Federal Trade Commission order that bars the company from advertising free services without specifying who is eligible for them at no cost.
Complicated tax situations
As people earn more money, make investments or run their own businesses, their tax situations can become increasingly complicated.
The Direct File program is only available to those who are in what might be considered “simple” tax situations, where their income sources are W-2 wages, Social Security wages, unemployment compensation or interest income of $1,500 or less.
People who earn income through their own businesses or gig work are not eligible, nor are people who itemize their deductions.
Some are also excluded based on income — individuals making more than $200,000 or couples filing jointly making more than $250,000 aren’t eligible.
Davidson Gillette, an East Carolina University professor who has researched other countries’ prefilled returns, told the Washington Post he views the American practice of joint filing as the biggest hurdle to implementing a government tax filing system. Joint filing can make it more difficult for the government to know who owes what.
“It’s unclear if the IRS would be capable of bearing that additional burden … with the level of funding they have,” he told the newspaper.
The Associated Press contributed to this report.