Lawmakers scrutinize free IRS filing options. “The whole process needs to be improved,” commissioner says

As tax season winds down, questions remain about the future of free filing options from the IRS — including a possible direct e-file option with the agency.

IRS Commissioner Danny Werfel on Wednesday fielded questions from the Senate Finance Committee about the agency's spending priorities, including research on the IRS direct e-file program.

As part of the $80 billion IRS funding plan, the Inflation Reduction Act earmarked $15 million for a feasibility study about a free filing option through the IRS, which should be complete by mid-May, according to Werfel.

However, he admitted there are issues with the current IRS Free File program. "The whole process needs to be improved," he said Wednesday, responding to comments about the program's slim participation rate from Sen. Elizabeth Warren, D-Mass.

A public-private partnership between the IRS and the Free File Alliance, IRS Free File offers free online guided tax prep software to taxpayers with an adjusted gross income of $73,000 or less for 2022.

While roughly 70% of taxpayers qualify to use IRS Free File, only 2% used it during the 2022 filing season, according to the National Taxpayer Advocate's annual report to Congress.

Warren said private companies "sabotaged the program" by making it harder for users to find free filing options to "keep raking in money." As a result, she has pushed for the IRS to develop its own free direct e-file program.

"Free File, with a 98% user approval rating, made the changes Sen. Warren references a number of years ago," said Tim Hugo, executive director of the Free File Alliance, which partners with the IRS on the current Free File program.

The IRS may be able to automate nearly half of tax returns, with the highest level of accuracy among low- to moderate-income filers, according to a 2022 working paper from the National Bureau of Economic Research.

Throughout Inflation Reduction Act negotiations, many Republicans have been skeptical about the IRS creating its own free filing program, as well as the $15 million allocated for the study.

"Having the IRS act as tax preparer, tax collector and tax enforcer raises significant conflicts of interest in many of our minds," Sen. Mike Crapo, R-Idaho, ranking member of the Senate Finance Committee, said during the hearing.

"It would incur billions of dollars of cost in development and would expose exponentially more taxpayer information to misuse or abuse," he added.

Werfel said the IRS hasn't made a decision about whether to move forward with a direct e-file solution and doesn't want to "jump ahead of the conclusion" before reviewing findings from the study.