Free Direct File Tool Would Promote Equity in Tax Code
By Ashley Burnside
The Internal Revenue Service (IRS) has been evaluating a free direct e-file tool to make filing taxes easier, more accessible, and free. This exciting tool would promote equity and ensure that more eligible people can access tax credits and refunds, including the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC).
In addition to providing credits and refunds to qualifying individuals and families, the IRS collects revenue for our federal government to fund essential public goods like schools, roads, and public transportation. But filing taxes can be a headache and requires an average of 8 hours of painstaking steps and about $140 to pay for tax preparation. As a result, many taxpayers file through a paid tax filing tool like H&R Block or TurboTax. Filing taxes is especially burdensome for people with very low incomes, people of color, immigrants, and disabled people due to administrative complexity, cost, and the time required.
The Inflation Reduction Act provided the IRS with funding to evaluate the viability of a free, direct e-file tool for taxpayers administered by the IRS. To gauge this proposed tool, the IRS commissioned focus groups and interviews with taxpayers.
The IRS report about the research concluded that the tool would be feasible to create and popular among taxpayers. In fact, separate polling has concluded that the majority of Americans support an IRS-administered free and simplified filing system. Taxpayers reported trusting a tool developed by the IRS, appreciating that it would be free and secure since it would be administered by a government agency. For example, one interviewee said “I mean it’s the IRS. I definitely would trust it. How would I not, because when you [file through other means] they send it to the IRS… I’m going straight to the source.”
In fact, the IRS has already developed a prototype of the direct file tool, which will be piloted with some tax filers during the tax season in 2024. Taxpayers who tried the prototype said the tool exceeded their expectations of being simple and easy to use – something that most people don’t associate with filing their taxes. One user explained, “It was a lot easier than I expected it to be. I guess when I file taxes, I expect it to be like this super hard, confusing thing.” The pilot program is an exciting and promising first step in assessing the feasibility of the tool.
Creating a direct file tool would promote equity for communities of color and people with low incomes, as well as people who have limited English proficiency and may have difficulty understanding complex tax terminology. The IRS report concluded that people with limited English proficiency were more likely to be interested in a direct file tool.
In tax year 2019, about 1 in 5 taxpayers didn’t claim the EITC despite being eligible. This means that people with low to moderate incomes left money on the table. Research has found that people of color are at higher risk of missing out on claiming the EITC, especially people living in Latinx communities and those who are Native American. CLASP research also found lower rates of claiming the CTC for Latinx families compared to white families. A free, direct tool could help to close these gaps in access.
Black filers are more likely than other taxpayers to be audited, making it even more anxiety-inducing and complicated for individuals to file a return. The disproportionately higher rate of audits among Black taxpayers is almost certainly a consequence of Black people who claim the EITC facing higher audit rates than non-Black filers who claim the EITC, among other factors.
Tax filers with very low incomes would also benefit from a free, direct filing tool. The IRS partners with tax preparation companies to offer a Free File program, but only about 3 percent of eligible tax filers successfully use the service. Paid online tax preparation options like H&R Block have purposely hidden the free version of their services – tricking users who should qualify for these free options into paying.
CLASP encourages the IRS to implement a permanent direct file option. For this tool to be most effective, Congress must invest sustainable funding in the IRS to maintain the technology and provide comprehensive customer support. Policymakers must also maintain the Inflation Reduction Act appropriations to the IRS, rather than divert the funding to other budgetary purposes outside of the IRS. Over time, the IRS should continue testing the tool with taxpayers who are people of color and disabled, along with immigrants, people with limited English proficiency, and those who have low incomes to ensure it is accessible for and centering the needs of these communities.