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Inflation Reduction Act Brings IRS One Step Closer to Free Tax Filing

Taxpayers in the United States will be one step closer to having access to a government-operated electronic free-file tax return system as a result of the passage of the Democrats’ signature climate change and health care plan, which President Joe Biden will soon sign into law.

Legislators and advocates have been working for years to secure this particular outcome. Many people in the United States find it aggravating that, in addition to having to pay sometimes hefty tax bills, they must also pay additional money for tax preparation programmes or preparers. This is because the tax system in the United States is becoming an increasingly complex system.

During a hearing in June before the Senate Finance Committee, the Secretary of the Treasury, Janet Yellen, stated that “it’s clearly something we should do, and when the IRS is adequately resourced, it’s something that will happen.”

And now that the Internal Revenue Service (IRS) is going to get almost $80 billion under the so-called “Inflation Reduction Act,” the agency has the wherewithal to design new systems to help Americans pay their taxes since it can receive nearly $80 billion. On Friday, the bill was approved by the Congressional body.

There are several obstacles in the way. Even if everything goes perfectly, it will probably be several years before a brand-new, cost-free system is fully operational.

There is opposition coming from commercial tax preparation companies as well, which raises the question of whether or not Americans want the IRS to prepare their taxes.

The Free File Alliance is an agreement between the Internal Revenue Service (IRS) and several commercial tax preparation companies that prevent the federal agency from developing its very own free tax return filing system.

This agreement is perhaps the most significant barrier. In a nutshell, the IRS promised to refrain from developing its own filing system in exchange for businesses’ promise to offer free services to taxpayers with annual incomes of $73,000 or less.

However, this initiative has been mired in controversy due to low levels of taxpayer engagement and commercial companies that have been shown to have exaggerated claims about the services they provide.

The Government Accountability Office reported in April that while 70% of taxpayers were eligible for services through the Free File Alliance, only 3% of taxpayers actually use the service.

This is even though 70% of taxpayers were eligible for the services. The watchdog organisation suggested that the Internal Revenue Service investigate additional free filing options before the Alliance’s expiration in October 2023.

The Internal Revenue Service will have the ability to develop a new system thanks to the cash included in the measure.

A provision that provides the Internal Revenue Service with $15 million to use toward the development of a free direct e-file tax return system is included in this legislation.

These plans would have to be prepared over the next nine months, and they would need to contain cost estimates for both the creation of a system and its administration. They would also demand input from the general public.


Additional efforts are being made in the legislative arena to advance this objective.

In July, Massachusetts Democrat Senator Elizabeth Warren reintroduced legislation known as the Tax Filing Simplification Act.

If passed, this legislation would require the Internal Revenue Service (IRS) to establish its own free online tax filing service and discontinue its partnership with private online tax preparation businesses.

An image of a completed IRS Form 1040 appears on the screen of a laptop computer while it is being prepared for electronic filing.

“I’ve been pushing for a free tax filing system for years, and now the IRS is on the verge of having significant funding to modernise its IT systems,” Warren said in an interview with the Associated Press.

“This means that it’s time to develop simplified filing tools laid out in my Tax Filing Simplification Act,” he added. “I’ve been pushing for years for a free tax filing system.”

It takes too much time and money for Americans to submit their taxes; the Internal Revenue Service ought to take on board these suggestions to assist millions of taxpayers in filing their returns and claiming their refunds.

During her presentation before the Finance Committee, Yellen advocated for the implementation of a new system.

She stated that there is “no reason in the world” why a contemporary economy should not have a system that makes it simple for such a huge number of taxpayers to file their returns.

Senior fellow at the Urban-Brookings Tax Policy Center Vanessa Williamson stated that “if the Internal Revenue Service moves forward with a free product, it might save lower-income households the money that they used to send to H&R Block or TurboTax.”

According to Williamson, “Tax preparation companies are notorious for deceiving tax filers into paying for services they should be getting for free,” and he went on to say that “an IRS free file service would be a very welcome step that would save Americans money.”

In 2019, ProPublica published an article on the efforts made by Intuit’s TurboTax and H&R Block Inc. to mislead taxpayers away from the federally backed free services for which they were eligible. And in May, the Attorney General of New York, Letitia James, was successful in negotiating a settlement worth $141 million with Intuit Inc. of Mountain View, California. As part of the agreement, Intuit was required to make payments of restitution to several taxpayers.

Intuit resigned from the Alliance in July 2021, citing in a blog post the fact that the company could continue to supply its benefits despite the constraints imposed by the Free File Alliance. In 2020, H&R Block terminated its participation in the collaboration.

According to Derrick L. Plummer, a spokesman for Intuit, “the majority of Americans do not want the tax collector to also function as the tax preparer.”

“The Internal Revenue Service already has a primary goal that it has to focus on,” he added, “and the creation of a new system would cost billions of dollars in public money and put the financial independence of millions more people in jeopardy.”

In response to a request for comment from the Associated Press, H&R Block did not provide a spokesperson for the company.

The Internal Revenue Service will require the use of face recognition scans to obtain tax returns.

For you to access your online tax information after the Internal Revenue Service rolls out its new programme, you will be required to have your face scanned as well as disclose other information about yourself. (Fox Edge is the source)

Studies have already begun looking at potential formats for a free-file scheme that would be controlled by the government.

Bruce Sacerdote, an economist at Dartmouth, has researched taxation systems in various countries and found that in many of these nations, people are not required to submit as much information on their electronic tax forms since the government has already completed this step.

“The IRS has great amounts of information on salaries and dividends,” he said, adding that a government-supported tax filing system “might be a good thing.” “The IRS has tremendous amounts of information on wages and dividends,” he said.

These kinds of systems are utilised in nations like Germany and Japan, which are both members of the Organization for Economic Cooperation and Development and work together to formulate economic policies that are designed to stimulate economic expansion.

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According to what he had said, “as a taxpayer, there could be a significant benefit to pre-population.” “The process of filing taxes consumes a significant amount of time. Given all of the information it possesses on taxpayers, the IRS could easily send you a return that is already filled out and signed.”

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