What to know about the IRS's tax filing experiment : The Indicator from Planet Money With tax season upon us, many people are paying someone or a software to get their tax returns done. A small group of people, however, are filing online directly with ... the IRS. For free. Today on the show: how the IRS's tax filing experiment came to be, how it's been working so far, and who doesn't like it.

The IRS wants to do your taxes for free. Will it last?

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This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods, and I'm here with NPR's economics correspondent Scott Horsley. Welcome back to the show, Scott. It's been a while.


Yeah. And it's great to be back with you during this countdown to April 15, tax deadline day...

WOODS: Yes, indeed.

HORSLEY: ...In most of the country. Last-minute filers are scrambling to get their returns finished. Tens of millions of early birds have already collected their refunds. Which camp are you in, Darian? Have you done your taxes yet?

WOODS: I am one of those early birds. I got a federal tax bill, a state refund. It kind of balanced out, but then of course I had to pay the software, so I wasn't really coming ahead.

HORSLEY: Good for you though. Yeah. We had a rainy weekend here in Washington not too long ago, and I was able to get that out of the way.

WOODS: And we've talked before on this program about how challenging and costly it can be to navigate the tax system. And this year, a small group of people are trying something new. They're filing online returns directly with the IRS for free.

HORSLEY: I like the sound of free indeed.

WOODS: Yes, indeed.

HORSLEY: So far, though, this is just a small experiment. The IRS is only offering its free Direct File service in a dozen states, and only to people with relatively simple tax returns.

WOODS: The service is getting powerful pushback, though, from the multibillion-dollar tax prep industry and its allies in Congress. Here's how West Virginia Republican Carol Miller put it at a recent hearing with the IRS commissioner.


CAROL MILLER: I mean, you've got to be kidding me. Nothing is free. Everything the U.S. government does is paid by taxpayer dollars. I don't think you should be wasting your millions of dollars when the private industry is doing a good job.

WOODS: Some strong words there, meaning a full rollout could be shaky.

HORSLEY: Yeah. This is going to be a fight for sure. Today on the program, we're going to look at how this new IRS tax filing experiment was cobbled together, how it's been working so far and the prospects that more people might be able to file their taxes for free in the future. That's coming up after the break.


HORSLEY: Doing your taxes can be complicated. That's why so many people pay someone, or pay for some commercial software, to help. We spoke with Marina Garcia. She used to tag along with her immigrant father every year when he'd go to one of many storefront tax prep offices that pop up near Mexican supermarkets in Texas every spring.

MARINA GARCIA: I remember because I was always a translator for my parents going into a hole-in-the-wall tax office.

WOODS: And today Marina works with a nonprofit in Texas that tries to promote financial health among low- and middle-income families. That includes helping people with their taxes. And she says she knows a lot of people who are intimidated by the process and reluctant to complete their tax returns on their own.

GARCIA: The issue is not a lack of interest. It's a fear that if you don't feel confident enough, you don't want to screw up. You don't want to owe the IRS, or you don't want to do something wrong.

HORSLEY: She says that's why people end up paying a lot of money for someone to lead them through this tax maze. You know, the average taxpayer spends about $140 a year on tax preparation. Marina says some people pay a lot more.

GARCIA: I was just talking to my best friend, and I said, have you file your taxes? She goes, no, I went to this lady. I said, how much did she charge you? She told me she paid $450 for a lady that her sister knows, and she just had a baby. And I said, that's $450 that you could have kept for your household expenses.

WOODS: Marina felt like a free tax prep service would be a godsend for a lot of people. But before she could recommend it, she had to check it out for herself. So a few weeks ago, she sat down to do her own taxes using the new IRS Direct File program.

HORSLEY: The website offers simple instructions in both English and Spanish. It asked taxpayers a series of questions and then it tells them where on, say, their W-2 form, they can find the answers. Marina says the program was similar to the H&R Block tax software she's used in the past, but without those pesky pop-up messages urging her to upgrade to a more expensive version of the service.

GARCIA: I kid you not, from the point I get started on H&R Block, by the time I hit submit, there's probably four to five different redirect ads - I mean, are you sure you don't want to upgrade? - are you sure you don't want to upgrade kind of thing. No thank you. I'm not going to keep upgrading my, you know, package or whatever.

HORSLEY: Now, we should mention here the commercial tax preparers say they do offer a free service to about 30 million customers every year. But like that H&R Block service Marina used, they get a lot of complaints about aggressive upselling. In fact, two years ago, TurboTax paid $141 million to settle complaints from state attorneys general that it tricked customers into paying for returns that should have been free. The company did not admit to any wrongdoing.

WOODS: Commercial tax preparers agreed to offer the free service back in the George W. Bush administration, and in exchange, the IRS agreed not to compete by offering its own free service. For most of the last two decades, the agency was so cash strapped it couldn't compete even if it wanted to. Now, though, that's starting to change. Two years ago, when Democrats were in control of Congress, they gave the IRS tens of billions of dollars to beef up tax enforcement, to hire more customer service representatives and to modernize its outdated computer system.

HORSLEY: And Congress also set aside a little sliver of that big new IRS budget, $15 million, to study the idea of launching this Direct File program. In surveys, nearly 3 out of 4 taxpayers said they'd be interested in filing online returns directly with the government for free. And so this year, the agency decided to experiment with this small pilot program.

WOODS: And it's small for a reason. The government doesn't have a great track record rolling out big online services. Remember when people rush to sign up for Obamacare and the crashing website became a bitter punchline?


JON STEWART: The [expletive] calculator doesn't work? The one thing that's been included in computers since 1972?

WOODS: Nobody wants a repeat of that digital disaster. So the IRS is deliberately taking a go-slow approach with its new tax filing experiment. For now, the program is only available in 12 states and only for people with straightforward income and standard deductions.

HORSLEY: The IRS is hoping something like 100,000 people will try the software this year - not exactly a threat to the commercial giants that process tens of millions of returns. Still, the tax prep industry is pushing hard to defend its market and prevent the government's free software program from getting a foot in the door.

DAVID RANSOM: We think Direct File is costly, confusing and unnecessary.

WOODS: David Ransom is a lawyer who represents the paid tax prep industry in Washington. David complains that building and maintaining the software will cost the government up to $249 million a year.

RANSOM: We regard this as a distraction and resources that could be put to better use through customer taxpayer service.

HORSLEY: David also raised a question that came up in the government's own surveys, will people trust the IRS to find every tax break they've got coming to them?

WOODS: They are the nation's tax collector, and their job is to collect tax revenue. The notion that you would put the tax collector in charge of tax preparation fundamentally causes concerns and potential conflicts of interest.

WOODS: IRS commissioner Danny Werfel has said repeatedly no one will be forced to use the Direct File system. If you like the accountant or the software you're already using to do your taxes, Danny says you can keep them.


DANIEL WERFEL: What we heard from taxpayers, and we heard it pretty loudly, was that there was an interest in having an option where they could file directly with the IRS for free.

HORSLEY: When this tax season is all over, the IRS will assess how the Direct File program worked and whether it might be expanded in the future to people in more states and with more complicated returns. There's no guarantee, though. Congressional Republicans keep trying to chip away at the IRS budget, and there could also be legal challenges over the government's authority to run the program. Still, Marina Garcia says she's sold.

GARCIA: If it sticks around for the rest of my working life, I'm doing business directly with the IRS. I don't have to go to a third party. I don't have to pay. It's straightforward. It's easy peasy.

HORSLEY: Marina thinks a lot of other taxpayers will also want to give the program a try, so long as there's enough hand-holding to get them past those initial nerves.

WOODS: This episode was produced and fact-checked by Angel Carreras with engineering by Neil Rauch. Kate Concannon is our editor. And THE INDICATOR is a production of NPR.

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