The IRS is mulling a massive transformation to the way Americans file their taxes.

As Americans prepare for the upcoming filing deadline, the IRS is studying how it could build its own online filing system through which Americans could file their taxes for free.

Such a system could pose a serious threat to tax preparation companies, who’ve long fought against efforts to make the tax-filing system easier to navigate.

While it could be years before the IRS launches an eventual e-filing system, regular taxpayers — along with industry groups and policy organizations — are already starting to weigh in on what they want this new system to be. 

The agency is studying how it could build an online e-filing system and is expected to deliver a report to Congress on the issue in May.

After three years of disarray at the IRS caused by the pandemic resulted in backlogs of tax returns and unanswered phone calls, advocates and taxpayers are hoping the new proposals could be a breath of fresh air for the highly complex U.S. tax system.

“This could simplify things, and I’m not opposed to that,” Ilene Miklos, a New York resident and family lawyer, told The Hill in an interview. “You might actually save a lot of money, because you wouldn’t need an accountant to help you. We might put them out of business.”

Miklos said she’s had good experiences with similar online services for Medicare and that she prefers how that online system lays out the figures in her coverage plan to hearing it explained from a person over the phone.

“I received some mail from Medicare and it was confusing to me. It was contradictory. And when I spoke to a human on the phone, they couldn’t explain it to me at all. Then I went into my own account, and I went, ‘Oh, now I understand it,’ ” she said. “It was actually better online.”

What would an e-file system look like?

The first step toward an eventual federal e-filing system is the IRS’s report, for which the agency received $15 million from the Inflation Reduction Act.

The IRS report will look at how much the program would cost, how taxpayers would feel about using it and whether a third-party expert thinks the IRS could successfully build and maintain such a system. 

The IRS has tapped Ariel Jurow Kleiman, a Loyola University law school professor, for the report’s analysis.

Jurow Kleiman declined to comment.

It’s not clear to what extent the report will lay out the actual design specifications for such a platform, but some policy groups have already started coming up with their own ideas and suggestions.

One such proposal from Code for America, a San Francisco-based technology think tank, envisions the program as a smartphone-based app or web platform. The platform would use digital forms that already include data that the IRS already has about taxpayers from previous years’ tax returns.

The Code for America system would likely be limited at first to basic personal income tax-filing and later expanded to more complicated tax forms and situations.

“You start with basic cases that are relatively easy and then you expand out from there,” Gabriel Zucker, a tax benefits policy specialist with Code for America, said in an interview.

“It would be great if eventually it served every taxpayer, but we think it’s important for the IRS to focus on low-income taxpayers with these simple tax situations first,” he said.

How will the IRS verify your identity?

The proposal includes a section devoted to identity verification, an increasingly sensitive area of modern bureaucracy and systems administration due to online risks that include identity theft, privacy violations and the exclusion and mistreatment of marginalized groups of people.

After clearing the identity verification section, filers would then be able to fill out forms that are already partially completed.

Just like with private tax preparation software, information that has a lower likelihood of changing from year-to-year — such as Social Security numbers or the number of people in a household — could just be rolled over for convenience.

“This is all the stuff that the IRS will have from a prior year return, or if there isn’t one, perhaps the year before. If there’s neither, folks will have to start from scratch of course, but this is the kind of thing you can have pre-populated for review,” Zucker said.

This part of the software could also calculate the applicability of certain common tax credits, such as the earned income tax credit and child tax credit, without having to fill out additional forms.

The last section would comprise review pages to see final payment information, as well as a consent page for third-party filers.

How IRS e-filing could transform the tax preparation industry

A free federal tax-filing system could represent a paradigm shift in the way normal people file their taxes and sap a major source of profit for the tax preparation industry.

The tax preparation service industry cost taxpayers and companies $11.3 billion in 2019, which was paid out to more than 100,000 individual businesses, according to a report from Los Angeles-based market research firm IBISWorld published on the General Services Administration website.

The two biggest companies in that industry are Intuit, which controls 22.1 percent of the market, and H&R Block, which controls 19.6 percent.

Until recently, these companies participated in an agreement with the IRS, originally containing a noncompete clause, through which lower-income taxpayers could use their software for free. 

But this agreement, called the Free File Alliance, was heavily criticized for sidetracking people onto commercial payment options. Last year, the Federal Trade Commission sued Intuit for what it called a “deceptive” free filing ad campaign.

Will the IRS e-filing system work for complicated tax returns?

For taxpayers with multiple streams of income and more complicated tax situations, the appeal of a personal accountant or tax preparer is perhaps unlikely to be diminished by whatever the IRS proposes to Congress.

“This makes a lot of sense, but I feel like where we are now, I definitely need to have an accountant, though it would be great if I didn’t have to,” Jill Rousseau, a stay-at-home parent in New York who rents out rooms in her property, said in an interview with The Hill. “Our taxes are really complicated and if we ever got audited, I would want to have an accountant to be able to work us through that and make sure that everything is correct.”

“It’s complicated to figure out,” she said.

Some veteran tax preparers don’t expect an online e-filing system to make a major impact.

Joseph P. Marino, who’s been working at an H&R Block for 36-years in Brooklyn, told The Hill he hasn’t been briefed on the forthcoming e-filing report from the IRS and that he hadn’t heard anything about it.

“Tax law changes every year and that’s a given,” he said. “I’ve been sitting at the same desk, the same seat, and I don’t expect to move anywhere.”

Marino said that the most significant change he’d experienced over his long career was the move from filing paper returns to electronic ones. He said he thought the new potential system from the IRS “could be advantageous to the public.”