Republican state officials urge IRS to end free tax-filing pilot program

Nearly two dozen state officials are calling for the Biden administration to terminate a new free tax-filing program by the IRS.

Indiana State Treasurer Daniel Elliott led a letter to Treasury Secretary Janet Yellen and others from 21 state Republican financial officers arguing against the pilot program. They argued the IRS Direct File program is “a solution in search of a problem” and specifically raised concerns about its effects on state tax returns.

The group argued the Direct File program “will create challenges for taxpayers and state treasurers and the costs of Direct File far outweigh any potential benefits it may confer to taxpayers.”

In the letter, the state financial officers contend that because the Direct File system only handles federal tax returns, residents might be unaware they also have to separately file state returns and could miss out on state tax refunds or face penalties for not filing at the state level.

“This is significant because many taxpayers who use Direct File are likely to be lower-income and build budgets around anticipated tax refunds,” the officers wrote in the letter. “Even worse, confused taxpayers who neglect to file their state returns will be at risk of incurring state penalties.”

“Imagine the surprise to the taxpayer who becomes subject to audit by the IRS after having filed through Direct File and having felt assurances that the tax return was prepared properly through the IRS’s own system,” the officials added.

Just under a year ago, the IRS announced plans to launch a pilot program for a free agency-run electronic filing system. After several weeks of testing, the pilot software is now available in 12 states, according to the Treasury Department.

During the rollout, treasury officials noted that other countries have had free tax-filing options for years now.

“American taxpayers who want to file their taxes for free directly with the IRS should have that option,” Deputy Secretary of the Treasury Wally Adeyemo said during a press call this month.

But tax preparers, who stand to lose business from the move, have pushed back vigorously against the Direct File pilot.

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“With more than 30 organizations already offering free tax preparation, this pilot is unnecessary and faces significant barriers to providing comprehensive tax preparation services,” tax preparation giant H&R Block said when the pilot was announced. “H&R Block remains committed to helping millions of Americans get the best outcome at tax time.”

Tax-filing season began on Jan. 29 for individual tax returns. April 15 is the deadline for filing a tax return or to request an extension in most states.