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Kate Linebaugh: Hey, it's Kate. We have a new reporter on our team, Jessica Mendoza. She's hosting today's episode. Here she is.

Jessica Mendoza: I'm curious, who taught you how to file your taxes?

Richard Rubin: I'm not sure I ever really learned. I learned mostly about taxes from writing about them.

Jessica Mendoza: Our colleague, Richard Rubin, covers US tax policy. What is your favorite tax reference in pop culture?

Richard Rubin: I was listening this morning to a song by the band Cake where they go, "You'll receive the federal funding, you can add another wink." It's like the perfect song to write about taxes too. It's about where the money comes from and where it goes.

Jessica Mendoza: The US tax system is something everyone loves to hate on.

Speaker 1: Sir, why did you wait until the last minute to pay your taxes?

Speaker 2: Because I'm an idiot. Happy?

Richard Rubin: The US is weird, right? The US, unlike a lot of other countries, has a very complicated income tax system, which makes my job fun, but I think it's something that people approach with a fair amount of trepidation.

Jessica Mendoza: Yes. Fun for rich, less fun for the average tax paying American.

Richard Rubin: Yes. I think, look...

Jessica Mendoza: Filing your taxes is probably never going to be fun, and it can also be expensive, but that might be about to change. This week, the IRS said it's planning to pilot a new tax filing system. And if people like it, it could make tax season more bearable and disrupt the tax prep industry.Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, May 18th. Coming up on the show, how the IRS wants to change the way you file your taxes. Every year when tax season rolls around, Americans tend to do one of two things: they sit down and do their taxes themselves, or they pay someone else to do it.

Richard Rubin: You probably stick to your pattern, right? If you do TurboTax or H&R Block or Jimmy's Tax Service down the street or your uncle's favorite accountant, you get in that habit and you keep doing it. It becomes somewhat familiar, like raking the leaves in the fall or whatever. I can use the fancy expensive leaf blower thing, or you can do it by hand. You can rake them all up with a manual rake and you don't really think a lot about it.

Jessica Mendoza: When the government started collecting income taxes about 100 years ago, only high income Americans needed to file, and they would often have a personal accountant file the return to the IRS. But in the 1940s, the US had a war to pay for, so the government started taxing more Americans.

Richard Rubin: It was really World War II that turned it from what some have called a class tax into a mass tax, where you had just the bulk of Americans all of a sudden needing to file tax returns. It's in that World War II and post-war period where income tax filing became something that lots of people had to do every year.

Jessica Mendoza: As more people paid income taxes, the government also started offering them tax breaks, like you can get a tax cut if you have children or if you paid college tuition. As a result, the tax system became really complicated and harder for people to navigate. Private companies saw this as an opportunity. Two companies in particular came to dominate the tax prep industry, Intuit, which owns TurboTax, and H&R Block.

Richard Rubin: H&R Block is the granddaddy of tax prep companies. H&R Block was perfectly timed to meet that growing demand that was coming in that post-war period when the income tax was expanding and becoming much more of a cultural phenomenon and a necessity for the government.

Jessica Mendoza: These companies offered services usually for a fee. They made it easier for taxpayers to fill out and file their tax returns. But once these returns got to the IRS, things would slow down.

Richard Rubin: IRS used to have processing centers all over the country. Last year I went to one of them, this enormous building, and there were carts full of paper returns that had come in. They were just on the cart gradually rolling their way toward literally where people would take the return out, sit there with a red pen, circle the key numbers on the return, hand it down to the next person on the assembly line, whose job is to then look at the red pen circles, type those numbers into the system.

Jessica Mendoza: While the IRS was still processing paper returns, tax prep companies had started building software to help people fill out their tax forms.

Richard Rubin: In the 1990s, the IRS was saying, "Oh, there's these things called computers that's going to be a lot more efficient than giant piles of paper." The IRS was thinking, ooh, we've got these giant facilities. We've got truckloads of mail coming in. This does not seem like a modern tax filing service. We should upgrade it. How should we do it?

Jessica Mendoza: The answer they came to was to partner with companies that were already working on these online services, and for a while the partnership worked because, Rich says, people like the handholding.

Speaker 3: First, tell us a bit about yourself and we'll customize the questions to you, saving you valuable time. They're simple questions that don't require tax knowledge to answer like, did you get married, or did you buy a house?

Richard Rubin: That Q&A format that the accountant software or tax preparer uses is really useful because they're an interpreter between the government, this very complicated tones of tax documents, and you.

Jessica Mendoza: There was one important detail to the partnership between the IRS and tax prep companies. The Intuits and H&R Blocks of the world could charge customers a fee. These days it can cost as much as $200 to use their services, but the companies were also supposed to let some people use a free option. For example.

Richard Rubin: If your income is below $73,000, you can go to the IRS Free File website, and that's basically a portal through which you can use private company's tax software and that's free.

Jessica Mendoza: That was the deal, but it turned out that's not what was always happening. A 2019 ProPublica investigation found that some of the big tax prep companies were making it so complicated to get to the Free File service that some people ended up paying for tax prep even when they didn't have to. That got the companies in trouble with a number of states and the Federal Trade Commission.

Speaker 4: Yes, they said free, free, free on the website, but in fact, you had to pay once everything went through.

Richard Rubin: Intuit, which owns TurboTax, is paying out a legal settlement because it had been sued for guiding people away from the IRS Free File program into some of its paid services.

Jessica Mendoza: After it was sued last year, Intuit had to pay $141 million to people who should have been able to file for free, but paid for their services instead. Intuit did not admit any wrongdoing in the settlement.

Richard Rubin: I think that just led to a lot of frustration among Democrats like Senator Elizabeth Warren, Senator Tom Carper who've been interested in this.

Jessica Mendoza: These lawmakers say Americans aren't served well by these companies, and they started asking how the IRS could do better. In 2022, when Congress passed the Inflation Reduction Act, the bill included $80 billion for improvements to the IRS, and it asked the agency to explore what a new government tax filing system could look like. On Tuesday, the IRS released its report.

Richard Rubin: It's a report that says, okay, could the IRS do its own software, its own version effectively of TurboTax and H&R Block? That's the fundamental premise of this report is, could the government just do this? How much would it cost and would people want it?

Jessica Mendoza: That's after the break. After releasing its report this week, the IRS said it would test a new system for filing taxes directly with the government. The agency called it Direct File.

Richard Rubin: I think it's designed to be something that's more like TurboTax in H&R Block.

Jessica Mendoza: Theoretically, the IRS could use the information it already receives to autofill some tax returns, though this wouldn't be something they'd do until much later.

Richard Rubin: The IRS has from your employer your W-2. They know whether you have children. They know what your address was. The bigger killer IRS app is really what they call a pre-populated return, where the IRS takes the information it has about you, drafts your 1040, sends it to you and says, "Hey, does that look good? Sure? Done."

Jessica Mendoza: Is this new IRS filing system meant to replace what the private sector currently has in terms of options?

Richard Rubin: Well, IRS Commissioner Danny Werfel was telling reporters this week that it's not intended to replace or become the only way that you can file it, and they're not going to ban you from using TurboTax or an accountant. You can have whatever professional assistance you might want. Their aim is to just provide this as a public portal, a public service for people to use.

Jessica Mendoza: Would it be free to use?

Richard Rubin: Yes. It's absolutely designed to be something that's a free government service.

Jessica Mendoza: What problem is the IRS trying to solve with this new tool

Richard Rubin: They're trying to solve the problem that is lots of Americans pay for access to what some people think should be a core government service. The ability to file your tax return in an easy way to meet your obligations as a taxpayer should be something that the government lets you do in a straightforward way and enables that. They're basically trying to offer a public service that is now not really available, but which you might think you would expect the government to provide.

Jessica Mendoza: But before the IRS can roll out a new tax filing system of any kind, it will have to overcome some pretty major challenges.

Richard Rubin: One thing that the IRS recognize as it developed this report was the importance of customer service. That if people are on their compute at... Hopefully people will file promptly. But if it's 11:30 on April 14th and you're sitting there trying to figure out what you're doing, is there going to be someone there either via chat or via phone who can help you?

Jessica Mendoza: Another challenge, what to do with state taxes?

Richard Rubin: This is relatively easy for someone in Florida or Texas or a state that doesn't have an income tax filing requirement. But for people in New York, New Jersey, California, Minnesota, wherever, it is going to be a little trickier. How useful is this IRS tool going to be if you then have to go figure out some way to file your state taxes?

Jessica Mendoza: I'm thinking about that now and I'm like, I don't want to do that.

Richard Rubin: You don't want to do that, right? It's something they've got to figure out as they go forward is how well can they interface with state systems so that this provides the benefit it's intended to provide.

Jessica Mendoza: The IRS estimates that the whole project could cost between 60 million to $250 million a year depending on how many taxpayers use it. And not everyone is convinced it's a good idea or that the IRS can pull it off.

Richard Rubin: Republicans are very skeptical of this. They've argued that the IRS has other things it can do. They point correctly to a track record the IRS has that is quite mixed on information technology projects. There have been occasional times when personal data has been exposed for various reasons. There's legitimate concerns about privacy and security, as there are with private companies too, but that's something that you hear people raise concerns about.

Jessica Mendoza: Critics are also concerned about the government's incentives. Would the IRS want to maximize taxpayer refunds when it's also the agency in charge of collecting taxes?

Richard Rubin: Republicans are much more receptive than Democrats to this concern about the IRS being on both sides of the transaction, the IRS helping prepare the returns and then audit them. I expect a fair amount of political back and forth in the coming months over this.

Jessica Mendoza: Private companies are also fighting the IRS's proposal.

Richard Rubin: They've been increasing lobbying spending over the past year, and they're trying to persuade lawmakers, if not to intervene, to at least ask a lot of hard questions of the IRS. They're basically arguing that this is not necessary, that the system that we have now works well and that the IRS should focus on other things.

Jessica Mendoza: The IRS plans to build a version of Direct File and let some people try it out during the next tax season. Based on your reporting, how likely is it that this will actually turn into a system that the IRS winds up adopting?

Richard Rubin: I don't know. I think the extent to which the Biden administration and Democrats are in charge of the Treasury Department enabled to nudge this thing forward. They've indicated a pretty clear interest in trying to make something like this happen. But I think it also is just going to depend on how it's perceived.

Jessica Mendoza: But while the IRS pilots its idea, most of us will still have to do our taxes same as always.

Richard Rubin: For a lot of people, this is a chore and they're going to get the chore done. And if they have a government tool to do the chore, that's great. And if they got to pay for a private tool to do the chore, so be it. But this is really about your obligations as a citizen and a taxpayer. It still can be a very nerve-racking experience in part because you know that if you get something wrong, there are real consequences.

Jessica Mendoza: That's all for today, Thursday, May 18th. The Journal is a co-production of Gimlet and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.

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IRS Might Make Tax Season a Whole Lot Easier - The Journal ... - The Wall Street Journal