IRS Online Tax Filing Program Faces Challenges, Including Building Trust

Last month, the IRS got folks talking when it announced it was launching a pilot program for a free direct online tax-filing service. The announcement was part of a report to Congress offered in response to a mandate in the Inflation Reduction Act of 2022.

IRS E-File System

According to the report, the IRS has spent several months studying how an IRS-run free direct e-file tax return system might work. The IRS noted that it “is committed to delivering significantly improved services by providing taxpayers with tools, information, and assistance to make it easier to comply with their tax filing obligations.” Most taxpayers surveyed by the agency reported interest in using an IRS-provided tool to prepare and file their taxes. The IRS hopes to make that a reality for some taxpayers for the 2024 tax filing season.

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Key to the process is the taxpayer experience. The IRS reported that the amount of time Americans spend record-keeping, gathering tax materials, filling out their taxes, and other tax-related activities makes up approximately 71% of all federal paperwork burden annually. And on average, including all associated forms and schedules for non-business income, individual taxpayers spend approximately eight hours and $140 preparing their taxes each year.

So how do you make that better? Jordan Burris, Vice President for Public Sector Strategy at Socure, says that it should involve working to include accessible and equitable digital identity verification that doesn’t cause friction for tax filers from the start.

Burris understands the challenges of incorporating technology in a government setting. Before his role at Socure, he served at the intersection of policy and delivery as the Chief of Staff in the White House Office of the Federal Chief Information Officer, where he was responsible for technology and cybersecurity efforts across two presidential administrations. Burris also has experience on the tax side—he previously worked for Deloitte, helping commercial and public sector clients improve cybersecurity risk management practices.

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IRS is working with what Burris refers to as “legacy tech”—older systems that have proved challenging for the agency. That could change with the infusion of cash expected due to the Inflation Reduction Act (though some of those funds were clawed back under the recent debt ceiling agreement). But while there is interest in modernizing, Burris says, “It’s not going to be cheap.”

Still, he believes that by incorporating some key processes, the IRS could build a system that could better serve taxpayers—a goal that IRS Commissioner Danny Werfel has often vocalized, including at his confirmation hearing.

Simplifying Systems

No matter how great a new system might be, it’s useless if taxpayers don’t feel comfortable using it. That means, says Burris, that IRS should aim to simplify gaining access to the technology. The longer taxpayers have to wait for anything—from refunds to filing—the more they worry that something is not right. Delays dissuade trust in the system.

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Simplifying the experience would encourage taxpayers to use the online tools built by the IRS, including a filing platform. But, even as lawmakers clamor to ensure data integrity, Burris says that having a system that could automatically verify your ID does not have to come at the cost of security. It’s a false choice, he says, to suggest that you can’t have security and a seamless user experience. This is something that many other systems, including those at financial institutions, manage quite nicely—that hasn’t gone unnoticed by Werfel.

Identity Verification

When you sign onto the bank app on your phone, you trust that you can access your information immediately and that it will be secure and protected. Burris says that verification for the IRS platform should be similarly easy. “If done right,” he says, “you can verify your identity in less than a second.”

Unfortunately, identity verification has been a problem for the IRS. Last year, taxpayers expressed concern about systems put in place by ID.me, an identity verification company with an $86 million contract, that relied heavily on biometrics like facial recognition. Amid the public outcry, the IRS announced it would stop using facial recognition software, offering the option for taxpayers to verify their identity during a virtual interview as part of the authentication process.

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Other concerns focused on the difficulties that certain populations, including those without credit cards or mortgages, face when confirming their identities. Included in that population? Gen Z consumers. That’s because so much of the identification process is linked to what Burris calls the “credit ecosystem.”

There are, Burris says, other markers that can be used to verify those identities. His company, Socure, uses data analytics to help verify identities outside of that ecosystem. They can, he says, now verify more than 70% of 18-year-olds opening their first accounts—a giant leap from the 30% baseline.

Data Analytics

The IRS already relies on some data analytics. If you’ve received one of those ID verification letters—the IRS identified nearly 1.1 million tax returns as potentially fraudulent as of March 2—you’ve been impacted by data analytics. Specifically, the IRS uses fraud filters to identify potential identity theft returns. For the 2023 filing season, the IRS used 236 such filters to analyze return info and incorporates criteria based on characteristics of confirmed identity theft returns, including income and withholding, filing returns, prisoner status, age, and filing history.

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If that sounds scary, consider that you regularly use apps and platforms that rely on data analytics. When Netflix
NFLX
recommends a show to you, it’s based on your views and likes, as well as certain demographic information. Ditto for what you see on social media sites—Facebook recommended that snuggly for you because your patterns suggested that you might be interested in a hooded blanket.

Of course, data analytics raises questions about data storage. Taxpayers rightfully have concerns over what kinds of data might be collected and what it might be used for—as well as whether it’s secure. But analyzing particular kinds of data can actually help protect taxpayers, Burris says. For example, a change in a taxpayer’s footprint can signal that something is wrong. And the presence of specific characteristics can point to fraud more quickly—precisely the kinds of things the IRS relies on now for fraud verification.

But the IRS will need to be upfront with taxpayers about the kinds of data it would handle—and what would happen to it. We are a data-saturated society, and that’s not going to change. Things tend to go wrong, Burris says, when you’re not transparent with respect to your data. Being upfront about data collection and security would be essential when building taxpayer-friendly platforms, including tax filing services.

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One Stop Shopping

What else could the IRS do to make the process easier? Burris suggests keeping the client on the government website rather than redirecting taxpayers to other sites. Studies show that when customers—not coincidentally, also a term Werfel has used to refer to taxpayers—are rerouted from a website, they are more likely to abandon their efforts. That’s why PayPal
PYPL
, used for payment processing on some retails sites, uses a pop-up screen, and credit card companies process directly on the page—shopping sites don’t want you to have to step away from your cart for even a few seconds.

Tech Solutions

The IRS must also allow taxpayers options for resolving difficulties that do not make the process more time-consuming. One of the big complaints from taxpayers has focused on requirements for in-person visits. When the IRS cannot verify identities, one solution is to visit an IRS office. But many taxpayers, including seniors and international taxpayers, can’t easily access the IRS offices. Tech processes should have tech solutions. Burris says that if done right, taxpayers would not encounter friction verifying their identity or accessing the site.

Thinking in advance about what could go wrong and how to keep taxpayers engaged in the process must be at the forefront of building a filing system. It won’t matter how good a free direct e-file tax return system might be if taxpayers can’t easily click through from start to finish.

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