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The IRS should stay out of the tax preparation business. Before explaining why, let me tell you how we got here.
In May, the IRS released a report on the feasibility of the IRS preparing and filing tax returns. The Democrat-passed, and misnamed, Inflation Reduction Act gave the IRS $15 million to have an "independent third-party" tell Congress whether the IRS should create its own tax preparation software, called a "direct file" program.
The IRS hired a Washington, D.C., think tank called New America, labeled a "left leaning" group by the Washington Post, to help write the 106-page report. That adds up to $141,000 a page. Considering the consultant, the report’s conclusion was no surprise: spend billions, so the IRS can offer tax preparation software that companies with decades of experience already provide for free.
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The plot thickens.
The IRS went ahead with building tax prep software without even getting congressional approval. (iStock)
The day before the study’s release, the Washington Post, citing anonymous sources, reported the IRS had "quietly" built tax preparation software that would be publicly launched in a few months.
Before even giving Congress a moment to review the report, the IRS went ahead with an unauthorized multi-billion-dollar venture into the tax preparation business. New America stated it was paid nothing to create the report. Instead, the $15 million appropriated by Congress to write the report was diverted — in violation of Congress’s explicit instructions — to build tax preparation software.
Considering this sequence of events, the commissioned "report" appears to be less of a study, and more of a rationalization for a predetermined outcome. This is a classic example of government waste and unaccountable bureaucratic overreach.
With that background, here are the most obvious reasons, of many, the direct-file program should be stopped.
An IRS-run direct-file program is not ‘free’ or ‘simple’
According to the report, the possible yearly cost for a new IRS call center is $208 million, and software development and maintenance is $40.8 million. While I doubt those estimates tell the full story, something "free" and "simple" does not have a $208 million annual budget for a call center to solve taxpayer problems and cost over a quarter billion dollars a year to run.
The report also has a "hold on to your wallet" disclaimer: "the cost estimates are subject to considerable uncertainty." The IRS is already plagued with abysmal customer service, which must be fixed instead of worsened with additional complexity of an added system. Even the IRS implicitly acknowledges there is nothing free or simple about this.
Tax preparation industry already provides a free way to file
A statistic proponents of IRS direct file do not want you to know is that in 2022, the private tax preparation industry prepared and filed more than 27 million free returns and also provided customer support for free. An additional 3 million free returns were provided by private industry through the IRS Free File Program. The real problem is more people need to know about these existing free programs.
No state income tax return filing
Unlike current private industry offerings, the IRS’s proposal only covers federal income tax returns. You are on your own to figure out how to file your state income tax return. The glaring absence of a critical piece of tax compliance will cause taxpayers confusion, expense and even more time filling out tax forms.
Before even giving Congress a moment to review the report, the IRS went ahead with an unauthorized multi-billion-dollar venture into the tax preparation business. New America stated it was paid nothing to create the report. Instead, the $15 million appropriated by Congress to write the report was diverted — in violation of Congress’s explicit instructions — to build tax preparation software.
Inevitable mistakes will have terrible consequences
What happens when the IRS’s tax preparation software makes a mistake? The answer? Taxpayers are still on the hook. The IRS preparing your tax return is not a defense. Taxpayers can expect a bureaucratic nightmare, with IRS auditors punishing taxpayers for mistakes made by IRS software developers.
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An inherent conflict of interest
It is unlikely the agency tasked and trained to extract maximum revenue from taxpayers will build software that minimizes tax bills. And taxpayers can never be sure they are being favored or disfavored for using (or not using) the IRS’s offering. Considering these conflicts, it is likely many taxpayers will avoid the IRS software, or conversely, feel compelled to use the software to avoid unwarranted IRS scrutiny.
IRS has a real problem with keeping tax data safe
The IRS has a long history of cybersecurity vulnerabilities and data leaks. For example, a "trove" of private tax files leaked to ProPublica and the Treasury Inspector General for Tax Administration (TIGTA) recently identified nearly 2,000 unaddressed security vulnerabilities on the Child Tax Credit Update Portal and Secure Access Digital Identity system.
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Scores of "critical" IT security recommendations for the IRS from independent government watchdogs like TIGTA remain unaddressed. Direct file would be a new source of vulnerability. A survey in the report confirms taxpayer skepticism.
The IRS has a wide range of issues that the American taxpayer expects the agency to address. The last thing the IRS should be doing right now is diverting resources and attention to an ideologically driven, elective project that is ill-conceived and destined to become the IRS’s next boondoggle.
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