June 21, 2023

Concerns Raised Over IRS-Run Tax Filing System: A Deeper Look

The Internal Revenue Service (IRS) is currently under scrutiny for its initiative to develop a government-operated tax filing system, raising alarms over potential overreach of power. The American Accountability Foundation (AAF), a conservative watchdog organization, has begun an investigation into the matter. Public records requests have been made to the IRS and the Office of Management and Budget regarding the formation of this IRS-led electronic tax filing system, colloquially known as “direct file.”

In the wake of the Inflation Reduction Act, a substantial Democrat-backed spending bill enacted last year, $15 million was allocated for the IRS to explore the establishment of a cost-free direct tax return system. However, concerns have arisen as it has been revealed that the IRS was covertly crafting a prototype of the direct file before presenting its report to Congress.

Daniel Werfel, IRS Commissioner, assured lawmakers repeatedly over the past two months that no final decision had been made about the direct file. His stance was that the agency would consider the matter, engage with Congress, and await the report’s findings to decide the future course of action.

Critics voiced their disapproval after discovering that the IRS already had a direct file prototype before its report and the third-party study were published. The early existence of the prototype suggests that the decision may have been predetermined, raising questions about the IRS’s intentions to follow Congress’s instructions for the study to be carried out impartially and independently.

The proposed direct file system’s supporters argue that it would be free, user-friendly, and efficient, allowing taxpayers to file directly with the government. In contrast, its critics warn that such a system would consolidate too much authority in the IRS’s hands, echoing the notorious technical issues that affected the government-operated Healthcare.gov.

The IRS justified the prototype’s early construction, explaining that it was only meant to supplement survey data to gather taxpayers’ opinions about a direct file system. Nevertheless, the AAF’s Freedom of Information Act requests aim to shed light on what exactly is happening behind the scenes with direct file.

The debate continues as Republicans and other critics voice concerns about an increase in the IRS’s audits, particularly those targeting low and middle-income Americans. This follows the additional resources granted to the IRS by the Inflation Reduction Act. However, both Werfel and Treasury Secretary Janet Yellen assure that audit rates for small businesses and households earning less than $400,000 will not exceed historic levels.

As the IRS moves forward with its direct file system pilot to test the program, the tax preparation industry faces potential disruption. Meanwhile, the IRS’s final report findings indicate that a majority of taxpayers favor the option to file their taxes free of charge directly with the IRS. Yet, this assertion is disputed by a study from the nonpartisan MITRE Corp, which found that direct file was relatively unpopular among Americans compared to private software or an IRS-automated tax filing system.

With differing views on the matter, it remains to be seen what the future holds for the IRS-run tax filing system.