The IRS Continues to Live Down to its Reputation
The WasteWatcher
More than any other federal agency, the Internal Revenue Service (IRS) provides a perennial punching-bag for pundits of all political stripes, and with good reason. As the agency seeks to take away business from private tax preparers by expanding its in-house tax preparation service, subject taxpayers to further collection of their private data, and disproportionately target lower-income taxpayers for audits, the IRS has yet to get its own house in order. This year, as every year, the IRS faces a persistent backlog of unprocessed individual and business tax returns, particularly those filed on paper.
As of October 28, 2023, the agency had 4.3 million returns awaiting processing, delaying the distribution of refunds. These refund delays on returns filed on paper have generally exceeded six months, with some taxpayers experiencing delays of at least 10 months. Adding insult to injury, taxpayers faced severely long wait times when trying to reach the IRS by phone, resulting in frustration and uncertainty regarding their tax obligations and refund status. These processing delays have created unprecedented financial difficulties for many taxpayers, especially those who rely on tax refunds to help pay bills during a time of persistent inflation.
Despite efforts to reduce the backlog, the IRS has not made substantial progress. The agency would need to process more than 500,000 Forms 1040 every week (more than double its pace in 2022) to eliminate this backlog. The shift to remote work during the COVID-19 pandemic was not helpful.
Notwithstanding this abysmal record, lawmakers like Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) have proposed that the IRS act as tax preparer, biller, and collector through an in-house tax preparation system created by the agency. Granting the IRS this power, however, raises concerns about the potential conflict of interest involved in trusting the tax authority to maximize taxpayers’ savings from deductions and credits and opens the door to the large-scale collection of taxpayers’ private data.
The Inflation Reduction Act (IRA) provided $15 million for the IRS to study whether to implement its own tax preparation system, despite the failure of its first attempt at such a service, called Cyber File, which cost taxpayers $17 million and ultimately failed due to inadequate customer service and data protection. But the agency decided to flout the statutory study by rolling out a pilot program for its own service “Direct File,” which is available in 13 states for up to 19 million eligible taxpayers. To date, only 50,000 taxpayers have signed up for the program.
Past regulatory interventions to reduce competition in the tax preparation industry include the agency’s attempt in 2012 to impose licensure requirements on every independent tax preparer in America under the disingenuous justification that they imperiled consumers. This blatantly anticompetitive policy ended when the U.S. Court of Appeals for the D.C. Circuit ruled against the agency in February, 2014, holding that “The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading” of federal law.
Direct File should concern taxpayers who prefer to avoid a tax collector ridden with conflicts of interest, data breaches, and the wasteful duplication of services. The IRS already runs the Free File program, created in 2002 to offer free federal tax filing services for eligible taxpayers through a public-private partnership with tax preparation companies. The IRS also has a history of leaving taxpayers’ information vulnerable to malicious data breaches and inadvertent disclosures. Given the IRS’s troubled history with data privacy, allowing it to access more private information through Direct File, or through lower income reporting thresholds, or any other data collection dragnet, opens the door to more costly data breaches.
The IRA promised to raise federal revenues by allocating an additional $78 billion to the IRS to identify and prosecute ultra-wealthy tax evaders. However, an April 3, 2024, Treasury Inspector General for Tax Administration report found that the IRS spent the majority of this new influx of resources auditing and investigating not the super-rich but people who earned less than $200,000 per year.
The IRS’s website states that, “The IRS may levy (seize) assets such as wages, bank accounts, Social Security benefits, and retirement income. The IRS also may seize your property (including your car, boat, or real estate) and sell the property to satisfy the tax debt.” Yet for years the agency refused to transparently publish the number, size, and other characteristics of the asset seizures carried out by the Treasury and the Department of Justice until the U.S. Court of Appeals for the D.C. Circuit ruled that the IRS needed to be more forthcoming with that information.
It is not easy for the average American to go toe to toe with the IRS when being audited. Once Direct File is ensconced into the annual tax filing season, taxpayers are likely to give in to the agency and pay the bill, rather than argue with if the IRS is mistaken in its preparation. Only taxpayers know how much they really owe in taxes. Individual circumstances change frequently, and the IRS is simply incapable of properly discerning what taxpayers should be paying.
The IRS has reached too far with Direct File, entering a marketplace filled with many non-taxpayer-funded competitors in addition to undermining its own Free File program. Congress needs to step in and reiterate the provisions of the IRA that provide for a study, not a new program, to both save money and prevent the IRS from becoming the preparer, biller, auditor, and enforcer of every taxpayer across the country.