The IRA Could Make the IRS Preparer, Bill, and Enforcer | Citizens Against Government Waste

The IRA Could Make the IRS Preparer, Bill, and Enforcer

The WasteWatcher

Following the enactment of the misnamed Inflation Reduction Act (IRA) of 2022, the size, scope, and power of the Internal Revenue Service (IRS) will be vastly expanded.  With more than $80 billion and 87,000 new agents at its disposal, the IRS is now positioned to become not only an annual thorn in the side of most Americans, but also the preparer, biller, and enforcer of the amount of taxes it deems everyone should pay.  The IRA directs $15 million to study how the IRS can develop software to prepare tax returns for all taxpayers, despite past wasteful spending on this same endeavor, the availability of a Free File program that costs taxpayers nothing, and the agency’s exposure of information on as many as 120,000 to public scrutiny in August 2022, similar to its exposure of tens of thousands of Social Security numbers in 2013, among other violations of confidentiality.

The Free File system was created in 2002 to take effect for the 2003 tax season after the IRS tried and failed to create its own tax preparation program called Cyberfile at a cost of $17 million, in response to a 2001 Bush administration initiative to improve electronic communications from government to government, government to business, and government to citizen.  The program is managed under a memorandum of understanding (MOU) with several tax preparation services to provide free tax services to taxpayers below a certain threshold level adjusted for inflation.  As former IRS Commissioner John Koskinen said in a January 15, 2016, press release, “Free File software can walk you through the steps and help you get it right,” and “[t]he real winner in this partnership has been the nation’s taxpayers.”  

But this did not stop the inclusion of funds to study an IRS-run tax return program in the IRA, which builds on an idea that has continuously been espoused by Sen. Elizabeth Warren (D-Mass.) to replace the Free File program.  In the Warren proposal, rather than using their own information about income and deductions to determine their tax liability, taxpayers would receive a pre-populated tax form from the IRS to sign and remit payment.  As bad ideas go, this one would be horrible.  Among the many reasons it is doomed to failure is the agency’s longstanding and serious mismanagement of taxpayer dollars, which has placed it on the Government Accountability Office’s (GAO) High-Risk list since 1990. 

The IRS cannot fathom the intricacies of the daily lives Americans lead nor the changes that can occur over the period of 12 months.  During that time, taxpayers can get married, divorced, have children, buy or sell a home, move, quit working for an employer and start a new business at home, inherit money or property, and make or lose money through investments.    

These are things that only the taxpayer knows, and the IRS will never be able to adequately prepare a taxpayer’s return without this knowledge.  Instead, the agency will simply bill the taxpayer and expect them to pay the amount it deems appropriate based on the prior year’s tax return information.  Taxpayers will likely be judged guilty and face a higher threshold of innocence and proof to overturn the tax return prepared by the IRS.  Many taxpayers will just pay the bill knowing that they could face the ire of one of the spanking new IRS enforcers who will come knocking on their door.

One of the simplest reasons to not bother moving forward with any study and saving $15 million is that taxpayers with a gross adjusted income of less than $73,000 can currently use the Free File program, which accounts for 70 percent of all taxpayers.  However, many taxpayers remain unaware of its availability to help them with their tax preparation.  In its 2018 report to Congress, the IRS Taxpayer Advocate determined that the Free File program was underutilized, with only 2.5 million eligible individuals filing taxes using this service in fiscal year (FY) 2017 compared to 3 million in FY 2014, and 5 million in tax year (TY) 2004.  The decline in use was attributed to the IRS not devoting enough funding to advertise the program to raise awareness among those who could utilize the service (which could be a desirable alternative use of that $15 million).  On October 6, 2020, the IRS noted that the Free File use increased by 50 percent with more than 4.1 million taxpayers using the service for TY 2019. 

A May 10, 2022, GAO report found that for TY 2020, only 3-4 percent of eligible taxpayers used the program and 44 percent of those who did had an adjusted gross income of $17,000 or less.  Taxpayers who did not use the program either filed their own taxes or used a paid tax preparation service offered by one of the several private sector companies in the marketplace, including those who participate in the Free File program, which seems to indicate a lack of trust in anything suggested by the IRS, even if it directs the taxpayer to a private company. 

The GAO determined that among the issues that led to the lack of participation include problems for taxpayers with disabilities to use the program and the need to improve the taxpayer experience with the service including adding more free filing options.  GAO also recommended that the IRS remove its requirements from the MOU that the agency must notify third party providers when it decides to develop its own software package designed to prepare tax returns on behalf of taxpayers. 

However, in its response to the GAO report, the IRS recognized the problems such a change would have on its ability to increase the number of private sector tax preparers participating in the program, noting that “this provision is necessary to maintain trust and transparency with industry.”  The IRS also balked at GAO’s recommendation to create its own free filing option, absent sufficient funding, noting that the agency “currently does not believe a public free filing option would significantly improve the taxpayer experience.”  However, the IRS left this option open to reconsideration if Congress enacted legislation to provide additional funding to create such a program.  The current MOU between the IRS and companies participating in the Free File program expires in October 2023, so any decision relating to the MOU must be made prior to that time.  

The funding for the study that was included in the IRA could lead to disastrous consequences for the American people.  Giving the IRS the power to create its own tax preparation software, making it judge, jury, collector, and enforcer, might make those who believe the federal government should take more control over everyone’s lives happy, but it will create even more resentment and distrust about that power than already exists.  It will also disproportionately impact middle and lower-income families, who will have fewer resources to fight back against a pre-filled tax return.

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