IRS Survey on Tax Preparation Software Misleads Taxpayers | Citizens Against Government Waste

IRS Survey on Tax Preparation Software Misleads Taxpayers

The WasteWatcher

The Inflation Reduction Act (IRA) authorized the Internal Revenue Service (IRS) to spend $15 million to report to Congress on how the agency could develop its own electronic tax preparation software in direct competition with the private sector market.

Instead of following the law, the IRS released a report to Congress on May 16, 2023, that it was evaluating the “a Direct File option for Congress and is taking steps to begin a pilot project for the 2024 filing season following a directive from the Department of the Treasury.”  The “directive” for the pilot program was not included in the IRA.

The IRS report stated that it had relied in part on a Taxpayer Experience Survey to gauge the support for this system.  However, an October 2, 2023 Treasury Inspector General for Tax Administration (TIGTA) report questioned both the design and results of the survey.

According to TIGTA, the survey failed to provide a five-point scale, which would include a neutral position of support or opposition to the new direct file system.  This failure on the part of the agency may have “overstated” taxpayer interest as a direct result of the way the survey was designed, which placed respondents in a situation of having to make a “forced choice” between supporting the idea or opposing it.  TIGTA also reported that, “the survey prompt may have led taxpayers to believe that the tool would have more options than it will immediately have available, such as the ability to file State tax returns.”

Expected to launch in 2024, the IRS decided to proceed with development of the program because of the results of the faulty Taxpayer Experience Survey, which showed “a 72 percent interest in a Direct File tool, per the Taxpayer Experience Survey.  However, only 28 percent were ‘very interested’ compared to 45 percent who were ‘somewhat interested.’”  The IRS also could not provide backing for its assertion that there would be at least 5 million users of the system, or the cost estimates associated with building and maintaining the program.  It would also be helpful to know the cost to taxpayers of the “free” tax preparation by the IRS for each taxpayer based on those numbers.

The IRS already tried and failed to create its own tax preparation program, wasting $17 million on what was called Cyberfile.  In 2022, TIGTA issued a series of reports identifying critical cybersecurity vulnerabilities that placed taxpayer data at risk.  A February 15, 2023, GAO report noted that aging information technology systems at the IRS were slowing “federal payments and services, and make taxpayer information vulnerable to cyberattacks.”  These systems were first placed on the GAO’s High-Risk List in 1997.

The Direct File program is undermines the Free File program, which began operating in 2003, following the IRS’s failed attempt to create Cyberfile.  The Free File program is available for taxpayers earning less than $73,000 annually and is a public-private partnership that allows tax preparation companies to offer eligible taxpayers to file their taxes using their services at no charge.  Approximately 70 percent of all taxpayers meet the eligibility requirements, although only 2 percent of them used the service during the 2022 tax season. Even this number leads one to question the results of the Taxpayer Experience Survey that convinced the IRS to proceed with its own tax preparation software.

As Citizens Against Government Waste has often noted, an IRS tax preparation software system would be used in direct competition with an effective, efficient, and competitive private marketplace and constitute a complete waste of taxpayer dollars and resources.  It would also detract from the IRS’s responsibility of providing quality customer services to taxpayers.

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