A group of 13 Republican Attorneys General criticized the Internal Revenue Service’s (IRS) soon-to-be-launched free online tax filing tool Direct File, warning that it would harm low-income Americans.
“We write to you in opposition to the unnecessary and unconstitutional efforts to empower the Internal Revenue Service (IRS) with the expansive authority to prepare and file tax returns for all taxpayers,” said a Jan. 30 letter from the Attorneys General to the Treasury Secretary. “Congress has never granted the Department of the Treasury authority to create a Direct File program. And for good reason: the American taxpayers do not want to invite the proverbial fox into the hen house. A Direct File program will also have negative consequences for low-income filers and devastate small businesses.”
The letter pointed out that there was an “obvious conflict of interest when the IRS acts as tax preparer, filer, and auditor,” which would impact low-income and vulnerable Americans the most.
Lawmakers cited a 2022 report from Syracuse University which found that the IRS audits poorest American families “at five times the rate” compared to everyone else.
They also pointed to a ProPublica report detailing that recipients of the Earned Income Tax Credit (EITC) were audited at two times the rate of taxpayers with incomes between $200,000 and $500,000. EITC is a credit granted to low-to-moderate-income workers with children.
“The Direct File pilot program will be limited to these same taxpayers, supporting only limited deductions and credits such as EITC,” the letter stated.
“The American public is rightly skeptical of the IRS given its terrible record.” In 2021, the IRS only answered 2 percent of the calls received to its official helpline. In 2022, the agency had a backlog of 21.3 million returns.
“If the IRS is already unable to answer the most routine calls from American taxpayers, Direct File will only exacerbate the agency’s failures. And when the IRS cannot answer routine inquiries from American taxpayers about Direct File, fraudsters will be all too eager to fill that void,” lawmakers warned.
Even if the IRS were to hire thousands of agents to boost its customer service, these agents wouldn’t be able to offer the same level of service and advocacy that taxpayers already receive from tax professionals.
Taxpayers choose to work with such professionals “because they want an advocate in their corner who will represent their interests against the IRS bureaucracy.” Moreover, the Direct File program, “needlessly threatens the livelihood of thousands of these small businesses tax preparers.”
Back in May 2023, just hours before the IRS announced the Direct File pilot program, the agency admitted to having historically audited black taxpayers at higher rates than other Americans.
“Why would any American trust the IRS to not abuse its power?” the lawmakers questioned. “Treasury’s attempt to establish an IRS-run Direct File system side-steps Congress’ constitutional authority and the will of the American people by unilaterally establishing a new government program and further empowering an IRS that has repeatedly targeted some of the most vulnerable taxpayers.”
“We urge the IRS to identify and address the root causes of the agency’s historic discrimination against low-income taxpayers before launching a system purportedly designed to assist these very same individuals,” they said.
Demand and Cost Issues
The GOP letter also highlighted several issues with the Direct File program. “From the start, this process has been plagued by repeated missteps and misrepresentations that now demand oversight.”When Congress passed the Inflation Reduction Act in 2022, it allocated $15 million to commission a study from an “independent third party” to assess the overall feasibility of an IRS-run tax preparation system. However, the IRS violated this requirement.
“Contrary to that congressional mandate, the IRS chose New America—a liberal think-tank—to complete the study even though the organization had extensively supported an IRS-run Direct File system in the past,” the letter said.
“Unsurprisingly, New America’s feasibility study was deeply flawed. Truly independent sources found that there were problems with both the study itself and an IRS-run Direct File system broadly.”
Lawmakers cited an October 2023 report by IRS watchdog Treasury Inspector General for Tax Administration (TIGTA) which stated that the tax agency may have “overstated” taxpayer interest in Direct File.
IRS’s survey of taxpayers showed that 72 percent expressed interest in a Direct File tool. The TIGTA report noted that only 28 percent were “very interested” in the tool, with the remaining 45 percent only “somewhat interested.”
In addition, TIGTA said that the IRS could not provide “any supporting documentation to support its cost estimates.” The tax agency’s cost projections for the tool “could not be substantiated” due to a lack of clarity as to how many taxpayers would use the service and the expected costs related to customer support and product development.
An estimate by software developer Govini put the cost of an IRS-run free filing system to be similar to that of government-run healthcare.gov website which cost more than $21.2 billion in the first 11 years of operation, the lawmakers noted.
The letter called for the IRS to cease taking any further steps on Direct File until it completes a “truly independent feasibility study as directed by Congress.”
Initially, Direct File will be launched in a pilot phase in 12 states—Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming.
