IRS Accused of Assuming ‘Tax Preparer’ Role

Internal Revenue Service (IRS) building in Washington, on Oct. 16, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) will soon launch its tax e-filing program, allowing some taxpayers from 13 states to use the service beginning next year, leading to accusations that the agency has assumed the role of a tax preparer.

During the upcoming 2024 tax-filing season, the IRS will conduct a “limited scope pilot” of its free online tax return-filing service called Direct File, the agency said in an Oct. 17 press release. In the pilot-testing phase, only individual tax filers with “relatively simple returns” will be eligible to access the service. Certain types of incomes, tax credits, and adjustments will be allowed in Direct File for the pilot test. Though this decision is yet to be finalized, the IRS expects the following components to be included in Direct File:

• Incomes: W-2 wage income, Social Security and railroad retirement income, unemployment compensation, interest of $1,500 or less.
• Credits: Earned income tax credit, child tax credit, credit for other dependents.
• Deductions: Standard deduction, student loan interest, educator expenses.

The purpose of the pilot launch is to “test the system the IRS has developed and to learn from that test.” This includes “testing the technology, customer support, state integration, fraud detection, and the overall taxpayer experience.” Though all states were invited to join the pilot program, not all are taking part.

Beginning next year, taxpayers from four states will integrate state tax filings into the Direct File program: Arizona, California, Massachusetts, and New York. Taxpayers in nine states may be eligible as well: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

“This is a critical step forward for this innovative effort that will test the feasibility of providing taxpayers a new option to file their returns for free directly with the IRS,” said IRS Commissioner Danny Werfel.

“In this limited pilot for 2024, we'll be working closely with the states that have agreed to participate in an important test run of the state integration. This will help us gather important information about the future direction of the Direct File program.”

Ever since the IRS announced its Direct File proposal, there have been concerns raised about the system—specifically the fact that the agency will essentially act as a tax preparer by providing such a service.

“The IRS control of tax preparation is the latest step in Democrats’ ongoing efforts to supercharge the agency to go after working-class families, after giving the agency $80 billion to increase audits on taxpayers making less than $75,000,” House Ways and Means Committee Chairman Jason Smith (R-Mo.) said in a May 16 statement.

The IRS initiated the Direct File pilot program without getting congressional authorization. Officials also chose a left-wing think tank, Washington-based New America, to conduct a $15 million “independent review” of the agency’s proposed online tax-filing system. Moreover, New America had earlier supported the idea of the IRS launching its own online tax-filing service.

“The characterization of New America as a strictly nonpartisan nonprofit is surprising since the organization is known to be a left-leaning think tank,” Mr. Smith said in a March 6 letter to acting IRS Commissioner Douglas O’Donnell.

“Specifically, some of the nonprofit’s top officials include alumni from the Obama administration ... and other top officials of the organization are tied to left-leaning mainstream and openly left-wing media outlets.”

Overstating Taxpayer Interest

The launch of the Direct File service comes as the IRS watchdog Treasury Inspector General for Tax Administration (TIGTA) released a report last month alleging that the IRS may have inflated taxpayer interest in an e-filing system while also underestimating the cost of implementing such a program.

On May 16, the IRS submitted a report to Congress stating its taxpayer surveys and other research found a majority of people were interested in an online tax filing system run by the agency.

However, the TIGTA report stated that the IRS may have designed these surveys in a way that exaggerated the taxpayer interest, thus making an outsized case for adopting Direct File.

“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,” the report said.

The IRS claimed to Congress that 72 percent of all taxpayers were interested in Direct File. However, 45 percent of such survey respondents had said they were merely “somewhat interested,” the report noted.

The IRS set aside $15 million for establishing a task force to study and design Direct File. However, the TIGTA report notes that the IRS did not include expenses like salaries and benefits to employees in its calculations. “TIGTA had no way to identify the reasonableness of the IRS’s cost estimates,” the report said.

The Inflation Reduction Act of 2022 provided the IRS with long-term funding and directed the agency to study the possibility of a free, online tax-filing service. This resulted in the IRS submitting the May report to Congress and the current launch of the Direct File pilot test.

Direct File is not intended to replace existing tax-filing options like tax professionals, Free File, free return preparation sites, commercial software, and authorized e-file providers. People will continue to have access to such services, the IRS clarified.

“We have more work in front of us on this project,” Mr. Werfel said. “The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure its user friendly and easy to understand. We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season.”