IRS Has ‘No Documentation’ to Justify Cost Estimates for Direct File Service: GAO Report

The Internal Revenue Service in Washington on March 25, 2024. Madalina Vasiliu/The Epoch Times

The IRS cost estimates for its free online tax filing tool Direct File are not backed by any documentation, with the agency failing to include several key costs in its estimate, according to a recent report by the Government Accountability Office (GAO).

The IRS had estimated that Direct File could cost between $64 million and $249 million annually, the GAO said in an April 9 report. However, the GAO, along with the IRS watchdog Treasury Inspector General for Tax Administration (TIGTA), found that the tax agency “had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates.” In addition, “IRS officials told GAO that the cost estimates did not include start-up costs, such as technology for a novel system, which could be substantial,” the report states.

“Without a comprehensive accounting of costs, IRS’s estimates could understate the full amount of resources required to develop and maintain a permanent Direct File program,” the report states.

The Direct File pilot service was made available to all eligible taxpayers from 12 states last month. It is available only until April 15, the tax filing deadline, in all but one of the states. IRS officials told the GAO that they intend to update cost estimates once the pilot is completed.

However, the GAO found there was “insufficient documentation to provide reasonable assurance that the pilot will capture the necessary data to inform more complete cost estimates.”

The agency estimated that the Direct File pilot can save taxpayers $21 million in compliance costs this season. In addition, the IRS claimed the service offers multiple other benefits such as reducing errors, minimizing the volume of paper returns, and making it easier for taxpayers to claim credits and deductions.

“However, IRS evaluation documents did not consistently identify relevant metrics for measuring these potential benefits,” the GAO pointed out.

The IRS told the GAO they had not yet decided on whether the Direct File service would continue beyond this tax season.

The tax agency pointed out that “the time required to continue Direct File would depend on several factors, such as the size of the team working on the program,” the report states. “They noted that hiring new employees to replace outgoing employees is a lengthy process,” it states.

“Thus, IRS officials will have a short amount of time to analyze cost and benefit information before making decisions about the pilot for the 2025 tax filing season.”

The GAO recommended the tax agency use best industry practices to correctly estimate and document the potential benefits of Direct File and use cost-benefit data collected during the pilot phase to make future decisions regarding the service.

Direct File Concerns

A report by TIGTA in 2023 alleged that the IRS may have underestimated the cost of implementing the Direct File program.

The IRS set aside $15 million to establish a task force to study and design the tax preparation service. However, the watchdog report noted the agency did not include expenses such as salaries and employee benefits in its calculations.

“The IRS could not provide TIGTA with any supporting documentation to support its cost estimates or how it determined there would be at least 5 million users. As a result, TIGTA had no way to identify the reasonableness of the IRS’s cost estimates,” the TIGTA report states.

In January, a group of 13 Republican attorneys general criticized Direct File in a letter to the treasury secretary, warning that it would ultimately harm U.S. citizens.

The letter pointed out an “obvious conflict of interest when the IRS acts as tax preparer, filer, and auditor,” affecting low-income and vulnerable Americans the most.

The GOP attorneys general criticized the IRS’s poor customer service record, noting that the tax agency only answered just two percent of calls received on its official helpline in 2021.

“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,” the lawmakers wrote.

Even if the IRS hired thousands of agents to boost customer service, these agents wouldn’t be able to offer the same level of service and advocacy that taxpayers already receive from tax professionals, they said.

Taxpayers choose to work with such professionals “because they want an advocate in their corner who will represent their interests against the IRS bureaucracy,” they said.

Direct File is available until April 15 in 11 states: Arizona, California, Florida, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming. The service is open until April 17 in Massachusetts.

In an April 9 update, the IRS said that Direct File customer service representatives are available every day from 7 a.m. to 10 p.m. EDT.

“After April 17, live chat customer support for Direct File will only be available through April 20 to assist filers who submitted their tax return with Direct File before the filing deadline and need assistance with a resubmission or a technical issue,” the agency said.

Customer service representatives can only offer technical support and answer basic tax law queries. They cannot access taxpayer data.