A watchdog report alleges that IRS surveys on the agency’s planned e-file system deliberately misled taxpayers about direct state tax e-filing and significantly underestimated implementation costs by billions of dollars.
The idea behind the IRS-run e-filing system, called Direct File, is that it had the potential to benefit taxpayers by making tax filing a simpler and cheaper process while also benefiting the IRS by increasing e-filing and so reducing resources needed to process paper tax returns.
But the watchdog said in its report that the IRS may have designed its surveys in a way that exaggerated the level of taxpayer interest and made an outsized case for the adoption of Direct File.
Faulting the IRS
One issue the watchdog took issue with is that the survey didn’t provide a “neutral” option, so the survey design pushed taxpayers into a “forced choice” response scenario.
Another problem flagged by TIGTA is that the IRS may have misled taxpayers as to the e-filing tool’s functionality.
“In addition, 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 states.
The watchdog cited an independent study by a federally funded research center as finding that 60 percent of taxpayers would pick their current tax filing software if state tax returns were excluded from an IRS-run e-filing tool.
The IRS said in its report to Congress that it had decided to proceed with a Direct File pilot based on the premise that most taxpayers are interested in such a system.
But the watchdog said in its report that the IRS took this decision based on the premise that 72 percent of all taxpayers were interested in the tool, even though 45 percent of them were merely “somewhat interested.”
Also, the watchdog faulted the IRS for not providing TIGTA with any supporting documentation for its cost estimates for the Direct File tool, nor how it determined that 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 watchdog said.
In its report to Congress, the IRS estimated that the e-filing system would cost between $64.3 million and $248.9 million a year to operate, depending on the complexity of returns accepted and the number of taxpayers using the system.
At the time, IRS Commissioner Danny Werfel told reporters that the size, scope, and complexity of the pilot program had yet to be determined, but that Treasury Secretary Janet Yellen directed the IRS to launch the pilot after reviewing the report. remove
IRS Responds
In response to the watchdog’s findings, the IRS said that it agreed it should be expensed against the $15 million allocation and said that it had taken “immediate action,” creating codes so that employees could record expenses properly.As to the other shortcomings identified by the watchdog, the IRS said it had “specifically flagged the potential for interest in Direct File to be overstated and influenced by a number of issues” in its report to Congress.
However, the tax agency said it was constrained by time to deliver its report to Congress, so it used similar response options in the taxpayer opinion survey as are used in the IRS’s Taxpayer Experience Survey, rather than designing something more optimal from scratch.
“As written, the TIGTA report makes it appear as though the IRS made a decision to move forward with a pilot and does not acknowledge that the IRS has shared repeatedly that we recognize the limitation of the data in the report and want to use the pilot to learn about a number of things, including taxpayer interest in using Direct File,” the agency said in a statement.
The tax agency also disputed the lack of cost estimate documentation provided to TIGTA, saying that the IRS said in its report to Congress that the estimates were “subject to uncertainty” given that the e-filing system is a new project with no prior ones similar enough to use as a cost benchmark.
