IRS should stay out of the tax preparation business

In May, the IRS released a report on the feasibility of the IRS preparing and filing tax returns. The Democrat-passed, and misnamed, Inflation Reduction Act gave the IRS $15 million to have an “independent third-party” tell Congress whether the IRS should create its own tax preparation software, called a “direct file” program. The IRS hired a Washington, D.C., think tank called New America, labeled a “left leaning” group by the Washington Post, to help write the 106-page report, which adds up to $141,000 a page. Considering the consultant, the report’s conclusion was no surprise: spend billions so the IRS can offer tax preparation software that companies with decades of experience already provide for free.

Before even giving Congress a moment to review the report, the IRS went ahead with an unauthorized multi-billion dollar venture into the tax preparation business. New America stated it was paid nothing to create the report. Instead, the $15 million appropriated by Congress to write the report was diverted — in violation of Congress’s explicit instructions — to build tax preparation software. This is a classic example of government waste and unaccountable bureaucratic overreach.

The direct file program should be stopped.

An IRS-run direct file program is not “free” or “simple.” According to the report, the possible yearly cost for a new IRS call center is $208 million, and software development and maintenance is $40.8 million. While I doubt those estimates tell the full story, something “free” and “simple” does not have a $208 million annual budget for a call center to solve taxpayer problems and cost over a quarter billion dollars a year to run. Even the IRS implicitly acknowledges there is nothing free or simple about this.

The tax preparation industry already provides a truly free way for millions of Americans to file their return. In 2022, the private tax preparation industry prepared and filed more than 27 million free returns and also provided customer support for free. An additional 3 million free returns were provided by private industry through the IRS Free File Program. More people need to know about these existing free programs.

No state income tax return filing. Unlike current private industry offerings, the IRS’s proposal only covers federal income tax returns. You are on your own to figure out how to file your state income tax return. The glaring absence of a critical piece of tax compliance will cause taxpayers confusion, expense and even more time filling out tax forms.

Inevitable mistakes will have terrible consequences. What happens when the IRS’s tax preparation software makes a mistake? Taxpayers are still on the hook. Taxpayers can expect a bureaucratic nightmare, with IRS auditors punishing taxpayers for mistakes made by IRS software developers.

An inherent conflict of interest. It is unlikely the agency tasked and trained to extract maximum revenue from taxpayers will build software that minimizes tax bills. And taxpayers can never be sure they are being favored or disfavored for using (or not using) the IRS’s offering.

The IRS has a real problem with keeping your tax data safe. The IRS has a long history of cybersecurity vulnerabilities and data leaks. Direct file would be a new source of vulnerability. A survey in the report confirms taxpayer skepticism.

The IRS has a wide range of issues the American taxpayer expects the agency to address. The last thing the IRS should be doing right now is diverting resources and attention to an ideologically driven, elective project that is ill‑conceived and destined to become the IRS’s next boondoggle.

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Mike Crapo represents Idaho’s First Congressional District in the U.S. Senate. He can be reached at crapo.senate.gov.