The wolves want to pass for sheep. The fox wants in the henhouse. The bank robbers want the vault codes. Now, the Internal Revenue Service wants to do taxes for millions of Americans. The Inflation Reduction Act, or IRA, charged the IRS to examine the feasibility of a federally administered, online tax-filing interface. The agency just published its report. It unsurprisingly concluded that “Direct File should be considered among future options.”
All along, the books were cooked. The IRA instructed the IRS to recruit further analysis from an “independent third party.” The agency chose the left-leaning New America, a nonprofit whose staffers have previously advocated a direct filing system. Moreover, well before the report’s release, the agency began work on a direct-file pilot program to be tested in 2024, The Washington Post revealed last week.
The IRS, as an institution, has not earned the public’s trust. If Congress wishes to ease the burden tax season imposes on Americans, it ought to simplify the tax code, rather than initiate an inevitably error-prone mitigation mechanism. Policymakers should eschew consolidating more power in the agency. They should further avoid discouraging citizens from engaging with private institutions — such as tax-preparation services – that mediate between the federal government and everyday citizens. The IRS too often rules as a petty tyrant within its realm of authority.
The IRS report pegs the annual cost of a direct-filing system at between $64 million and $249 million. The government serially understates the price of new programs, however, and more sober estimates dwarf even the IRS’ highest figure. In 2021, Govini, a Virginia-based software firm, compared direct-filing proposals to Healthcare.gov — the latter born in 2010 of the Affordable Care Act. Through October 2021, Healthcare.gov had devoured $21.2 billion from taxpayers.
The interface cost $2.84 billion in 2014, which equates to over 20% of the IRS’ appropriated 2023 budget of $14.1 billion. Further, “Despite exorbitant costs, the launch of Healtcare.gov [sic] was plagued by IT crashes, downtime, and data security shortfalls,” Govini notes.
Compared with Healthcare.gov, Govini found that direct filing would necessarily serve many more users, process more complex datasets, and require far broader commercial integration. Thus, the IRS would likely face higher costs and obstacles than the Department of Health and Human Services. Policymakers ought to review Washington’s past fiscal and technological debacles more thoroughly before rushing to create new ones.
Low-income Americans can scarcely consider the IRS a friend. In recent years, the agency’s audit enforcement has focused heavily on the poorest Americans, particularly those who claim the earned income tax credit, or EITC. For instance, in 2022, the agency audited filers who made less than $25,000 and claimed the EITC the previous year at more than 5½ times the rate it audited others. Low-income Americans drew audit scrutiny similar to their most well-off countrymen, whose wealth entices heightened IRS enforcement. Indeed, 2018’s “top 1% of taxpayers by income were audited at a rate of 1.56%,” ProPublica reports. “EITC recipients, who typically have annual income under $20,000, were audited at 1.41%.”
The most frequently audited counties lie in the largely Black and rural regions of the Deep South. “Audit rates are also very high in the largely Hispanic communities in south Texas, the counties with Native American reservations in South Dakota, as well as the poor, white counties in eastern Kentucky’s Appalachia region,” MarketWatch observed in 2019. “In fact, the audit rates in these areas were more than 40% above the national average.”
Such disparities may be attributed partially to the EITC’s high rates of alleged fraud. Low-income Americans, however, make easy targets for auditors. They often lack the disposable income, financial knowledge, and social and professional capital that often empower wealthier Americans to fight IRS audits successfully.
Roughly 160.6 million people filed taxes in 2022. The provision of an e-filing service to even a fraction thereof would place considerable strain on the IRS’ historically abysmal customer service. In 2021, agency staff fielded just 11% of 282 million taxpayer calls. To its credit, the agency improved customer service greatly in 2023. However, these improvements give no assurance that the agency could withstand the added workload a federal direct-filing system would inevitably impose.
What’s more, Americans making less than $73,000 per year qualify to file for free with private tax services through the IRS’ “Free File” initiative. The IRS should rather perfect this program before inventing and injecting into the market a new, socialized filing option.
Consulting the IRS on the feasibility and prudence of establishing an in-house direct-filing system resembles asking a toddler if he should be allowed to have more cake. Invariably, both will answer in the affirmative, despite the fact that it will not be in the best interests of their long-term health.
• David B. McGarry is a policy analyst for the Taxpayers Protection Alliance.
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