Tough Questions Surround IRS Plan to Offer Free E-Filing System

The Inflation Reduction Act of 2022 includes within its 274 pages a set of well-known provisions, such as providing the IRS with $80 billion in additional funding. But it also includes a much lesser-known provision: a task force to design an IRS-run free “direct e-file” system. The agency will receive
$15 million to produce a report on:

• The cost of developing and running such a system, as well asbuilding and administering each release;
• Taxpayer opinions on an IRS-provided free direct e-file system;
• An independent third party’s opinions on the overall feasibility, design, cost, and agency capacity to deliver such a tool.

In early March, think tank New America and Professor Ariel Jurow-Kleiman were selected as the independent third parties. This announcement went over poorly in some circles; House Ways and Means Chairman Jason Smith (R-Mo.) and House Oversight Subcommittee Chairman David Schweikert (R-Ariz.) issued a forceful letter with a litany of pointed, incisive questions about the wisdom of the selection. Because of that focus, their letter skips over several issues.

Few would defend the current system by which Americans calculate taxes owed to federal and state governments. The desire to make filing simpler and less expensive is understandable. And if we wanted tax returns to be less burdensome to file, we would build a tax code that to the extent possible reflected that desire.

Our byzantine, unpredictable code doesn’t reflect that desire. Blaming the IRS for the bloat of forms and schedules and the weight of record-keeping requirements is like blaming the tequila for your hangover. It’s not the tequila; it’s the five margaritas you ordered.

Pre-populated Tax Returns

Are pre-populated tax returns a good idea? Possibly. Are they a slam dunk? No. One obstacle is that if we ask the IRS to pre-populate returns, we make the IRS the sole arbiter of the returns it drafted. If the IRS creates an accurate return, then all is well. But if it errs and subsequently wants to audit you, that’s problematic.

Either the IRS won’t audit returns it pre-populates, or taxpayers will need to review returns for accuracy before agreeing to them. Is that really easier? And more broadly, is this the dynamic we want to create between taxpayers and the IRS?

Another issue with pre-populated returns is that the returns must be simple—no itemizing, no self-employment, no gig work, and no rental properties. More pointedly, lower-income returns often aren’t simple. Determining qualifying children for the earned income tax credit, for example, is notoriously vexing, and the IRS would be unable to answer residency questions.

Is it a great idea to ask the IRS to divert resources to make simple returns easy and low cost to file, or is it an exercise in custom building a sledgehammer to drive a thumbtack—a low return on investment?

The new tax and climate law stipulates that the report on the free direct e-file system is due “within nine months following the date of enactment.” With that in mind, we should expect it by May 16.

There are several known obstacles to consider, however. It will be interesting to see how the report addresses:

Technical issues. The private sector (mostly) has solved the riddle of how to build and update Form 1040 filing software for tax pros and consumers. This isn’t easy as it may look. One hopes the report attempts to capture the degree of difficulty of the ask. Other interesting questions include:

• Is the IRS building form fill-in or interview-based software?
• Is it reasonable to task the IRS with building its own consumer tax preparation software and then updating it every year?
• How many staff years and dollars would such an effort require?
• What happens when Congress makes December or retroactive January tax code changes?
• What are the reputational risks?

Customer service. If we assume the IRS can surmount the technical issues, what about the customer service requirements? The agency already struggles to answer its telephones—and that’s before taxpayers are calling with internet connectivity problems and questions about where to record a backdoor Roth contribution. Let’s see if the report addresses:

• What level of support would taxpayers expect?
• What would it take for the agency to meet those expectations?
• How difficult would it be to find the expertise?
• What customer base does the IRS expect to serve? Is it only those eligible for VITA/TCE returns? Or all Form 1040-series return filers including, for instance, Schedule F (farm), Schedule D (capital gains/losses), and Schedule C (profit/loss from business)?

The IRS’ struggles with its IT modernization have been significant and span decades. Its customer service struggles are of more recent vintage, but they aren’t trivial. It continues to be tasked with additional programs unrelated to self-assessment and collection of tax.

As former Commissioner Lawrence Gibbs recently asserted, we have a serious non-compliance problem, the magnitude of which is enormous. Notwithstanding a desire to make filing less expensive and simpler, should we ask the IRS to build, maintain, and support a free e-file system? Let’s hope the report’s writers take a thoughtful approach.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Bob Kerr, EA, is principal of Kerr Consulting LLC, where he consults with individual firms on tax administration, tax policy, and public policy and pursues a long-held interest in education and public speaking.

We’d love to hear your smart, original take: Write for us.