Another Congressional Bill, Another IRS "Free" Tax File Scheme

The misnamed “Inflation Reduction Act” winding its way through the legislative process will plague taxpayers for years if it passes. Among the bill’s many flaws are higher taxes that will touch the middle class, destructive price controls that will strangle development of vital medicines, and a massive funding boost for the IRS that will crush taxpayer rights. Apparently a handful of lawmakers, led by Senator Elizabeth Warren (D-MA), have included a proposal in the Act to provide the IRS $15 million in taxpayer funds to study “developing and running a free direct efile tax return system.” 

We have written many times before about the full-scale version of this scheme, otherwise known as “return-free.” It involves the IRS preparing a return for each taxpayer based on the information the government has, which the taxpayer could either submit to or modify and file online. 

Set aside for a moment the obvious conflicts of interest and intimidation factors involved with getting the IRS into the tax preparation business. Some might still view this exercise as a convenient way of improving taxpayer service. Unfortunately, the opposite could prove to be true.  

One reason is obvious – the IRS has other basic challenges that need to be prioritized, such as:

  • A backlog of unprocessed tax returns that stood at over 20 million in May;

  • A 10% answer rate on the IRS’s telephone assistance line, with an average wait time of 29 minutes;

  • An average 8-month response time to taxpayer correspondence;

Add to these worsening statistics pervasive snafus such as destroyed tax documents, confusing child tax credit payments, and contradictory guidance, and a “free” (actually funded by taxpayers) tax return filing system should be low on the list. 

Tax administration experts sensibly contend that with any government-run tax filing portal, the IRS might need to learn crawling before walking and chewing gum at the same time becomes commonplace for the tax agency. On August 2, David van den Berg of the trade publication Law360 (paywall) noted “Observers who spoke with Law360 said a tax filing system as envisioned in the proposal could run into issues” and the likelihood of success would depend upon “a system focused on the simplest returns.” In our view, informed by decades of research on tax system complexity, that would likely rule out tens of millions of filers with itemized deductions, self-employment activities, or moderate-income households with Earned income Tax Credit claims (not to mention small businesses as well as higher income households). Back to square one. 

But there’s also history to bear in mind. When NTU served with the National Commission on Restructuring the IRS in 1996-97, a major topic we explored was how to help the IRS adopt emerging business technologies that would allow taxpayers to file their returns electronically. Ambitious goals were set for e-filing in the Commission’s final report, some of which were adopted in landmark legislation that became law in 1998. 

Yet almost immediately upon the law’s enactment, IRS officials conceded that the annual targets for getting more taxpayers to e-file could never be met with platforms developed within the tax agency’s own bureaucracy. Thus, the Free File program, a public-private partnership between the IRS and tax preparation software companies, was created to provide e-filing services to moderate income Americans. The program has managed to save taxpayers more than $1.6 billion in administrative costs that the IRS would otherwise incur by having to process paper returns. 

Lest anyone believe such history is ancient or irrelevant, at an American Council for Capital Formation forum earlier this year two former IRS leaders (appointed by Presidents of opposite parties) agreed that implementing return-free and dumping Free File would be a waste of critical resources. As former Acting IRS Commissioner David Kautter put it, “The IRS needs to get its technology house in order, and until that occurs, I think that it’s unwise.” 

Even the current management of the IRS tends to agree, with one distinction. In their response to an April 2022 Government Accountability Office report pointing out some improvements that could be made to the current Free File program, tax agency leaders wrote, “Currently the IRS does not believe a public free-filing option would significantly improve the taxpayer experience nor do we have sufficient funding to develop this solution.” 

The hint is obvious here – throw more money at the IRS, beyond a $15 million study now being proposed in the Inflation Reduction Act and maybe the tax agency will give the “public option” a try. And a few Members of Congress would be delighted to assist with the throwing.

Senator Warren and her allies are not satisfied by the progress under Free File, with a misguided belief that the government can do a better job on its own with return-free. For several years now, they have authored flawed legislation, offered amendments, and pushed IRS officials to adopt return-free. The Inflation Reduction Act is only their latest attempt. 

But any hope that Senator Warren, et al. have of using a study to incrementally move the IRS into the tax preparation business is akin to forcing a stumbling camel’s nose under a tent that is on the verge of collapse anyway. 

The Inflation Reduction Act would instruct the task force putting together recommendations on this government-run filing program to solicit “the opinions of an independent third-party on the overall feasibility, approach, schedule, cost, organizational design, and Internal Revenue Service capacity to deliver such a direct efile tax return system.”

We think taxpayers could save $15 million now, and billions more later, by taking NTU’s simple advice: don’t bother.