Tucked into the tax and spending bill that passed the Senate this weekend was a $15 million provision to study allowing the IRS to prepare taxes. What could possibly go wrong with that?
A small part of the $80 billion IRS funding in the Inflation Reduction Act includes the $15 million dedicated to fund a task force to study the cost and feasibility of creating a free direct e-file program. This means having the IRS do your taxes for free. Talk about a conflict of interest!
But Senator Elizabeth Warren was not satisfied with that. She isn't planning to wait for a task force study and has already filed a bill to develop a free, online tax preparation and filing service that allows all taxpayers to prepare and file their taxes directly with the federal government instead of through private tax preparers.
"Congress should pass my Tax Filing Simplification Act, and the IRS itself can and should adopt my plan to simplify the tax filing process for millions of Americans and lower their costs," Warren said.
However, the concept of "return-free filing," or allowing the IRS to control the tax filing for mostly low-income individuals has critics on both sides of the political spectrum.
For one, it presents a clear conflict of interest, said Grover Norquist, president of the conservative Americans for Tax Reform.
"The IRS is the prosecutor and the judge under this system. All the incentives are wrong," Norquist told FOX Business.
Moreover, the IRS has demonstrated numerous problems handling the responsibilities it already has, Norquist contends.
"This is an agency that thoroughly needs reform, and that’s no time to give it more responsibilities," Norquist said. "They would say they just need more money. No more money until it reforms."
Norquist added this system did not work when it was attempted in Britain.
The Treasury Inspector General for Tax Administration, the internal watchdog of the IRS, reported in 2016 that IRS staff lost 1,000 laptops with sensitive taxpayer information. In 2015, hackers gained access to the data of about 330,000 taxpayers.
On the left, a 2020 report from the Progressive Policy Institute argued this system could prevent some low earners from getting the Earned Income Tax Credit.
"The IRS does not have the necessary information in its databases to accurately determine a low-income taxpayer’s eligibility for EITC and/or correctly calculate the amount of credit due to the taxpayer — indeed, far from it," the Progressive Policy Institute report says. "The EITC is based on a stew of residency, family relationship and income limits with complex tiebreaker rules."
Warren blamed the time and costs of tax preparation on large corporations for "sabotaging the Free File program to rake in large profits."
However, a PriceWaterhouseCoopers study from December 2021 determined the compliance costs for individual payers under current rules dropped 40% since 2005.
"Because a significant portion of the population has self-employment income and a greater number use above-the-line deductions, the pool of taxpayers eligible to use a return-free system may be limited without a substantial expansion of information reporting," the PriceWaterhouseCoopers study says.
"Such an expansion would include significant new costs, not only in terms of administrative burden on taxpayers, tax administrators and third parties, but also burdens with respect to taxpayer privacy."