President Biden’s IRS is moving forward with a pilot program to begin a government-run tax preparation service despite lacking Congressional authority to do so.
IRS Commissioner Danny Werfel confirmed this week the IRS’ decision to take the first step in creating a government-run tax preparation service, marking a sweeping expansion of the IRS’s powers in which the agency seeks to become tax preparer, filer, and auditor.
Arizona, California, Massachusetts, and New York – all states run by Democrat governors – will participate with the IRS in the Direct File pilot for filing season 2024.
This announcement from Werfel directly contradicts promises Werfel made to Congress that the IRS would not move forward without Congressional approval.
Americans for Tax Reform rejects the use of unauthorized taxpayer dollars being used to expand the IRS into the tax preparation business and urges states to reject participation in the program.
House Republicans have proposed appropriations legislation that would bar the IRS from using funding to develop or provide a free direct-file tax return system without the prior approval from Congress. Americans for Tax Reform supports this legislation.
Democrats included $15 million in the Inflation Reduction Act passed last August for the IRS to conduct a report of the cost, feasibility and public trust of an IRS-run “direct file” tax system. The legislation did not provide the IRS with the funding or authority to create a pilot program.
Both the Treasury Department and the IRS are exceeding their authority by using taxpayer funds to build software for an IRS-run tax preparation service.
Werfel repeatedly asserted that the IRS was simply doing a feasibility study as authorized by the Inflation Reduction Act. Werfel assured everyone he’d wait for the report and “reflect” before making any decisions.
Congress did not give the IRS the authority to do this. In addition to being legally problematic, Werfel’s actions send a clear message that the IRS is not interested in addressing its longstanding trust and credibility problem.
Timeline of Werfel’s Public Statements
Let’s take a look at a timeline of IRS chief Werfel’s statements.
April 19, 2023: Werfel testified to the Senate Finance Committee that no decision had been made on whether or not the IRS would offer a “direct file” system.
As shown in this video, Ranking Member Sen. Mike Crapo asked Werfel:
“Has the IRS made the determination that it is going to pursue this?”
“Senator, no decision has been made on moving forward with direct file solution.”
April 27, 2023: Werfel testified before the House Ways and Means Committee chaired by Jason Smith (R – Mo.)
Asked about Direct File, Werfel said:
“So the Congress said, ‘study it.’ And my understanding of the Congressional provision is, what would it cost? What are the taxpayers’ opinions on it? And then an independent assessment of its feasibility. And that’s what we’ll produce in mid-May and we’ll come and we’ll talk about it. And you’ll have more grounding to ask me the tough questions.”
Werfel also said:
“I don’t know yet whether the Direct File solution is the right additional menu item to put in place so that taxpayers that prefer to engage that way can do it. What I’d like to do is have the report issued. And then engage in a conversation with the right set of stakeholders and then figure out what the go-forward is.”
May 4, 2023: Danny Werfel was a guest on Bloomberg’s “Talking Tax” podcast hosted by Naomi Jagoda. He assured listeners that he would wait for the report and then “reflect” on the “diverse viewpoints” before making “any decision.”
“Once the report comes out, how much time will it take for the IRS to sort of digest the report and study it before determining how you want to proceed following the report’s release?”
“I think there needs to be reflection around what are the pros and cons, what are the benefits and costs. And it wouldn’t surprise me if people read the report and reach different conclusions. Some will read it and say ‘oh, we should definitely absolutely go forward,’ and some will read it and say, ‘ah, this is what I thought and therefore we shouldn’t go forward.’
What I’m interested in is making sure that we have a good understanding of what those diverse viewpoints are. That we are communicating the calculus and the evidence base for any decision — go or no go — that comes out.
What would make me lose sleep at night is if we did something without an evidence base or an analytic base to it. That’s what I always want to ground to.”
May 15, 2023: the Washington Post scoop surprises everyone:
WaPo excerpt 1:
The Internal Revenue Service has quietly built its own prototype system to allow Americans to file tax returns digitally and free of charge, according to three current and former agency officials, essentially creating government software that could disrupt the tax-prep industry.
The system will be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins, said the people briefed on the matter, who spoke on the condition of anonymity to discuss internal agency conversations. It was developed by the IRS and the U.S. Digital Service, the White House’s technology consulting agency.
WaPo excerpt 2:
IRS Commissioner Daniel Werfel had previously told lawmakers that the IRS would consult Congress after the think tank made its recommendation and had not yet determined whether to pursue its own software program. But if the IRS already has a prototype before the New America report has been released, “this suggests a pre-determined outcome and flies in the face of previous commitments Commissioner Werfel made to publicly consult Congress on a potential free-file solution, and for the IRS to not act without explicit legal authority,” said Sen. Mike Crapo (Idaho), the top Republican on the Senate Finance Committee.
May 16, 2023: Ways and Means Committee Chairman Jason Smith calls out the IRS:
“The announcement of a pilot program raises serious questions about how long the Biden Administration’s decision to move forward on such a program has been in the works, whether the agency had any intention of following Congress’ direction that this study be conducted in an independent and impartial way, and whether the IRS is acting outside the law in establishing a program that Congress has not authorized.”
A video compilation of the three Danny Werfel statements can be found here: https://www.youtube.com/watch?v=AS2BOYun0Qs
“Direct File” Pilots Have Already Failed in the States
Pilot Programs of a government-run tax preparation service have been tried before at the state level and have failed.
As the Tax Foundation points out, California’s failed experiment with the so-called “ReadyReturn” tested how Californians would react to a pre-filled-out tax return. The state mailed out 50,000 tax returns that were all filled out for people and required them only to sign and return them. Instead, “39,000 people threw them away and filled out their own returns.”
A study by the University of Exeter attempted to simulate the effects of pre-filled tax returns, finding little to no increase in compliance, and potentially negative effects on compliance if taxpayers face barriers correcting incorrectly populated values.”
Conservative Groups Oppose Government-run Tax Prep:
The letter blasts the IRS for using taxpayer funds to contract the progressive-leaning New America Foundation to conduct a study examining the impact of a government-run “direct-file” tax preparation system, despite the organization’s extensive public advocacy in favor of such a tax prep system.
Government-run tax preparation would incentivize the IRS to overcharge taxpayers or withhold information from filers to maximize revenue. Private tax preparation companies, in contrast, have a financial incentive to minimize the taxes their clients owe.