President Reagan famously quipped, “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.” T This tax season, the IRS is launching its Direct File program in select states to become not just the tax collector, but the tax filer. This is a massive conflict of interest that puts tax dollars—and taxpayers—at risk.
The move was not a response to a strong demand from American taxpayers. Instead, it appears the Biden administration went to lengths to justify its decision to further insert the federal government into the lives of American citizens. An independent Treasury Inspector General for Tax Administration (TIGTA) report confirmed that the IRS manipulated response options to a survey gauging public interest in Direct File in order to elicit an inflated positive response to questions. Still, even with an IRS thumb on the scale, the best it could muster was 28% of taxpayers responding that they were very interested in using Direct File. An independent study within IRS’s report to Congress further concluded that absent a state return capability (which Direct File does not possess), 60% of taxpayers would continue to file with whatever tool they’ve been using.
Big government supporters on Capitol Hill like Sen. Elizabeth Warren incorrectly claim that the program was needed to save taxpayers from spending money on tax preparation services. Already, more than 30 non-profits offer free tax preparation services, and the for-profit tax preparation industry made available over 30 million free filings to taxpayers last year. Additionally, the IRS itself markets do-it-yourself tax preparation options, including the Volunteer Income Tax Assistance Grant Program and the Free File program.
Then there is the matter of the cost of a new government-provided service.
The IRS pegged the cost of Direct File at $2.5 billion over ten years. But the independent Treasury Inspector General for Tax Administration (TIGTA) reported that, “when we asked the IRS for documentation supporting how it arrived at these various cost estimates, it could not provide us with any.” Indeed, a third-party contracting consultant Govini estimated that the actual costs would be closer to the tens of billions of dollars that Healthcare.gov cost the taxpayers. But even that figure could be low; the ACA website handles ten to 15 million users annually, whereas the comparatively more complex Direct File site would need to be able to accommodate a potential 160 million taxpayers annually.
Beyond being superfluous and costly, Direct File will simply be inferior to existing commercial options – traditional, in person tax preparation services and programs that provide a digital assistant for filling out basic returns. Unlike most available tax services, Direct File will not help Americans file state returns. That’s a serious flaw because some taxpayers – many of whom build budgets around anticipated tax refunds – are likely to miss the fact that they must file state returns separately. Worse, those who neglect to file their state returns will be at risk of incurring state penalties.
IRS’ “free” tax-filing software project “doesn’t address some of the most basic needs of the targeted taxpayers, and “is virtually guaranteed to fail,” wrote former Obama administration Chief Information Officer Tony Scott. “These are important matters that the commercial tax prep companies have long ago learned and are missing from the proposed IRS approach on Direct File,” he said.
These fundamental flaws will be exacerbated by the IRS’s insufficient customer service to assist those taxpayers who use Direct File. All inquiries have to be submitted through a chat feature – with no option to call and speak with a live agent.
So why spend billions of dollars on an inferior and flawed service that no one asked for and few will use?
Some worry about the long-term implications of a structure that could eventually provide the federal government with a centralized repository of 120 million Americans’ direct banking links. Such a centralized system could, for example, make a Central Bank Digital Currency (CBDC) much easier to implement or make the rollout of a Universal Basic Income scheme seamless. Given the hopelessly flawed Direct File, even those not prone to conspiratorial thinking might question whether this was the intent of its left-leaning backers all along. Recent inquiries from Congressional leaders into whether the IRS may already be violating peoples' presumed privacy, using AI to search for evidence of tax crimes by monitoring their banking transactions, only amplify those concerns.
Americans understand that the IRS is incentivized to maximize what you pay in taxes, not to help you claim all the credits and deductions for which you are eligible. The only surprising thing about the fact that only 66% of Americans trust the IRS to help them understand their tax obligations is that the number is that high.
The Direct File program is at best yet another misguided, poorly executed attempt to have government do more than it should; at worst, it’s the first shot in a battle to further intrude on the private lives of American citizens. Either way, the nascent program should me smothered in the cradle. The IRS would be better advised to direct taxpayer funds toward increasing awareness of existing low- and no-cost tax preparation options and, better yet, toward improving its processing times and notoriously bad customer service.
Derek Kreifels is the CEO of the State Financial Officers Foundation.
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