The IRS recently announced that it will launch a free-to-use e-filing pilot program next year. But taxpayers should look past the appealing word “free” in that phrase and be more skeptical about what such a program would really cost them.
Every tax filing season, Americans spending time and money filing their taxes ask why it is even their responsibility. It’s an understandable question, after all: should taxpayers really be required to help the IRS with the process of rifling through their pockets?
But taxpayers are left with this responsibility for a simple reason: it’s a far better alternative than entrusting it to the IRS. While this pilot program is, for now, more akin to an online filing portal than a tax preparation service in the manner of TurboTax, it would still lead to unprecedented intrusions into taxpayers’ private personal and financial information. It would also require taxpayers to assume that the IRS has their best interests at heart when it comes to ensuring that their tax bill is as low as it should be, an extremely optimistic assumption.
Both of these concerns about IRS-generated returns apply to the IRS operating a “free” (that is, taxpayer-funded) e-filing system. As unpleasant as it may be to pay someone for tax preparation services, taxpayers can know that those preparation services have a financial incentive to find every lawfull credit and deduction that a taxpayer is entitled to. The IRS has no such incentive.
The IRS has been working for some time to increase the amount of taxpayer information it has access to. A proposal last year would have given the IRS access to information on any financial account exceeding $600 in gross inflows and outflows over the course of a year — in other words, just about every account. Even the follow-up proposal, raising the threshold to $10,000 and exempting payroll deposits, would nevertheless have caught up millions of average Americans’ bank accounts in its dragnet.
What’s more, the IRS has a track record of treating many taxpayers it gets into a dispute with as tax cheats trying to pull one over on the agency. With that institutional attitude, only strengthened by a recent massive injection of enforcement funding under the Inflation Reduction Act and a mandate to crack down on the “tax gap,” taxpayers would be foolish to expect that the agency’s e-filing tool would endorse anything but the strictest possible interpretation of credits and deductions.
There’s also the question of whether the IRS can truly handle this responsibility. The IRS’s customer service metrics appear to be up of late from their abysmal lows, but the agency has still not shown that it is ready to enter the modern era. Website functions that are standard in the private sector (and even other government agencies), such as virtual and automated chat customer service and secure document-sharing, are still yet to be implemented on any kind of scale. Is an agency that hasn’t managed those fairly basic technological feats really ready to build and maintain a reliable e-filing platform for taxpayers?
And while this IRS-run platform would technically “compete” with private alternatives, a taxpayer-funded platform could push many of those alternatives out of business — it’s hard to compete with a price point of “free,” though the government would be engaging in its own form of deceptive advertising. Even if taxpayers end up losing money in the bargain from more restrictive interpretations of credits and deductions, they would have no way of knowing that without paying even more out of pocket for what would be tougher-to-find “second opinions” among tax preparers.
Neither is any government-run program truly “free” for taxpayers. The IRS has claimed that a filing portal able to serve 25 million taxpayers (or about one in six taxpayers) would cost taxpayers nearly $250 million. That price tag would only go up as it becomes more ambitious.
Taxpayers have many reasons to be skeptical about the expansion of the IRS. They should be especially so when it comes to tax filing.
