Why the IRS wants to increase its direct e-filed returns
The Inflation Reduction Act of 2022 required the IRS to report to Congress on issues surrounding an electronic filing system operated by the IRS. The report was issued on May 16.
The basic idea seems to be a good one. The IRS would develop and operate a system that allowed taxpayers to electronically file (e-file) at no cost to the taxpayer.
But of course, in today’s environment even a simple idea becomes contentious. Since 2002 certain commercial tax return software has offered free e-filing to qualified taxpayers.
There are some problems that have arisen. For one, it is alleged that the providers encourage users to sign up for other costly services offered by the provider.
Another issue is that in 2019 it was reported that more than 14 million people who qualified for free e-file had paid a fee to the provider.
In 2022 Intuit, a major software provider, paid $141 million as part of a settlement with the New York Attorney General’s Office.
Commercial providers have vigorously fought against competition from the IRS. Campaign contributions seem to have lined up support for these providers in Congress.
The May report was intended to focus on facts. Specifically, what do potential users of IRS e-filing services think about the idea.
First some definitions. “Free file” is a public-private partnership between the IRS and commercial providers to offer free e-file to qualifying taxpayers. It has been in operation since 2002.
“Direct file” is the free system to be developed by the IRS without any input of commercial providers. It has a prototype but is not in operation.
“E-file” is an IRS operated back-end system to process e-filed returns. It handles more than 150 million returns annually with a 1 percent error rate.
The error rate on paper filed returns is 20 percent. Only 8 percent of returns are paper filed but they account for 70% of the IRS processing costs.
It’s easy to see why the IRS wants to increase the number of e-filed returns. Fourteen states have developed their own direct-file systems.
So, what do taxpayers think about an IRS direct file system? Almost 3 in 4 say they would be interested or very interested.
The greatest interest is those who are younger, have limited English proficiency, and who currently prepare their own returns.
Those who have the least interest are those reluctant to change what they currently do and who are concerned about the lack of support for state-filed returns.
The IRS has taken abuse in the media. But almost half of those surveyed said they would use direct file because it was an IRS design.
Almost 20% specifically said their preference for an IRS system was because IRS would not sell their data for commercial benefit. About three in four said they trusted IRS with their data.
Others said IRS should not compete with commercial providers of e-file. These people also had concerns that IRS might not help compute the largest refund.
The IRS direct-file system would be free. When asked if they would use the IRS system over a commercial system costing $80, 70% said yes.
There are some in Congress trying to block IRS funding for a direct-file system.
I can’t understand this other than one more example of “money doesn’t talk, it swears.”
For all but extreme situations, choice is considered good in economics. The IRS direct file would not be mandatory. It would be one more choice.
It would cost the government money. But it would save tax filers money. The government is the people. Tax filers are the people.
I see direct file as saving “the people” money on a net basis. Commercial providers could compete on quality. The consumer can choose.
If it isn’t fair for the government to provide a service that competes with profit-making companies, much that the government does is also at risk of de-funding.
Those who believe that private business always outperforms the government should view the direct file proposal as one more chance to prove their point.
If direct file is shot down in Congress before it can take wings, it will be because commercial providers fear the competition and use their money to do their swearing.