A Prospect Newsletter About Big Ideas
 ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

View this email in your browser

 

Can the IRS Beat the Tax Prep Industry at Its Own Game?

The free Direct File program is being tested in 13 states this tax
season.

Earlier this week, the IRS announced

that beginning in the upcoming tax season, 13 states would pilot a free,
electronic tax filing system known as Direct File. Years in the making,
the development of such a system has faced aggressive counter campaigns
from the largest tax preparation companies and their trade associations.
According to the money-in-politics watchdog group OpenSecrets, the tax
prep industry spent $90 million

in lobbying over a two-decade period.

There's a lot at stake for the tax prep industry if taxpayers have an
easily available, free option on the table. Even as 70 percent of
taxpayers are eligible for the existing Free File program (more on that
later), only 3 percent use it, translating to taxpayers spending up to
$13 billion each year on tax prep services, according to estimates
from
the personal finance company NerdWallet.

In response to the new Direct File, the pro-industry argument touts the
existing Free File program as sufficient. Created in 2001, Free File is
a public-private partnership between the IRS and companies from the
sector known as the Free File Alliance
. For
the tax prep industry providing the free filing service, in return, the
IRS pledged not to create an in-house tax filing system.

But two decades of severe underutilization and companies such as Intuit
deliberately

writing code to shadow-ban the Free File option from search engine
results, the IRS today is recognizing the misaligned incentives from the
Free File program's inception. Why would the tax prep industry
unilaterally hand over its market share-the customer base that
sustains its business operations-to the federal government for free?
Instead, Free File as operated for the last 20 years was simply a fig
leaf for an industry that continued to funnel its customers into paid
options.

Outside of the federal government, in the weeks leading up to the Direct
File program's announcement, more than 200 advocacy groups under the
banner of Better IRS mounted a
digital campaign drumming up support for the pilot program. Throughout
the process, Better IRS directly responded to the tax preparation and
financial services trade association, American Coalition for Taxpayer
Rights (ACTR), which earlier criticized

Democratic lawmakers Sen. Elizabeth Warren (D-MA) and Rep. Katie Porter
(D-CA) over their support for a Direct File program.

In short, ACTR argued that the existing Free File program could be
improved, taxpayers won't know how to use a new Direct File,
administrative costs would add up over the upcoming decade, and public
support for Direct File isn't there. It also mentioned a potential
legal challenge against the IRS for engaging in tax preparation.

Better IRS counters

that the American Coalition for Taxpayer Rights arguments are at best
speculative, and at worst distorting the intended implementation of
Direct File. This first version is a pilot program; future iterations
would hopefully improve from there. Some of the complaints ring
distinctly hollow-if public support is minimal, then why would the tax
prep industry care? One suspects that tax preparers are actually worried
that people might love Direct File.

[link removed]

Indeed, Better IRS cites the IRS Report to Congress
on a Direct File system that
72 percent of Americans are interested in a Direct File program. To be
fair, this figure was disputed by a report published

by the Treasury Inspector General for Tax Administration (TIGTA)
auditing the IRS Direct File study. The report indicated that the
IRS's survey design could have translated

to inflated support for a Direct File program, further adding that the
agency didn't provide documentation to support the program's
expected adoption rate and operating costs.

In response, the IRS argued that the agency had acknowledged the
possibility of overstated support, and that the agency provided
documents for cost estimates even if TIGTA found them insufficient.
Oddly, the IRS response did not mention the adoption rate concerns.

Common sense would indicate that the public response to Direct File will
entirely turn on whether it works or not. If the IRS can demonstrate a
high adoption and satisfaction rate with taxpayers participating in the
Direct File program in the pilot states, then people will flock to it.
It will be a challenge given that most taxpayers are accustomed to H&R
Block, TurboTax, and other services. But if Direct File is similarly
simple and also free, presumably most will prefer it.

Aside from the customer satisfaction perspective with a Direct File
experience, legal challenges questioning the agency's authority could
perhaps be the program's biggest threat in the medium to long term.
ACTR questioning the IRS's authority over tax preparation should be
seen not as an empty threat, but rather a promise to file a lawsuit
designed to roll back the creation of Direct File, with the legal
"justification" to be filled in later.

But until then, the tax prep industry's front-end PR campaign is
losing steam from a combination of missteps. Because the Speaker-less
Republican-led House chaos has no end in sight, the news of the Direct
File pilot program went unmentioned by the GOP this past week. Further,
without a Speaker in place, the GOP war against the IRS and its $80
billion in funding from the Inflation Reduction Act is on hold.

In the event Republicans resolve their intraparty squabbles before the
current continuing resolution expires on November 17, they'll be
facing a two-fronted battle: attacking the Direct File program and
clawing back funding. It's hard to imagine the GOP setting those as
priorities and executing them in a matter of weeks.

The only backstop Republicans currently have is the 1 percent budget cut
from former Speaker Kevin McCarthy (R-CA) and President Biden's debt
ceiling deal. The impact of that 1 percent cut in the legislation's
text translates to a $1.4 billion cut to the IRS, but could rise to as
high as $21.4 billion, according to the

**Prospect**'s reporting

from earlier this year. (Those losses could be replenished, however.)

All told, despite legitimate concerns from the tax agency's inspector
general, the shift to a Direct File program has riled the middlemen with
the most to lose from a government-sponsored tax filing alternative. At
the same time, the party hell-bent on slashing the agency's funding is
stuck in the mud until further notice. For the IRS, that's a good
sign.

~ JAROD FACUNDO, WRITING FELLOW

Follow Jarod Facundo on Twitter

[link removed]

CLICK HERE TO OPT OUT OF THIS NEWSLETTER SERIES

Click to Share this Newsletter

[link removed]

 

[link removed]

 

[link removed]

 

[link removed]

The American Prospect, Inc., 1225 I Street NW, Suite 600, Washington, DC xxxxxx, United States

Copyright (c) 2023 The American Prospect. All rights reserved.

To opt out of American Prospect membership messaging, click here
.

To manage your newsletter preferences, click here
.

To unsubscribe from all American Prospect emails, including newsletters,
click here
.