This is a special Weekly Update in preparation (pun intended) for Tax Day. Tax Day is dreaded by most Americans out of fear of an audit or just the size of their tax bill. Tax reform and Internal Revenue Service (IRS) reform must work hand in hand with each other.

Even though the Tax Cuts and Jobs Act (TCJA) was passed in 2017 giving the economy a much-needed boost, the tax code is still way too complex. When TCJA was passed, middle class earners received a nice tax cut and businesses expanded and distributed millions of dollars worth of bonuses. The economy grew and the economic future of the country looked bright. There is still more work to be done to reform the tax code and make sure the 2017 TCJA tax cuts are made permanent.

Reforming the IRS is critical because the agency has been chronically mismanaged and expanded into areas it has no business being involved with. IRS computer systems are decades old and IRS staff has been caught leaking sensitive private tax information. Despite the IRS claiming that the agency wants to focus its audits on high income earners, the IRS actually targets low-income earners at a higher rate than high income earners. The IRS is also expanding its reach into tax preparation. The latest agency debacle, Direct File, was launched this year. Direct File allows the IRS to prepare and file taxes. Direct File is a massive conflict of interest. As the preparer of taxes, the IRS will be an advocate of the agency trying to minimize refunds and maximize revenue. The current pilot program was never authorized by Congress and according to a Government Accountability Office ([link removed]) report, very expensive. The IRS's cost estimates did not address other
recommended best practices, such as ensuring all costs were included and documented. GAO and the Treasury Inspector General for Tax Administration found that IRS had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates.

Enjoy this special Weekly Update and make sure your taxes are filed on time.
As a bipartisan, pro-growth, offset package, the Tax Relief for Americans and Working Families Act represents the largest positive movement on U.S. tax policy since TCJA in 2017. TPA was proud to lead a coalition letter ([link removed]) alongside 11 other organizations urging Senate leaders to take up the tax package, and signed on to another ([link removed]) coalition letter, led by Americans for Tax Reform, calling on the Senate to put aside their differences and support this commonsense legislation.

For most of 2023, the idea of a bipartisan tax package seemed low on the list of congressional priorities. However, last December, reports began surfacing that lawmakers were quietly in bipartisan negotiations on renewing major tax provisions that have expired or are currently being phased out.

Late in January, the House of Representatives passed a rare, bipartisan tax deal that would give American working families and small businesses a break. Today, the deal still sits idle in the Senate. Sens. Chuck Schumer (D-N.Y.) and Mitch McConnell (R-Ky.) should do the right thing and bring this tax deal to the Senate floor.

For years, businesses have been raising the alarm about the rising cost of their operations. This hinders their ability to competitively innovate against other nations that offer “super-tax” breaks for product innovation. Pro-growth tax provisions from the Tax Cuts and Jobs Act (TCJA) – like full research and development (R&D) expensing – expired as far back as 2021. The business community has, as a result, suffered a competitive disadvantage for deploying their capital in the United States.

Until 2022, if a business invested money into (R&D), they could deduct the full amount from their taxable income for that year, since the money was not effectively used as income, but re-invested into the company. As of 2022, however, those costs had to be spread out over five years. This increased American businesses’ tax bill and made it a riskier proposition to invest. This tax package is a worthy response to repeated calls for help from America’s business community.

The bill – introduced by Rep. Jason Smith (R-Mo.) – is appropriately dubbed The Tax Relief for American Families and Workers Act of 2024. On January 31st, the entire House voted overwhelmingly to shore up the wallets of families and entrepreneurs alike. The bill passed 357-70, and H.R.7024 was sent to the Senate for a future vote.

The longer the Senate waits to vote on this tax package, the more likely the window to fix the damage this tax season goes by. This legislation brings solid wins to the American public and a much-needed political wins to both sides of the aisle. The House rightly saw the immediate need to restore immediate and full R&D expensing, reinstate one hundred percent bonus depreciation, and provide relief on certain business-interest deductions, like machinery. These provisions make it easier for businesses to invest in themselves and the American economy, minimizing that risk.

Looking at where the provisions apply retroactively, R&D expensing is provided for 2022 and 2023, one hundred percent bonus expensing applies for 2023, and increased interest deductions apply for both 2022 and 2023.

Looking to the future, returning to immediate R&D expensing will allow companies to deduct their expenditures in the year they were incurred. This will free up capital and allow small businesses that are highly leveraged to make investments in their future. This includes adding jobs, as the salaries of those workers helping to develop products are generally categorized under R&D expenditures. Simply put, high-skilled jobs will start in the United States and stay there.

Research by the Tax Foundation shows that the package does not exacerbate inflation, despite dubious claims to the contrary. After 2025, tax revenues actually increase through 2033. Providing relief at a time when wages have not kept pace with inflation is just as critical to Americans as any other issue the Senate is set to debate soon. Should the Senate decide to take up The Tax Relief for American Families and Workers Act of 2024 soon, they will build on the benefits ushered in under the TCJA, and adding even more reforms on top of it.

This tax deal makes America more competitive and builds up the economy to weather this current inflationary climate. Leaders in the Senate have been handed a massive opportunity by the House. Further, this is a chance for a bipartisan win – something that has been sorely lacking as of late. There are few “no-brainers” in Washington. However, this is as close as the Senate has come to deliver a key victory for taxpayers. They should take it.

Tax Day looms, and the Taxman cometh. It is a certainty, as Ben Franklin said.

This year, the Internal Revenue Service has launched a pilot program dubbed “Direct File” through which Americans can opt to have the IRS prepare their taxes for free (well, except for the billions of taxpayer dollars used to create the program).

The IRS wants to eliminate Americans’ reliance on private-sector, tax-preparation services. Despite its recent trendiness in certain circles, Direct File has little potential for good — and much for bad. In addition to the pilot program’s dubious legality ([link removed]) , there are many fiscal and prudential reasons ([link removed]) not to trust the IRS with this new responsibility.

Adding a federally operated competitor to a market does not equate to providing or promoting competition, as some of its advocates have argued — not in any traditional usage. Nobody would consider creating a federal grocery store, a federal airline or a federal movie studio as a pro-market or pro-competitive policy. State-run enterprises enjoy the profoundly anti-competitive advantage of bearing the imprimatur of the state, and they are not subject to the ordinary competitive pressures to which private businesses must remain sensitive and respond.

Neither does a Direct File system seem likely to provide a valuable service to taxpayers. The proposed system’s very conceit clangs against the American legal and political tradition, in which adversarial actors’ opposition to one another is an indispensable guardian of liberty and good governance. This combative friction — the defense lawyer against the prosecution, Congress against the presidency, the states against the federal government — ensures (in theory, at least) that no one faction or institution has a smooth route to self-interested injustice.

The IRS proposes to excise such friction. The agency wants to file the citizen’s taxes, collect that money, and double back to conduct audits — without any mediating institution to gainsay potential (nay, likely) abuse. Washington politicians and bureaucrats certainly should not promote its adoption. Low-income and minority taxpayers — whom IRS auditors target disproportionately ([link removed]) and whom the IRS would likely market Direct File most energetically — have perhaps the most significant interest in retaining private intermediaries such as TurboTax or TaxSlayer.

What’s more, Direct File would not be “free,” as its advocates aver. Americans might not pay when filing their taxes, but those tax dollars would fund the digital infrastructure, personnel and other resources undergirding the system.

The IRS estimates Direct File to cost $64 million to $249 million annually, which seems wildly low. In 2021, researchers at Govini analyzed ([link removed]) Direct File’s likely price tag against the experience of Healthcare.gov ([link removed]) , concluding that the former’s costs would dwarf the latter’s. Govini reported the Obamacare website cost taxpayers $20.2 billion through October 2021.

An audit ([link removed]) by the Treasury Inspector General for Tax Administration (TIGTA) could not confirm the IRS’s cost assumptions — nor could the agency meaningfully defend them. “When we asked the IRS for documentation supporting how it arrived at these various cost estimates,” TIGTA said, “it could not provide us with any.” This lacuna elicits no confidence in the IRS’s figures.

Besides such fiscal qualms, the IRS is an agency ill-suited to ameliorate the private-sector harms that proponents of Direct File have identified.

Consider the Taxman’s record.

The IRS has failed routinely to prevent data breaches, including a 2022 incident ([link removed]) in which the agency briefly published the personal data of 120,000 taxpayers. According to a 2022 Government Accountability Office report ([link removed]) , from 2012 to 2021, “the IRS completed 1,694 investigations into the willful unauthorized access of tax data by employees.” The agency substantiated 462 cases as “violations” and left 380 cases unresolved.

Some say private tax preppers have targeted minority communities. But the IRS cracks down on such populations with gusto, auditing counties in predominantly Black and rural regions of the Deep South most frequently. “Audit rates are also very high in the largely Hispanic communities in south Texas, the counties with Native American reservations in South Dakota, and the poor, White counties in Kentucky’s Appalachia region,” MarketWatch reported ([link removed]) in 2019. “In fact, the audit rates in these areas were more than 40 percent above the national average.”

The IRS is the ultimate economic bully. Its audits are notoriously ferocious and burdensome, and it has, at times, deployed its vast powers for unethical and politicized ends ([link removed]) . What’s more, the agency’s customer-service capacity has proven painfully dismal ([link removed]) , erecting further obstacles for would-be law-abiding taxpayers. Offering Direct File at scale would substantially increase the demand for customer and technical support, a demand the IRS could not likely meet.

The proper remedy to any issues with private tax preparation companies is to address discrete problems where they exist. Instead, advocates of Direct File propose to centralize still more power in one of Washington’s least responsible agencies, injecting a fully socialized competitor into the market and mucking up the basic principles of American governance.

Have a great weekend!

Best,

David Williams
President
Taxpayers Protection Alliance
1101 14th Street, NW
Suite 1120
Washington, D.C. xxxxxx

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