Republican attorneys general denounce IRS free file pilot as rival to products like TurboTax

Republican attorneys general from 13 states have signed a letter decrying IRS efforts to pilot a Direct File system, saying it is unconstitutional.

The letter was originally drafted through the office of Montana AG Austin Knudson. It was also signed by the attorneys general of Georgia, Texas, Idaho, Iowa, Louisiana, Missouri, Nebraska, South Carolina, Tennessee, Utah, Virginia and West Virginia.

The attorneys general sent the letter in response to the agency piloting a free direct file program in 13 states after the IRS conducted a feasibility study authorized by the Inflation Reduction Act (see story). At the time, Republican lawmakers had decried even conducting the study, let alone implementing the system the study was meant to evaluate, saying those selected to conduct the study were already supportive of a Direct File system. Despite these objections, the IRS moved forward with its plans, ultimately demoing the new solution just last week.

If the pilot is successful and the program is implemented, the U.S. will join at least 36 other countries in the world who have either return-free filing, or a system where the central tax agency prepares tax filings for taxpayers.

The letter stated that Congress never gave the IRS the authority to actually implement the program, saying that the $15 million appropriation as part of the Inflation Reduction Act was only to study the matter. The attorneys general said the administration appears to be trying to circumvent the Constitution by launching the pilot program. However, while the AGs voiced several procedural objections, they also expressed dismay at the very concept of an IRS Direct File program.

“The American taxpayers do not want to invite the proverbial fox into the hen house. A Direct File program will also have negative consequences for low-income filers and devastate small businesses,” said the letter, which later elaborated on this statement by saying the IRS cannot be trusted with such power, and they believe the IRS will likely abuse taxpayers as a matter of course.

They added that there is also a conflict of interest for the IRS to offer a tax filing tool, as it would be serving as a filer, an auditor and a tax preparer simultaneously. The letter noted that lower-income taxpayers are more likely to be audited than wealthier ones, so there needs to be work to identify and address the root cause of this phenomenon before even considering a Direct File program.

“This is especially important because an IRS-run Direct File program may leave taxpayers with the mistaken impression that the IRS is an independent and disinterested party,” said the letter.

It also pointed to the existing Free File Alliance as an avenue for taxpayers to get their returns prepared without paying. When the consortium was originally formed, the IRS pledged not to enter this space in order to incentivize the private entities to take part in the program. However, this provision was removed in the 2018 agreement shortly before a series of articles by the investigative news site ProPublica exposed problems with the Free File program, namely that some of the private companies taking part appeared to be deliberately obscuring and discouraging the free option.

The attorneys general concluded by saying the program should not even exist before another, likely more critical, study is produced.

“Treasury’s attempt to establish an IRS-run Direct File system side-steps Congress’ constitutional authority and the will of the American people by unilaterally establishing a new government program and further empowering an IRS that has repeatedly targeted some of the most vulnerable taxpayers,” said the letter. “We urge the Department to end the IRS-run Direct File pilot program. The agency should take no further steps on the program until it completes a truly independent feasibility study as directed by Congress.”