Senators press IRS chief on offering free tax prep

The Internal Revenue Service is still studying the feasibility of offering its own free online tax preparation system, and its new leader is not ready to say yet what it will recommend, but he promised it would be released next month.

IRS commissioner Daniel Werfel testified Wednesday before the Senate Finance Committee a day after the end of what appeared to be a relatively smoother filing season compared to recent years. Earlier this week, Werfel and the Treasury Department reported that the extra funding for the IRS from last summer’s Inflation Reduction Act had allowed the agency to hire 5,000 more employees to answer taxpayer questions, reducing call wait times and allowing the IRS to reopen more of its in-person Taxpayer Assistance Centers.

The Inflation Reduction Act also contained a provision providing the IRS with $15 million to study the feasibility of providing its own free tax-filing system. In addition to a number of other topics, several senators repeatedly pressed Werfel on where the IRS stood on providing such a system, but Werfel urged them to wait until the study’s release.

Among them was Sen. Elizabeth Warren, D-Massachusetts, who has frequently called on the IRS to provide such a system, especially after the investigative news site ProPublica uncovered efforts by Intuit and other tax software companies to make the free versions of their programs harder to find in the IRS Free File program, or to upsell customers into paying for extra features.

“Thanks to the inflation Reduction Act, the IRS now has the resources it needs to make tax filing free and easy,” she said. “This has been on the IRS agenda, their to-do list for decades. Back in 2003, the IRS set up the Free File program, which was a partnership with companies like Intuit and H&R Block. That was supposed to make filing free for 70% of taxpayers. But today, that Free File program serves just 2% of Americans. And that’s because the tax prep companies sabotage the program. They could keep raking in money, deliberately hiding Free File web pages from Google searches and confusing eligible taxpayers by marketing other fake free programs to them, only to scam them by collecting a fee later on.”

She asked Werfel if he agreed that the current Free File program is a failure.

“I agree it’s not reaching as many people as it should,” he admitted.

Warren insisted that Free File is a failure. “The difference between 2% and 70% is massive,” she said. “I think that’s a failure. Tax prep companies have sabotaged the Free File program. They’ve tricked and trapped American taxpayers into paying for alternative services that are marketed as free, but in fact, they don’t make free and the result is that today, the IRS reports that Americans waste an average of 13 hours and $250 each year filing their taxes.” 

She also pointed to a Treasury Department analysis estimating that about 12 million low income Americans miss out on thousands of dollars in refunds because it is too expensive and too difficult to file through these supposedly free options. 

“We’re issuing a report by congressional mandate in mid-May and that will walk through a lot of the issues,” said Werfel. “One of the goals that we have at the IRS is to increase the options that taxpayers have to engage with us. If they want fully digital, they should have fully digital. If they want to do it on paper, we’re not thrilled with that, but we have to meet taxpayers where they are. And if they want to come directly to the IRS versus working through a third party, we now have the opportunity to study that and tell Congress what the implication of that is. As a guiding principle, the more workable options, the better. But because Congress asked and has legitimate questions about the issues associated with the direct file program, we’re going to answer them and then I’ll come back in mid or late May and then we can talk through what the report says.”

The IRS already offers a Free File Fillable Forms option in conjunction with its Free File program. The Free File Alliance includes a number of commercial tax software providers this year such as TaxAct and TaxSlayer, FreeTaxUSA, 1040Now, OLT and FileYourTaxes.com who offer various forms of tax prep to taxpayers who earn less than $73,000 in adjusted gross income, but there are often extra charges for state tax software. The two biggest tax software providers, Intuit’s TurboTax and H&R Block, no longer participate in the Free File program but they continue to offer free editions, although many taxpayers end up paying extra for more complex returns and state tax software. Cash App Taxes also offers free tax prep, but it too isn’t part of the IRS’s Free File program.

Senate Finance Committee chairman Ron Wyden, D-Oregon, also pointed out the provision for the IRS to study its own free tax prep system during his opening statement. “The Inflation Reduction Act took an important step on a free, direct-filing system,” he said. “It would provide another option for taxpayers who are sick of the hassle and expense that comes with filing online today. There’s a study underway looking at how to go about building such a system. building such a system. Republicans and the tax prep lobby have reacted as if this is going to bring on the end of Western Civilization. There used to be bipartisan interest in building a free-file system that saved taxpayers time and money every year.” 

Sen. Mike Crapo, R-Idaho, the ranking Republican on the Senate Finance Committee, disagreed with Wyden’s assertion. “I want to start out with an issue which my colleague Senator Wyden raised in his introductory remarks where we do have a big disagreement, namely whether the IRS should be the entity that prepares people’s taxes for them,” he said. “Some want the IRS to prepare tax returns for taxpayers, and several colleagues have actually introduced legislation in Congress to authorize the IRS to do that. The IRA gave the IRS $15 million to study such an outcome. This idea is concerning, and not just because of the apparent biases in favor of doing so by those who were selected to conduct this study. But for a lot of other reasons, having the IRS act as tax preparer, tax collector and tax enforcer raises significant conflicts of interest in many of our minds. They would incur billions of dollars of cost in development and would expose exponentially more taxpayer information to misuse or abuse. The private industry. The private sector of this country already prepares and files free tax returns for tens of millions of Americans, and millions more of Americans are already eligible for that. The IRS strategic plan has an entire initiative devoted to an IRS-run tax preparation program, which seems to me odd, because it’s still being studied right now.”

He asked Werfel if the IRS has yet made the determination that it’s going to pursue a free tax prep system, and if so, where the IRS finds its statutory authorization to do so or the funding allocated and appropriated for it to do so.

Werfel assured him that no decision has been made yet on moving forward with a direct-file solution, largely because the inflation Reduction Act only mandated that the IRS produce such a study for the Senate Finance Committee and for Congress on the feasibility of such a solution. “That study is due in mid-May,” said Werfel. “We’re on track to complete that study. I don’t want to jump ahead of the conclusion because the study is not done yet. And so we’re still working through it, and what we plan to produce will helpfully create an important dialogue with between the IRS the administration and this committee on what the study says and whether it is feasible or not what the various issues are, because you’ve raised some questions, and hopefully this study will help us have a good dialogue on those points.”

Last month, a pair of Republican leaders of the tax-writing House Ways and Means Committee objected to the selection of a group called New America to carry out the IRS study on a free tax-filing system, claimingto the acting IRS commissioner that the organization has already recommended such a system in the past and would be biased in favor of a free tax prep system.

Sen. Ben Cardin, D-Maryland, raised the issue of paid tax preparation. “I appreciate the discussion you have with the ranking member and chairman in regard to direct filing and and the study that’s being done,” he said. “I would encourage you to also include small businesses as to the impact it could have on our small business population in trying to simplify the way that they can comply with our Tax Code. I’ll just point out that the authority issue is interesting because we haven’t given you the authority you need to go after paid providers. And one of the issues is that particularly for low-income families, yes, there’s free tax service available, but there are also paid providers that they’re paying for. And we’re not sure they’re getting value in all these circumstances. And unfortunately, we don’t have the accountability that is necessary here.”