As the Internal Revenue Service (IRS) gears up to start accepting and processing 2023 tax returns, the agency announced it will be launching its own tax preparation system.  The IRS having its own tax preparation system would greatly expand the agency’s power and make the IRS tax preparer, biller, and enforcer, interfere with a competitive and efficient marketplace, and undermine its own Free File program.

The IRS announced that the new pilot program will be fully available by mid-March in 13 states for taxpayers meeting certain eligibility criteria.  This pilot program was launched after the Inflation Reduction Act (IRA) included $15 million for the IRS to explore the viability for an in-agency tax preparation system, which is a far cry from their ignoring the law and moving forward with their own system.  The IRA was not the first time such a program has gotten support from lawmakers.  Some members of Congress, like Sen. Elizabeth Warren (D-Mass.) have long pushed for the IRS to launch its own tax preparation system.

There are several reasons that this expansion of the IRS’ power is a terrible idea for taxpayers and a waste of taxpayer dollars.  Most notably, the IRS has already tried and failed to create and operate its own tax preparation system when it launched Cyberfile.  The Cyberfile program cost taxpayers $17 million and failed to provide adequate customer service or protect taxpayer information.  In addition, the IRS already runs Free File, a free tax filing system for taxpayers whose income is below a certain threshold.  The Free File program was created in 2002, to take effect for the 2003 tax season, in response to the failure of Cyberfile.  The IRS has contracts with several tax preparation companies to provide taxpayers with free tax preparation services.  Approximately 70 percent of all taxpayers are eligible for this program but only 2 percent of taxpayers utilized the system during the 2022 tax filing season.

The IRS also has a troubled history of not adequately protecting private taxpayer information.  In 2016, the IRS said that more than 700,000 Americans had their Social Security numbers and other information exposed in a data breach.  A June 8, 2021, ProPublica article exposed the tax information of billionaires like Jeff Bezos, Elon Musk, and Warren Buffett.  In September 2022, the IRS revealed that the agency had inadvertently disclosed private information on 100,000 taxpayers.  The IRS also used taxpayer information for political purposes.  Under the Obama administration, the IRS delayed or unfairly investigated conservative groups applying for tax-exempt status.  The IRS’s history of mismanaging taxpayer information is clear, and the agency should not be given the power to collect even more information that is required to prepare personal tax filings.

In addition to their mismanagement of taxpayer information, the IRS has a record of poor customer service.  In its 2023 Annual Report to Congress, the Taxpayer Advocate Service listed customer service as one of the agency’s most serious problems.  The report stated that “despite improved phone service over the past year, the way the IRS calculates levels of service (LOS) paints a picture far more optimistic than the reality of the taxpayer’s experience when calling for assistance and does not address ‘quality service.’”  Taxpayers still suffer from long wait times when trying to get their tax questions answered by the IRS.  Before the IRS is granted more power and attempts to implement its own tax preparation system, the agency should work to ensure it can provide timely and quality customer service and avoid adding to their backlog.

Finally, only taxpayers know just how much they owe in taxes.  While the IRS already maintains a lot of taxpayer information, certain information like whether somebody got married, had kids, changed jobs, made changes to their retirement funds, bought or sold a home, or made charitable contributions would not be included in the IRS’ tax assessment if they are allowed to pre-determine a taxpayer’s income and tax liability.  Taxpayers use this information to determine how much they owe whether they prepare their own taxes, hire a tax professional, or use the IRS’ Free File system.

The Direct File program is another step in the IRS expanding its authority that has been years in the making.  Given the IRS’s troubled history of poorly protecting taxpayer information, allowing the agency the ability to access even more private information that would be required to run the Direct File program is ill-advised.  The agency should instead focus on improving customer service and modernizing its existing technology systems to better protect this private information.  The private tax preparation market is competitive and efficient, and the IRS already offers the Free File program that provides this service to taxpayers free of cost.  Expanding the IRS’ authority into preparing tax returns for taxpayers is a chilling development for all taxpayers.