IRS takes baby steps with new direct file program

The IRS is taking a cautious approach to launching a free online tax filing system as the agency and its ambitious projects face intense political scrutiny.

The IRS’ new “Direct File” online tax filing system will be available to an unlimited number of citizens when it is widely rolled out in mid-March, the IRS announced.

But the program is still in an internal testing phase, and so far only about a dozen IRS employees in states with no income tax have filed returns under the new system, IRS officials said last week.

The IRS plans to directly file returns from 1,200 people in states with no income tax as part of a preliminary testing phase. open it to California, Texas, New York, and other populous states.

The agency has repeatedly said it wants to start small with its new filing system, a public alternative to private software programs such as TurboTax and TaxSlayer. The initial sample of a dozen filers is actually a far cry from the hundreds of thousands of tax returns the IRS expects to process using direct filing during the current tax filing season.

Experts say scaling the program should not be a problem for the IRS, whose technology infrastructure is robust enough to handle larger Direct File-like systems.

“From a scalability perspective, there is no reason to think that the IRS would have no problem processing tens of millions of tax returns through Direct File,” said the author, who contributed to the evaluation of the feasibility of the Direct File program. said Professor Ariel Jourou Klayman of Loyola Law School. She spoke to The Hill as part of a team of outside experts.

“We already e-file our tax returns. The IRS already receives them and processes them, and that part of the IRS process actually works very well. Direct file addition is just a small change on top of that. So technical scalability didn’t seem to cause any concern for our engineers,” she said.

Still, technology has long been a challenge for the IRS, which is one reason the agency received an $80 billion funding increase over 10 years in the 2022 Inflation Control Act (IRA).

Some of that funding is still effectively debatable, as Republicans seek to restore regular spending to government agencies to reduce additional funding.

Last year, the government internal oversight body An IRS technology audit found that 33 percent of computer applications, 23 percent of software, and 8 percent of hardware assets are considered “legacy.” This could mean software that is more than 25 years old or as many as 15. A later version than the current version.

Of the nearly 20 different modernization efforts currently underway at the IRS, only three include plans to update or replace legacy systems that could enhance or adjust taxpayer programs such as direct filing. This was revealed in an investigation by the government accountability organization (GAO).

GAO said the Direct Filing Initiative is expected to provide various forms of tax preparation assistance, some of which could pose problems to the system’s ability to process additional taxpayers, experts said. The house points out.

“What has raised concerns in terms of scalability is customer service. Customer service is our largest ongoing cost and will likely be the largest ongoing cost of direct file,” said Jurou Kleiman. . “When you have more users, you need more customer service representatives. That costs money and requires training.”

The IRS plans to hire 7,394 taxpayer service employees in 2023 and 6,489 service employees this year, according to an IRA funding management plan released in April. Last year, it has not been disclosed whether he will specifically work on the file account.

In addition to the issue of scaling the program, questions have also arisen about how it differs from other tax preparation software and services.

The vast U.S. tax code gives wealthy taxpayers and corporations several ways to minimize their taxes. Tax preparation software programs often bill customers as optimizing the largest possible personal refund.

In the future, as government agencies incorporate more artificial intelligence into their protocols, Direct File could replace many of these programs and perhaps even some private tax professionals, but the IRS I don’t consider it an optimization tool.

Rather, the system is intended to help taxpayers file correct returns, one IRS official working on the Direct File pilot told reporters during a program briefing in January. .

Still, officials said they want to make sure taxpayers don’t leave money on the table and receive all the deductions allowed by law.

Although direct filing is structured around individual tax returns rather than businesses, some business tax experts warn that private accounting standards and incentives built into tax returns are inherently misaligned. are doing.

“There are as many possible differences as to why tax returns and financial statements may not be similar,” Dean Driskell, a forensic accountant at consulting firm JS Held, told The Hill. “The purpose of the IRS is to maximize revenue to the Treasury.”

Given the initial limitations, it is unlikely that many wealthy individuals will take advantage of the IRS program.

The IRS’ direct filing system can only process payroll income, not investment income, and can only process the standard deduction and a few deductions typically targeted to low-income households and individuals, such as the child tax credit and the earned income tax credit. Masu. Earned Income Tax Credit and Other Dependent Deductions.

The program could be expanded in the future to handle more complex cases and bring more people onto the same playing field for tax preparation. But some experts worry it could make the two-step tax process even worse, favoring the wealthy.

“Direct files grow over time, so you definitely have to keep in mind that if the IRS and Treasury decide it’s worth doing, you don’t want to build a system that exacerbates that kind of tiering. Yes,” said Jurow Kleiman.

“We don’t want this to be something that only low- and middle-income people have access to, so there’s a double or triple line where some people have public services and some people have private services. “Because it feels like there’s a system ‘for wealthy people,'” she said.