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Democrats are pushing for a free IRS tax filing service. Tax pros worry it’s an ‘administrative nightmare’

  • Sen. Elizabeth Warren, D-Mass., along with 22 more Democratic lawmakers, are pushing the IRS to create its own free tax filing service.
  • The bill also aims to allow eligible taxpayers to choose a “return-free option,” providing a pre-populated filing.
  • But some tax professionals say it’s not a realistic plan for the overburdened agency.
Sen. Elizabeth Warren, D-Mass., questions Treasury Secretary Janet Yellen during the Senate Banking, Housing, and Urban Affairs Committee hearing on May 10, 2022.
Tom Williams | Reuters

Bill would replace Free File, allow for ‘return-free’ filing

The Senate bill, known as the Tax Filing Simplification Act, directs the IRS to create a free, online service, allowing Americans to file taxes directly with the agency.

Reps. Katie Porter, D-Calif., and Brad Sherman, D-Calif., have introduced companion legislation in the House.  

The current IRS Free File program is a public-private alliance with the Free File Alliance, a nonprofit coalition composed of tax software companies. Although Free File users start at the IRS site, they are redirected to third-party providers to complete their returns.

Although roughly 70% of Americans are eligible for IRS Free File, only 3% of taxpayers used the service during the 2020 tax season, according to a U.S. Government Accountability Office report.

Officials at the Free File Alliance did not immediately respond to a request for comment.

“The average American spends 13 hours and $240 every year to file their taxes — that’s too much time and too much money,” Warren said in a press release.

The bill also aims to allow eligible taxpayers to choose a “return-free option,” providing a pre-populated filing with the tax bill or refund already calculated. 

It may be possible to automate nearly half of tax returns with information the agency already has, according to a working paper from the National Bureau of Economic Research.  

Tax pros: IRS can’t handle another ‘to-do’ right now

While tax experts applaud the desire to simplify the tax-filing system, many are skeptical about the Democrats’ latest approach. 

“I’m all for easy and effective free filing options for taxpayers,” Kubey said. “However, this law heaps additional requirements on an already overburdened IRS.”

Dan Herron, a San Luis Obispo, California-based certified financial planner and CPA with Elemental Wealth Advisors, echoed these concerns, pointing to burdens placed on the IRS through changing tax laws and added duties amid the pandemic. 

“They do not need this additional ‘to-do’ right now,” he said. “Let them work through the backlog, then have them try to implement this system.”

Let them work through the backlog, then have them try to implement this system.
Dan Herron
Principal at Elemental Wealth Advisors

The Taxpayer Advocate Service reported 21.3 million unprocessed paper returns as of May 31, up from 20 million one year prior, in its mid-year report to Congress.

An IRS spokesperson in late June said the numbers in the report were “neither the most accurate nor most recent figures.”

Return-free filing may cause missed tax credits

Tax filers choosing the return-free option may be subject to “all sorts of potentially damning results,” noted Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA, CPA in Orlando, Florida.

He said issues may include missing the earned income tax credit, errors calculating the child tax credit, skipping the child and dependent care credit and more. The NBER report found fewer than half of tax returns could be accurately pre-populated, with errors more likely to occur as itemized deductions increased.

Still, despite these challenges, some experts see promise in the proposed legislation. 

“I have advocated for this type of system for a long time,” said Brian Streig, a CPA with Calhoun, Thomson and Matza LLP in Austin, Texas. “Most taxpayers don’t need a tax professional to file their taxes because the cost of the preparation and advice is more than they would save in taxes.”

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Source: Investing - personal finance - cnbc.com

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