The Treasury Inspector General for Tax Administration (TIGTA), in a report[1] dated October 2, 2023, concluded that the Internal Revenue Service (IRS) likely inflated taxpayer interest in using an IRS Direct File tool for tax preparation because IRS used a flawed survey methodology. TIGTA also states: “Direct File cost estimates [by IRS] could not be substantiated.”
America’s tax preparers assist tens of millions of American taxpayers each year in preparing and filing their federal and state income tax returns, helping those taxpayers claim all the credits and deductions to which are legally eligible. Last year, private industry provided an estimated 30 million free federal tax returns. The fact is, IRS Direct File is unnecessary, expensive, and a distraction from more pressing priorities at IRS.
Here are the key findings of the TIGTA Report:
- An IRS Survey Likely Overstated Taxpayer Interest in Direct File. In its report, TIGTA stated that “taxpayer interest in a Direct File tool may be overstated due to the design of the surveys conducted.” Specifically, TIGTA said the IRS Taxpayer Experience Survey put participants into a “forced choice” response scenario – and thereby potentially inflated taxpayer interest. Furthermore, TIGTA said, “the survey prompt may have led taxpayers to believe that the tool would have more options than it will immediately have available, such as the ability to file State tax returns.” Finally, TIGTA noted that a MITRE study found that 60 percent of taxpayers would choose their current tax software when State returns are excluded from the Direct File tool.
- IRS Direct File Will be Inferior to Private-Sector Offerings. Although TIGTA does not explicitly say this, there is no other conclusion. TIGTA states: “According to our discussions with IRS management, State tax return filing, i.e., preparing and submitting a tax return, will not be an option for the Direct File pilot.”[2] It is still unclear today who will be eligible to use IRS Direct File.
- The IRS Direct File Cost Estimates Could Not be Substantiated. The IRS report to Congress in May 2023 estimated that Direct File may cost American taxpayers $2.5 billion over 10 years. But that figure is wholly unreliable – and low. TIGTA states: “The IRS’s estimate included costs associated with providing customer support, product development, i.e., labor costs, and technology, i.e., hosting fees, software licensing fees, etc. Yet when we asked the IRS for documentation supporting how it arrived at these various cost estimates, it could not provide us with any.” Govini, a federal government contracting analyst, found that the cost of building and maintaining the Affordable Care Act website was $24 billion over 10 years. The ACA website services about 10 million to 15 million health insurance applicants each year. By comparison, IRS Direct File theoretically would have to service 160 million taxpayers annually.
[1] Treasury Inspector General for Tax Administration, “Inflation Reduction Act: Assessment of a Free and Electronic Direct Filing Tax Return System,” Report No.: 2024-408-22 (Oct. 2, 2023).
[2] TIGTA notes that IRS is trying to work with States and stakeholders “to include limited State income tax filing information sharing to help facilitate State tax return filing for the taxpayer.”
