18 states call on Biden IRS to abandon ‘flawed’ billion-dollar tax filing program

FIRST ON FOX: A coalition of 18 states is calling on the Biden administration to terminate a taxpayer-funded tax filing preparation program, characterizing it as wasteful, unnecessary and flawed.

In a letter Monday to Treasury Secretary Janet Yellen, Deputy Secretary Wally Adeyemo and Internal Revenue Service (IRS) Commissioner Daniel Werfel, 21 top financial officials from 18 states said the costs of the IRS Direct File program “far outweigh any potential benefits” and will create new issues for taxpayers and states, alike. In May 2023, Yellen ordered the IRS to move forward with the first-of-its-kind program, which is funded by the Inflation Reduction Act.

“Regrettably, Direct File is a solution in search of a problem,” the state financial officers wrote. “Direct File has the potential to do more harm than good for taxpayers. It will only enable them to file their federal tax returns. Taxpayers who are unaware that they must separately file state returns will not receive anticipated state refunds this spring.”

“This is significant because many taxpayers who use Direct File are likely to be lower-income and build budgets around anticipated tax refunds,” they added. “Even worse, confused taxpayers who neglect to file their state returns will be at risk of incurring state penalties. Imagine the surprise to the taxpayer who becomes subject to audit by the IRS after having filed through Direct File and having felt assurances that the tax return was prepared properly through the IRS’s own system.”

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According to the IRS, the Direct File program – which is estimated to cost at least $2.5 billion over the course of 10 years – was first launched as a pilot in January and officially expanded to more taxpayers earlier this month. However, the program doesn’t allow users to file state tax returns and is limited to some taxpayers who have simple tax situations in just 12 states, though the states picked either have no state income tax or have a similar state-backed filing tool.

The state financial officers argued the program may mislead users – many of whom are lower-income – who aren’t aware they need to file state returns with a separate preparation service and, as a result, may find themselves subject to fines. In addition, the letter said the IRS is offering limited customer service for the program, which will “cause taxpayer frustration.”

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And they said the program will harm states which may have to increase collection resources to ensure Direct File users file state returns.

“Surely a better use of taxpayer funds would be for the IRS to boost existing marketing efforts, or undertake new marketing efforts, for existing low- and no-cost tax preparation options rather than try to build a flawed service with the potential to harm those it seeks to help,” the letter concluded. “Again, we urge you to shut down Direct File. We appreciate your attention to this important matter to protect taxpayers.”

A Treasury Department official said it was false to suggest existing staff would be assigned for the Direct File program. Instead, the official told FOX Business, new employees have been hired for those customer service roles.

The Inflation Reduction Act, passed and signed into law in August 2022, mandated that the IRS hire an independent third party to analyze “the overall feasibility, approach, schedule, cost, organization design, and Internal Revenue Service capacity to deliver” a government-run direct e-file tax return system. 

The IRS announced in February 2023 that it would contract New America Foundation – a left-wing think tank funded by nonprofits founded by liberal billionaires Bill Gates, George Soros, Mike Bloomberg and Eric Schmidt – to study the hypothetical system. Then, in May 2023, Yellen green-lit the program after the IRS finalized a report outlining the options for the program.

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However, the report’s public opinion findings were based, in part, on a study conducted late last year by the nonpartisan MITRE Corporation that showed Direct File was relatively unpopular among Americans compared to private software or a system where the IRS automatically files returns for taxpayers.

The MITRE study found just 15% of Americans would use an IRS direct e-file system even if it was able to prepare state returns and provided the same functionality as free commercial software. In that scenario, 48% preferred the current software they use and 37% would use a system in which the IRS automatically filed individuals’ taxes for them.

In another scenario where state returns aren’t included, just 12% of taxpayers would use the IRS direct e-file option while 60% would opt for commercial software.

“State financial officers are careful stewards of their states’ resources, guardians of their economies, and watchmen against wasteful spending from Washington,” Derek Kreifels, the CEO of the State Financial Officers Foundation, told FOX Business. “The IRS’ abortive Direct File program sets off alarms for all three.”

“Wasteful and expensive, as well as unnecessary and flawed, the program will predictably have negative consequences for hapless filers and state treasuries,” Kreifels said. “It may also be the proverbial camel’s nose under the tent for government direct access to Americans’ bank accounts. State financial officers have every reason to oppose this big government solution in search of a problem.”

State financial officers and treasurers from Alaska, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Utah, West Virginia and Wyoming signed the letter Monday.

“Thanks to President Biden’s Inflation Reduction Act, millions of American taxpayers have a free, secure option to file online directly with the IRS for the first time,” Treasury Department spokesperson Haris Talwar told FOX Business. “Already this year, tens of thousands of taxpayers have filed with this free system that ensures taxpayers get their full refund by showing them the numbers and explaining the credits they should receive.”

“The IRS is committed to ensuring customer service for all taxpayers remains at record highs — the IRS is answering over 90% of calls, up from 15% when President Biden took office, and the average call wait time down to under three minutes,” he continued.