IRS should stop wasting money on its own tax filing software 

Some of the most frequently criticized provisions of the Inflation Reduction Act are related to funding for the Internal Revenue Service (IRS). While the focus has mostly been on the impact of hiring 87,000 new IRS agents, the legislation also included $15 million for the agency to create its own direct tax filing system. The Fiscal Responsibility Act rescinded $1.39 billion for the IRS, which impacted hiring, but not the proposed new software program.

The concept of giving the IRS the power to create and run its own tax filing system has been around since before the turn of the century. In 1995, the IRS signed an agreement with the National Technical Information Service to create Cyberfile and spent $17 million on the program before it was cancelled. As the Government Accountability Office (GAO) noted in its Aug. 26, 1996, report, Cyberfile “was poorly planned and managed.” Understanding that the federal government should not be in a business that was already being successfully provided by the private sector, Congress created the Free File program, which began operating in 2003.

As former IRS Commissioner John Koskinen said in a Jan. 15, 2016, press release, “Free File software can walk you through the steps and help you get it right,” and “[t]he real winner in this partnership has been the nation’s taxpayers.” The 2023 program is available for taxpayers who earned $73,000 or less in tax year (TY) 2022. While nearly 70 percent of taxpayers during the TY 2021 filing season were qualified to use Free File, only 2 percent used it. That does not mean that the government should solve this “problem” by wasting tens of millions of dollars creating its own software program, it means that if there was improved outreach, more qualified taxpayers would likely use the free services.   

And that was the conclusion reached in the Electronic Tax Administration Advisory Committee’s Annual Report to Congress. Recommendation #18 states, “ETAAC recommends the IRS and Congress evaluate making improvements in communication, marketing, and accessibility of existing free tax filing programs before investing in the development and implementation of an IRS Direct eFile platform.”  

Nothing has occurred since the failure of the Cyberfile program to give taxpayers any confidence that IRS information technology systems are capable of handling tax preparation better or more securely that the Free File program. In 2022, the Treasury Inspector General for Tax Administration issued a series of reports identifying critical cybersecurity vulnerabilities that placed taxpayer data at risk. A Feb. 15, 2023, GAO report noted that aging IT systems at the IRS were slowing “federal payments and services, and make taxpayer information vulnerable to cyberattacks.” These systems were first placed on the GAO’s High-Risk List in 1997.   

One of the reasons given for the IRS study is to supposedly help the agency crack down on so-called tax cheats, but even the smallest taxpayer would be caught up in the new system. And having the IRS pre-fill a tax return based on a prior year’s filing would not include vital information about the taxpayer, like a marriage, death, divorce, new child, home purchase or other life instances that would affect the taxpayer’s tax liability. It would also undermine one of the most critical components of the U.S. tax system. As the ETAAC noted, it is “imperative that the taxpayer’s journey remains one that encourages voluntary compliance, instills trust, provides high levels of service, and inspires confidence in our nation’s tax system.”   

The results of the $15 million “study” of a direct filing system were released on May 16, 2023, when it was learned that the IRS had not studied whether it should create its own tax preparation program, it went ahead and created such a program. House Ways and Means Committee Chairman Jason Smith (R-Mo.) said, “The announcement of a pilot program raises serious questions about how long the Biden Administration’s decision to move forward on such a program has been in the works, whether the agency had any intention of following Congress’ direction that this study be conducted in an independent and impartial way, and whether the IRS is acting outside the law in establishing a program that Congress has not authorized.” 

With proven private sector options available to help taxpayers file their taxes for free using the existing Free File program, the IRS should not be spending a penny to build and promote its own tax preparation program. Congress should heed recommendations of the EETAC and require the IRS to modernize its antiquated IT infrastructure, harden it against cybersecurity threats and stop wasting money to development systems that are available and working well in the private sector.   

Deborah Collier is Vice President of Policy and Government Affairs at CAGW.