Watchdog launches probe into IRS creating government-run tax filing system: 'Recipe for disaster'

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A conservative watchdog group is launching an investigation into the Internal Revenue Service (IRS) for building a government-run tax filing program that critics argue would give the agency too much power.

The American Accountability Foundation (AAF) is making public records requests, first obtained by Fox News Digital, seeking communications and other documents from the IRS and the Office of Management and Budget concerning the creation of an IRS-run electronic tax filing system, commonly referred to as "direct file."

The Inflation Reduction Act, a mammoth Democrat-backed spending bill signed into law last year, included $15 million for the IRS to look into creating a free direct tax return system. Specifically, the legislation required a study by an independent third party examining the idea's feasibility, as well as a report by the IRS for Congress assessing the study, the cost of such a system, and taxpayer opinions based on surveys.

Commissioner Danny Werfel speaks after being ceremonially sworn in at IRS headquarters in Washington, D.C., on April 4, 2023. (Ting Shen/Bloomberg via Getty Images)

BIDEN ADMIN ANNOUNCES PLANS FOR IRS DIRECT FILE SYSTEM

IRS Commissioner Daniel Werfel told lawmakers several times over the past two months that no decision had been made about direct file, adding that the agency would "reflect" on the issue, consult Congress, and wait for the report to determine how to move forward.

"No decision has been made on moving forward with direct file solution," he testified to the Senate Finance Committee in April.

Days later, Werfel echoed that sentiment to the House Ways and Means Committee: "I don't know yet whether the direct file solution is the right additional menu item to put in place so that taxpayers that prefer to engage that way can do it. What I'd like to do is have the report issued. And then engage in a conversation with the right set of stakeholders and then figure out what the go-forward is."

However, the IRS had been quietly building an actual prototype of direct file before submitting the report to Congress, as the Washington Post first reported in May. The IRS announced its final report one day after the Post's revelation. The IRS system will reportedly be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins.

Critics blasted the IRS for having a prototype before its report and the third-party study were released.

"This suggests a pre-determined outcome and flies in the face of previous commitments Commissioner Werfel made to publicly consult Congress on a potential free-file solution, and for the IRS to not act without explicit legal authority," Idaho Sen. Mike Crapo, the top Republican on the Senate Finance Committee, told the Post.

Rep. Jason Smith, R-Mo., chairman of the House Ways and Means Committee, expressed similar sentiments following the IRS's announcement last month. 

"Americans don't want to give the IRS such sweeping control and authority, yet the Biden administration refuses to listen," Smith said in a statement. "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."

When reached for comment for this story, the IRS told Fox News Digital that the prototype was built only to help with survey data to gauge the opinions of taxpayers on a direct file system.

Rep. Jason Smith questions Treasury Secretary Janet Yellen during a House Ways and Means Committee hearing on Capitol Hill on March 10, 2023. (Drew Angerer/Getty Images)

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"The prototype was developed to augment survey data so taxpayers had a tool to share their views on – it is not a fully functional direct file tool and no real tax information was used in usability testing sessions or for any other purpose," said an agency spokesperson.

AAF's Freedom of Information Act requests seek various correspondence and calendars in an effort to figure out what exactly is going on behind the scenes with direct file.

Supporters of a direct file system argue it would be free, easy to use, and efficient by allowing taxpayers to file directly to the government.

Critics counter that such a system would centralize too much power in the hands of the IRS as not only the auditor but also the preparer and filer of taxes, noting the infamous technical problems that plagued the government-run Healthcare.gov for people wanting to sign up for ObamaCare.

"IRS's 'direct file' option is a recipe for disaster," AAF president Tom Jones told Fox News Digital. "Imagine what will happen when the technology fails – and it will if the rollout of Healthcare.gov is any guide – and the federal taxpayers are faced with a legion of 87,000 new IRS agents waiting to audit their tax returns. Adding insult to injury, the Biden administration has decided to contract this project out to a bunch of former staffers from the Obama administration."

The Inflation Reduction Act granted $80 billion to the IRS to hire tens of thousands of new employees over the next decade.

President Biden speaks at the White House during a celebration of the Inflation Reduction Act on Sept. 13, 2022. (Nathan Posner/Anadolu Agency via Getty Images)

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In February, the IRS announced 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 direct file.

House Republicans were quick to note that New America employees – several of whom are alumni of the Obama administration and Hillary Clinton's staff – in 2021 wrote favorably about Sen. Elizabeth Warren's Tax Simplification Act, which would set up a government-run filing system at the IRS.

The Biden administration also appointed Ariel Jurow-Kleiman, a tax attorney and professor, to work with New America. Jurow-Kleiman earlier this year co-authored a paper that stated, "Speaking directly to the question of a government-run e-file program: The IRS should adopt the most expansive version of the program, one that includes the maximum amount of taxpayer information and requires the least amount of taxpayer input for each individual taxpayer."

Smith has suggested the decision to tap New America and Jurow-Kleiman was meant to "cook the books" by ensuring the IRS's final report would present direct file in a favorable light.

"The administration handpicked a think tank with ties to the liberal wing of the Democrat Party that has already advocated for this bureaucratic expansion," Smith previously told Fox News Digital. "Can we really trust the IRS to file Americans' taxes for them in a fair and impartial way when it already stacks the deck toward a predetermined conclusion to gain more power?"

Smith has also argued that, under direct file, Americans would be "powerless when the IRS completely controls the tax filing process from start to finish."

IRS documents (Luke Sharrett/Bloomberg via Getty Images)

BIDEN ADMIN STEAMROLLED INTERNAL STUDY IN PURSUIT OF KEY TAX PRIORITY

Republicans and other critics have expressed concern that the IRS will ramp up its number of audits, including those targeting lower- and middle-income Americans, due to the additional resources granted by the Inflation Reduction Act. Both Werfel and Treasury Secretary Janet Yellen have said the government won't raise audit rates above historic levels for small businesses and households making less than $400,000.

Yellen has reportedly ordered the IRS to move forward with a pilot direct file system to test the program after reviewing the agency's report.

"The approach directed by the U.S. Treasury is consistent with best practices for new product launches in both the government and the private sector where the transition from research and development to customer-facing is done in an incremental manner to enable additional testing of hypotheses considered during the research and development phase," Werfel told reporters on a call last month, adding that taxpayers will always have options for how they file their taxes and saying the IRS can't run the tax system alone.

Direct file would present a unique challenge to private companies in the tax-prep industry.

"Filing taxes is expensive and time-consuming for American taxpayers," Laurel Blatchford, a Treasury Department official tasked with overseeing IRA implementation, told reporters on the same call. "On average, individual taxpayers spend approximately eight hours and $140 preparing their taxes each year. Taxpayers with income from a business or those who work in the gig economy pay even more." 

"Dozens of other countries have provided free tax filing options to their citizens and American taxpayers who want to file their taxes for free online should have an accessible option," she continued. "IRS' report released today found the majority of taxpayers support having the option to file their taxes for free directly with the IRS."

Secretary of the Treasury Janet Yellen on Feb. 27, 2023. (Genya Savilov/AFP via Getty Images)

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However, the public opinion findings of the IRS's final report were based, in part, on a study conducted late last year by the nonpartisan MITRE Corp. showing 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 a 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 direct file while 60% would opt for a commercial software.

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AAF's records requests include documents dating back to Aug. 1, 2022, about two weeks before the Inflation Reduction Act was signed into law.