Left-wing groups and Democrats in Congress are backing a plan by the Internal Revenue Service (IRS) to build a government-run tax filing program that critics argue would give the agency too much power.
The new tax filing plan, known as "direct file," has become a major issue on Capitol Hill, where lawmakers are actively fighting or supporting an initiative that, if implemented, could directly impact millions of Americans each year.
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 to examine the idea's feasibility as well as a report by the IRS for Congress to assess the study, the cost of such a system and taxpayer opinions based on surveys.
IRS Commissioner Daniel Werfel told lawmakers several times over the past few 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.
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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 be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins.
Critics, especially Republicans in Congress, blasted the IRS for having a prototype before its report and the third-party study were released, arguing that it suggested a pre-determined outcome to proceed with the system no matter what and that the agency was moving ahead without explicit authorization by Congress.
The IRS told Fox News Digital in June that the prototype was built only to "augment" survey data to gauge the opinions of taxpayers on a direct file system.
"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.
The IRS hasn't publicized that the agency seems intent on making direct file not just a federal program but one that will also include state tax filings in some manner.
Last Wednesday, Werfel sent a letter to the Federation of Tax Administrators — which serves the tax administrators of all 50 states, New York City, Philadelphia and Washington, D.C. — that said in part that the IRS's report to Congress on direct file "found that a material number of taxpayers would be interested in a free IRS-provided direct e-filing tool, but substantially more so if that product included a state tax filing component."
Werfel's letter noted that the IRS is finalizing plans for "state tax integration," adding that the team working on direct file is "excited to partner with states to ensure a best-in-class experience for taxpayers that includes both federal and state taxes."
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When asked to clarify how state taxes would be incorporated into what would seem to be a federal program, an IRS spokesperson said direct file is still in an early conceptual stage of development.
One day after Werfel's letter, Code for America requested a "vendor ID" to access tax information through the National Association of Computerized Tax Processors, which assigns identification numbers for firms accessing private tax information. In the document obtained by Fox News Digital, Code for America stated the reason for requesting the ID was that it's "building state return software that will be a companion to the IRS direct file tool."
The IRS spokesperson told Fox News Digital that Code for America, which uses technology to improve government, has not been involved in developing the direct file pilot program. However, signs of collaboration and general support from the nonprofit may raise eyebrows on Capitol Hill given the organization's left-wing ties.
Code for America, which during the 2016 presidential campaign signed onto a letter condemning Donald Trump for running on "anger" and "bigotry," is funded by various left-wing groups and has a stated goal of making "automatic record clearance — where the state initiates and completes the clearance of all eligible criminal records — the standard across the country."
In 2018, Code for America teamed up with progressive Los Angeles District Attorney George Gascon to find every marijuana criminal case eligible for expungement or resentencing. The following year, Gascon moved to wipe out more than 9,000 marijuana-related convictions dating to 1975.
Code for America also promotes its commitment to so-called diversity, equity and inclusion, stating on its website, "Equity is not just a core value, but also at the center of our work."
When reached for comment, Code for America told Fox News Digital that it "strongly supports" direct file, noting like-minded groups are trying to figure out how to ensure taxpayers can file their tax returns with the federal government and states at the same time.
"In light of this, Code for America is currently exploring what it would take to develop state tax software that would create a seamless filing experience for filers," said Gabriel Zucker, associate policy director of tax benefits at Code for America. "Requesting a vendor ID with the National Association of Computerized Tax Processors is a preliminary step in this exploratory effort. We, like many others in the space, have had numerous discussions regarding state tax filing both inside and outside of government, though we have no partnership with the IRS on Direct File."
Some lawmakers are speaking out against direct file and the IRS's shared goal with mainly left-leaning groups to advance it.
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"Establishing an IRS-run tax filing system has been a longtime priority of far-left liberals, such as [Sen.] Elizabeth Warren and [Rep. Alexandria Ocasio-Cortez], for years," Rep. Claudia Tenney, R-N.Y., a member of the House Ways and Means Committee, told Fox News Digital. "No matter how you look at it, this is a bad idea. This endeavor would be extremely costly, overly burdensome and grant the IRS all kinds of new power, effectively making it the judge, jury and executioner of our nation’s tax laws."
Tenney also noted Code for America isn't the first left-wing group to make concrete steps to back the IRS's direct file plan.
"Even more concerning, President Biden's IRS is partnering with New America, a liberal organization, to conduct a so-called 'feasibility study' on the establishment of an IRS-run tax filing system," said Tenney. "This is clearly all for show and set up to arrange a predetermined outcome since New America has already stated in the past that the government 'can and should build this tool in the coming years.' At the end of the day, all this spells trouble for low- and middle-income taxpayers and small businesses who will ultimately be the target of Democrats' supercharged IRS that appears to be getting even bigger and more powerful."
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 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."
Rep. Jason Smith, R-Mo., chair of the House Ways and Means Committee, 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.
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"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."
Critics like Smith argue that direct file 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.
Supporters counter that a direct file system would be free, easy to use and efficient by allowing taxpayers to file directly to the government. In June, dozens of Democrats in Congress wrote an open letter to Werfel and the Treasury Department, praising the direct file program and urging them to make the pilot "available to as many taxpayers as is feasible."
The Inflation Reduction Act granted $80 billion to the IRS to hire tens of thousands of new employees over the next decade. Republicans 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.
Direct file would present a unique challenge to private companies in the tax-prep industry.
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"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."
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.
