The IRS is rolling out a new filing option for taxpayers being dubbed “Direct File”.
In a nutshell, the program claims to offer taxpayers the ability to directly file their tax return with the IRS using an application provided by the IRS itself, at no cost to the taxpayer. In this first year (2023), the program is only open to taxpayers in 12 states, primarily those that either don’t have a state income tax or those that have a similar option available for the state tax returns that need to be filed. IRS Direct File
At first glance, this seems like a pretty simple win for both parties involved, taxpayers have their tax return filed at no cost to them, and the Service has a tax return that it prepared delivered directly to it, in theory cutting down on non-filing as well as accuracy related issues. But whether this is a good development requires a little more careful consideration.
The IRS has for a long time now wanted to develop this capability. The question is why? On the surface, it claims to be a benefit for taxpayers but the IRS has, for quite awhile, offered free file options to taxpayers who meet particular requirements. The free file program is a public-private partnership in which the IRS connects taxpayers to private service providers where they can file their tax return. Per the IRS website, their goal is to connect taxpayers with private companies who are the best at what they do. If that is the case, why does the government need to spend millions of dollars to accomplish the same thing? Another possibility would be that by not funding the free file program, the government might save some money. But when has the government ever really been concerned about saving money?
Another reason that I’m not gung-ho on the IRS filing system is that I have interacted with varying levels of IRS representatives for the past decade plus some. The general public has the tendency to assume that the IRS knows the tax rules since they are tasked with assessing and collecting taxes from The People. This is not an accurate assumption in my experience. From arguing with agents over application of tax law to just sorting through minor discrepancies, I will tell you the IRS is not always right. For instance, if you go long enough without filing a tax return when you should have, the IRS will file a return on your behalf referred to as a Substitute for Return. In my career, I have never seen a Substitute for Return filed where I agreed with the tax assessment. Admittedly part of this is due to the IRS having limited information, but nonetheless, you never want to blindly accept a Substitute for Return. I have concerns that the new Direct File system will look closer to the Substitute for Return system rather than a return prepared via a tax professional’s software.
This also brings me to a related point. It seems to me there is a strong conflict of interest in having the organization charged with collecting tax also preparing the return telling you how much you owe them, as though you were audited. By including a 3rd party in to the mix, now you have a knowledgeable advocate helping your prepare a return in compliance with the law but also striving to make sure the tax assessment is accurate and as low as possible. The IRS is more or less charged with collecting as much tax as it can, putting it at direct odds with the taxpayer. They have no incentive to ensure the taxpayer has maximized the deductions and credits available to them nor does the average taxpayer have much knowledge about tax to hold the IRS accountable if it doesn’t. The situation doesn’t set up to be taxpayer friendly. As you can see, I’m not a huge fan of the New Direct file system, partly based on my biased prior experience, but as George Clooney once said, “That doesn’t mean that I’m wrong”
The Direct File program appears to fill a void that doesn’t really seem to exist. Some people have a term for this: pointless. Something can be pointless and people still use it (I’m looking at you throw pillows), but I won’t be using the Direct File system anytime soon.
If you have a tax question or disagree with me entirely, Great! Leave me a note in the comments. I’ll try answering the common questions in a later post.