Warren wants IRS to provide direct free tax filing

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By Bankrate

The Internal Revenue Service offers Free File, a partnership with tax software manufacturers that allows millions of taxpayers each year to prepare and e-file their taxes for, as the name says, free.

Sen. Elizabeth Warren, however, says Free File primarily serves the tax industry, not taxpayers. She wants the IRS to dump TurboTax, H&R Block and other companies that are part of the current system.

The Democratic senator from Massachusetts on April 13 introduced a bill that would require the federal tax agency to develop its own free, online tax preparation and filing service. All taxpayers, without the income limits in place under Free File, would use this IRS direct system instead of going through the current tax industry software intermediaries.

Warren’s Tax Filing Simplification Act of 2016 also would give filers the ability to download all the third-party tax info the IRS already has on them, such as W-2 wage statements and some investment and retirement account statements.

Even better, taxpayers with simple tax situations wouldn’t have to fill out their forms. Instead, in these cases, the IRS would send the eligible taxpayers an already prepared tax return for them to review and, if it’s correct, they would simply submit it unchanged.

Perennial call for IRS direct filing

Warren’s ideas are not new. Similar direct IRS tax filing proposals have been proposed over the years. Even President Barack Obama, when he was candidate Obama in 2007, suggested a similar filing system.

In fact, in this current session of Congress, 2 other lawmakers already beat Warren to the punch. In April 2015, Rep. Bill Foster, D-Ill., introduced the Autofill Act of 2015, and Sen. Jeanne Shaheen, D-N.H., introduced the Simpler Tax Filing Act of 2015.

None of the suggested direct IRS tax-filing changes, however, ever made it very far along the legislative process. Will Warren’s bill fare any better? Maybe.

The outspoken advocate for consumer rights already gets a lot of attention and she has proven tenacious in fighting for her ideas. Plus, in this presidential election year, she’s got the backing of 2 prominent candidates.

Sen. Bernie Sanders, I-Vt., is 1 of 7 original cosponsors of Warren’s bill. Former Secretary of State Hillary Clinton issued a statement praising Warren’s tax simplification proposal.

Free File maze

In support of her bill, Warren’s staff prepared a report denouncing the tax industry’s participation in what the Senator calls a tax maze.

Each software company is allowed to set up its own eligibility criteria, notes the report, creating a jumble of offerings that confuses taxpayers into purchasing unnecessary products.

The report also questions the security of the third-party tax prep providers.

And Warren’s report calls Free File a failure. While the IRS and Free File Alliance say that the program’s options apply to around 70% of taxpayers, the report says that only 3% of eligible taxpayers use Free File.

The companies that are part of the Free File Alliance, the coalition of 13 tax software manufacturers that works with the IRS each year to implement Free File, disagree with Warren’s assessments.

“Not only would [Warren’s] legislation create a tremendous and potentially harmful conflict of interest for the American people by enshrining roles of tax preparer, tax collector, tax auditor and tax enforcer together in one entity, the IRS, but the system’s very creation would also be a huge burden for taxpayers,” said Tim Hugo, executive director of the Free File Alliance. “The proposal would make the essential tax administration work of the IRS impossible, while disadvantaging the taxpayer.”

Expanded IRS filing concerns

Kudos to Warren and others looking for ways to make tax filing less expensive and easier. Suggestions that would help filers with very simple taxes hold a lot of promise.

But there also are arguments against putting even more of our annual filing duties into the IRS’ hands.

• While pre-filled returns could work for some filers, many would be left out. Self-employed taxpayers, for example, don’t get W-2s or even 1099s in some cases.
• Pre-filled returns could lead to more tax cheating. If the IRS doesn’t get a 1099, either due to a reporting error or oversight by the payer or because the income wasn’t at the $600-plus triggering level, a taxpayer might be tempted keep the IRS in the dark about that added income. Yes, that’s already a possibility. But taxpayers now worried that the IRS might find out about unreported income tend to go ahead and include the earnings on their 1040s. If, however, they get an IRS-completed return that confirms the agency doesn’t know of the earnings, some filers wouldn’t correct that perception.
• Some tax breaks could be missed, even for those who don’t itemize. Individuals who claim any of the dozen or so income adjustments, popularly known as above-the-line deductions, would have to make sure those were accounted for in any return filled out by the IRS.
• While there are security issues with private software companies, the IRS is not immune to hackers. And an IRS-only system might make things worse. At least now, criminals have to search many tax-related systems to get the data they want to put to illegal use.
• Then there’s the money. The IRS already is hampered in doing its current job because Congress keeps cutting its budget. Warren and her bill’s sponsors must convince their Capitol Hill colleagues to loosen the purse strings enough so that the IRS can create and then implement a tax preparation and filing program that can compete with the private sector.
• Finally, there’s a general public and specific political resistance to giving the IRS any additional power over their tax returns, even if doing so might make things easier.

Would you like the IRS to start the annual filing process by filling out your 1040? Do you use Free File? Would you use a similar system run entirely by Uncle Sam?

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.