IRS does not have congressional authorization for Direct File as noted by 13 state Attorneys General
The Inflation Reduction Act authorized $15 million for the IRS to study Direct File, a system with a fundamental conflict of interest where the IRS becomes tax preparer, tax collector, and tax auditor. Direct File is also a redundant waste of taxpayer money as existing free programs such as Free File can already accommodate most filers.
The Inflation Reduction Act did not provide the IRS with funding or authority to create a Direct File system, as noted by the Attorneys General from 13 states (read the letter here.)
But the Biden administration and the IRS did it anyway.
Not only that, the IRS was dishonest about it from the start.
IRS chief Daniel Werfel had repeatedly asserted that the IRS was merely doing a study as authorized by the Inflation Reduction Act.
In reality, the IRS was secretly working the entire time to build out a Direct File system, as revealed in a Washington Post scoop on May 15, 2023.
The Washington Post article notes the IRS and White House had already assembled a large team and had already written the software and built the system.
Werfel was given many opportunities to notify congress and the public about this. He did not do so. Why?
It is a question tax reporters might want to ask instead of writing puff pieces that are nearly indistinguishable from IRS press releases.
Timeline of Werfel’s Public Statements
Let’s take a look at a timeline of IRS chief Werfel’s statements.
April 19, 2023: Werfel testified to the Senate Finance Committee that no decision had been made on whether or not the IRS would offer a “direct file” system.
As shown in this video, Ranking Member Sen. Mike Crapo asked Werfel:
“Has the IRS made the determination that it is going to pursue this?”
Werfel replied:
“Senator, no decision has been made on moving forward with direct file solution.”
April 27, 2023: Werfel testified before the House Ways and Means Committee chaired by Jason Smith (R – Mo.)
Asked about Direct File, Werfel said:
“So the Congress said, ‘study it.’ And my understanding of the Congressional provision is, what would it cost? What are the taxpayers’ opinions on it? And then an independent assessment of its feasibility. And that’s what we’ll produce in mid-May and we’ll come and we’ll talk about it. And you’ll have more grounding to ask me the tough questions.”
Werfel also said:
“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.”
May 4, 2023: Danny Werfel was a guest on Bloomberg’s “Talking Tax” podcast hosted by Naomi Jagoda. He assured listeners that he would wait for the report and then “reflect” on the “diverse viewpoints” before making “any decision.”
Jagoda:
“Once the report comes out, how much time will it take for the IRS to sort of digest the report and study it before determining how you want to proceed following the report’s release?”
Werfel said:
“I think there needs to be reflection around what are the pros and cons, what are the benefits and costs. And it wouldn’t surprise me if people read the report and reach different conclusions. Some will read it and say ‘oh, we should definitely absolutely go forward,’ and some will read it and say, ‘ah, this is what I thought and therefore we shouldn’t go forward.’
What I’m interested in is making sure that we have a good understanding of what those diverse viewpoints are. That we are communicating the calculus and the evidence base for any decision — go or no go — that comes out.
What would make me lose sleep at night is if we did something without an evidence base or an analytic base to it. That’s what I always want to ground to.”
May 15, 2023: the Washington Post scoop reveals that Werfel was not forthcoming in his public statements, to put it charitably. IRS had already built the system, using a large team.
WaPo excerpt 1:
The Internal Revenue Service has quietly built its own prototype system to allow Americans to file tax returns digitally and free of charge, according to three current and former agency officials, essentially creating government software that could disrupt the tax-prep industry.
The system will be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins, said the people briefed on the matter, who spoke on the condition of anonymity to discuss internal agency conversations. It was developed by the IRS and the U.S. Digital Service, the White House’s technology consulting agency.
WaPo excerpt 2:
IRS Commissioner Daniel Werfel had previously told lawmakers that the IRS would consult Congress after the think tank made its recommendation and had not yet determined whether to pursue its own software program. But if the IRS already has a prototype before the New America report has been 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,” said Sen. Mike Crapo (Idaho), the top Republican on the Senate Finance Committee.
May 16, 2023: Ways and Means Committee Chairman Jason Smith called out the IRS:
“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.”
A video compilation of the three Danny Werfel statements can be found here and below:
As noted in the aforementioned Jan. 30, 2024 letter from 13 attorneys general to Treasury Secretary Yellen:
“We write to you in opposition to the unnecessary and unconstitutional efforts to empower the Internal Revenue Service (IRS) with the expansive authority to prepare and file tax returns for all taxpayers. Congress has never granted the Department of the Treasury authority to create a Direct File program. And for good reason: the American taxpayers do not want to invite the proverbial fox into the hen house. A Direct File program will also have negative consequences for low-income filers and devastate small businesses.”
The full text of the Attorneys General letter can be found below:
January 30th, 2024
Dear Secretary Yellen:
We write to you in opposition to the unnecessary and unconstitutional efforts to empower the Internal Revenue Service (IRS) with the expansive authority to prepare and file tax returns for all taxpayers. Congress has never granted the Department of the Treasury authority to create a Direct File program. And for good reason: the American taxpayers do not want to invite the proverbial fox into the hen house. A Direct File program will also have negative consequences for low-income filers and devastate small businesses.
The United States Constitution vests the power to make laws and appropriate funds with Congress. Administrative agencies, meanwhile, “are creatures of statute” and thus “possess only the authority that Congress has provided.” Nat’l Fed’n of Indep. Bus. v. DOL, OSHA, 142 S. Ct. 661, 665 (2022). Allowing the Treasury Department to set up an IRS-run Direct File Pilot Program is a clear attempt by the Biden administration to circumvent these constitutional limitations. Congress has neither passed legislation granting this authority to Treasury nor allocated any additional funds for this program.
From the start, this process has been plagued by repeated missteps and misrepresentations that now demand oversight. In 2022, Congress passed the Inflation Reduction Act, which allocated $15 million to commission a study from an “independent third party” to report on “the overall feasibility, approach, schedule, cost, organization, and design” of an IRS-run tax preparation system (“Direct File”). But contrary to that congressional mandate, the IRS chose New America—a liberal think tank—to complete the study even though the organization had extensively supported an IRS-run Direct File system in the past.
IRS Commissioner Daniel Werfel testified before the Senate Finance Committee in April 2023 that he “[didn’t] want to weigh in on the debate [on Direct File]. I want you [Congress], and the Treasury Department, and the President, to decide.” These assurances proved hollow just one month later when Treasury announced the results of its so-called “independent feasibility study.” In that announcement the Department also said it would immediately begin building a Direct File pilot program that would launch in time for the 2024 tax season. Yet Congress only appropriated $15 million for a feasibility study—it did not vote on or appropriate any funds to construct this pilot program. Considering the pilot program was announced simultaneously with the results of the study, these funds were potentially misappropriated or misused in pursuit of a policy priority violating Congressional intent and a plain reading of the law.
Unsurprisingly, New America’s feasibility study was deeply flawed. Truly independent sources found that there were problems with both the study itself and an IRS-run Direct File system broadly. The Treasury Inspector General for Tax Administration (TIGTA), an independent watchdog, concluded that the IRS may have overstated taxpayer interest in the agency-run e-filing system. The IRS claimed that Direct File would only cost taxpayers $78 million, but TIGTA concluded that these “direct file cost estimates could not be substantiated” because of questions surrounding how many taxpayers would use Direct File and how the IRS estimated costs associated with customer support and product development. In contrast, an earlier estimate from Govini estimated the costs for a potential IRS-run free filing system would be comparable to the costs of Healthcare.gov—a boondoggle that cost more than $21.2 billion in its first 11 years. Govini also noted the federal government’s “troubled track record” when it comes to “delivering high quality, secure customer-facing technology solutions,” which would put the privacy of millions of taxpayers at risk.
The federal tax system needs reform to better serve the public. But thus pilot program doesn’t address any of those needs. MITRE conducted a survey in early 2023 gauging taxpayer interest in an IRS-run Direct File program. Only 37 percent of filers with simple returns would use an IRS-run system. A scant 29 percent of taxpayers would use this system if it did not also prepare state and local returns. And since taxpayers in participating states will have to use separate platforms to file their state and federal taxes, Direct File doesn’t address the actual needs of American taxpayers.
Moreover, there’s an obvious conflict of interest when the IRS acts as tax preparer, filer, and auditor—a conflict destined to impact vulnerable and low-income taxpayers the most. Research from Syracuse University found that the IRS was five times more likely to audit low-income households earning less than $25,000 a year. Recipients of the Earned Income Tax Credit (ETIC) are also twice as likely to be audited than taxpayers earning $500,000.
According to public reports, the Direct File pilot program will be limited to these same taxpayers, supporting only limited deductions and credits such as EITC.10 We urge the IRS to identify and address the root causes of the agency’s historic discrimination against low-income taxpayers before launching a system purportedly designed to assist these very same individuals. This is especially important because an IRS-run Direct File program may leave taxpayers with the mistaken impression that the IRS is an independent and disinterested party.
The American public is rightly skeptical of the IRS given its terrible record. The IRS is infamous for its consistently poor customer service. In 2021, the IRS answered just 2 percent of the calls to its official help line. The next year, the IRS had a backlog of 21.3 million returns. If the IRS is already unable to answer the most routine calls from American taxpayers, Direct File will only exacerbate the agency’s failures. And when the IRS cannot answer routine inquiries from American taxpayers about Direct File, fraudsters will be all too eager to fill that void.
And even if the agency manages to hire the tens of thousands of IRS agents it supposedly needs to “improve tax enforcement and customer service,” those agents won’t provide the same service and advocacy for the American taxpayer as the thousands of small business tax professionals who are already serving their communities around the nation. Given the IRS’s existing pattern of discrimination against individuals with lower incomes, it’s much more likely that those agents will harass vulnerable and well-meaning taxpayers.
A decade ago, the IRS under President Obama and then-Vice President Biden targeted nonprofit organizations based on their political leanings. In May 2023 (just 24 hours before it announced this pilot program), the IRS admitted that it has historically audited Black taxpayers at much higher rates than other taxpayers. Why would any American trust the IRS to not abuse its power?
Every year, tens of millions of taxpayers file their taxes for free with help from existing programs or online software. Additionally, millions of Americans work with small businesses in our states to file their taxes at an affordable cost, including both independent tax preparation services and local accountants. They choose to do so because they want an advocate in their corner who will represent their interests against the IRS bureaucracy. The Direct File program needlessly threatens the livelihood of thousands of these small businesses tax preparers. And this new system is likely to fail the very people it’s intended to help.
Treasury’s attempt to establish an IRS-run Direct File system side-steps Congress’ constitutional authority and the will of the American people by unilaterally establishing a new government program and further empowering an IRS that has repeatedly targeted some of the most vulnerable taxpayers. We urge the Department to end the IRS-run Direct File pilot program. The agency should take no further steps on the program until it completes a truly independent feasibility study as directed by Congress.
Sincerely,
Austin Knudsen
Attorney General of Montana
Christopher M. Carr
Attorney General of Georgia
Brenna Bird
Attorney General of Iowa
Andrew Bailey
Attorney General of Missouri
Alan Wilson
Attorney General of South Carolina
Ken Paxton
Attorney General of Texas
Jason Miyares
Attorney General of Virginia
Raúl Labrador
Attorney General of Idaho
Liz Murrill
Attorney General of Louisiana
Mike Hilgers
Attorney General of Nebraska
Johnathan Skrmetti
Attorney General of Tennessee
Sean Reyes
Attorney General of Utah
Patrick Morrisey
Attorney General of West Virginia