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13 Republican State AGs Seek to Stop IRS’s Free Direct File Pilot Program

S.J. Steinhardt
Published Date:
Feb 2, 2024

Thirteen Republican state attorneys general have sent a letter demanding that Treasury Secretary Janet Yellen halt the IRS’s free Direct File pilot program, calling it “unnecessary and unconstitutional,” Accounting Today reported.

“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,” the letter, written by Montana Attorney General Austin Knudsen, read. “The United States Constitution vests the power to make laws and appropriate funds with Congress. 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.”  

The letter was co-signed by Knudsen’s counterparts in Georgia, Idaho, Iowa, Louisiana, Missouri, Nebraska, South Carolina, Tennessee, Texas, Utah, Virginia, and West Virginia.

The IRS announced the new service in October. It will provide taxpayers who meet certain eligibility requirements with the choice to file their federal tax return electronically and directly with the IRS for free. The pilot program is open to low- and moderate-income taxpayers with simple returns.

At least 36 other countries have either free filing or a system whereby the central tax agency prepares tax filings for taxpayers, Accounting Today reported.

Knudsen argued that the program would also have negative consequences for low-income filers and devastate small businesses. He also called the study commissioned by the IRS to report on the system “flawed.”   

“While Congress commissioned a study from an “independent third party” to report on “the overall feasibility, approach, schedule, cost, organization, and design” of the system, "the IRS chose New America—a liberal think tank—that previously supported an IRS-run direct file system to complete the study,” he wrote. At the time, two leaders of the  House of Representatives’ tax-writing committee also cast doubt on the selection of New America and Loyola Law School Professor Ariel Jurow-Kleiman as the independent third parties.

Currently, the IRS offers a Free File program for taxpayers whose adjusted gross income (AGI) is $73,000 or less. The program is a public-private partnership between the IRS and the tax preparer and filing software companies; these companies provide free online tax preparation and filing for taxpayers who qualify. Seventy percent of taxpayers qualify for this program, but fewer than 3 percent use it, the U.S. Government Accountability Office reported in 2022.

“Every year, tens of millions of taxpayers file their taxes for free with help from existing programs or online software,” Knudsen wrote. “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.”

Intuit TurboTax, one of the tax preparation software companies that participated in Free File until withdrawing from it in 2021, agreed to pay $141 million to customers across the United States in May 2022 for steering taxpayers who were eligible for the free program toward a TurboTax paid program. The payment resulted from the settlement of a lawsuit initiated by New York State Attorney General Leticia James following a 2019 report by Pro Publica that found that TurboTax essentially hid its free-filing options.

Tania Mercado, a company spokesperson, called the IRS's direct-file project a “half-baked solution” and a waste of taxpayer money when the rollout was announced in early January, The New York Times reported. “The direct-file scheme is a solution in search of a problem,” she said.

The IRS has noted that other free options, including Free File, remain available, the Times reported. But with the new direct file service, the agency intends to make the filing process more efficient. In one possible scenario included in the IRS's report to Congress, the agency could fill out tax returns with information it already has, such as data from W-2 wage statements.

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