IRS Reform Bill Clears House With Controversial Provision Regarding Free Filing

Chris Gaetano
Published Date:
Apr 10, 2019

The House has passed legislation that introduces major structural changes to how the IRS is run, representing the first major overhaul of the agency in decades, though its passage in the Senate will likely be more fraught due to a provision that some Democrats are saying prevents the IRS from developing its own free tax filing platform, according to Accounting Today. Aimed at modernizing the IRS structure and creating an emphasis on the "service" part of the Internal Revenue Service, the bill would: 

Establish a new IRS Independent Office of Appeals: While the IRS had been instructed to develop an appeals process in 1998, this bill formally codifies it through the creation of a new office led by a new chief of appeals, who would report directly to the IRS commissioner. The appeals process this office would oversee would be "generally available to all taxpayers," and if the IRS decides not to grant a referral to the Independent Office of Appeals, then it must provide the taxpayer must with a precise and detailed reason why, and instruct the taxpayer on how to protest the decision. The process would also increase congressional oversight through an annual written report on the number of requests for referral that were denied. The Office of Appeals would have to provide those who undertake the appeals process with access to nonprivileged portions of their case file relevant to the dispute within 10 days of the conference (in contrast to current law, which provides that such information is available only through a Freedom of Information Act request). 

Lower the e-Filing mandate threshold from 250 returns to 10: This requirement would be phased in between 2021 and 2024. The provision allows for an exception for those filing in areas with limited or no Internet access. 

Strengthen the Office of the Taxpayer Advocate: The bill would require the IRS to respond to Taxpayer Advocate Directives and clarify a time period for that response. The Taxpayer Advocate would also get a timeframe to appeal a response. Further, the Taxpayer Advocate would reduce the number of "most serious problems" in its report to Congress from 20 to 10. The IRS must also provide the Taxpayer Advocate with statistical support upon request. The Taxpayer Advocate, in turn, will be required to coordinate research efforts with the Treasury Inspector General for Tax Administration. 

Require all tax-exempt organizations to electronically file: Right now, only those with assets over $10 million and those that file more than 250 returns with the IRS have to file the Form 990 electronically. Organizations could get up to two years of relief from this requirement. 

Allow any concerned taxpayer to get an Identity Protection Personal Identification Number (IP PIN): Right now, only those who have been previous victims of identity theft can request one or is at significant risk of having their identity stolen. 

Require the IRS to develop and submit a comprehensive customer service strategy within a year: The strategy must address how the IRS intends to provide assistance to taxpayers and establish benchmarks and metrics to gauge their success. 

Beyond this, the bill contains a number of other provisions, one of which codifies into law the public-private partnership between the IRS and various tax prep software vendors, which requires the vendors to provide free commercial-type online individual income tax preparation and electronic filing services to the lowest 70 percent of taxpayers by adjusted gross income. The specific provision reads: 

SEC. 1102. IRS Free File Program.

(a) In general.—

(1) The Secretary of the Treasury, or the Secretary’s delegate, shall continue to operate the IRS Free File Program as established by the Internal Revenue Service and published in the Federal Register on November 4, 2002 (67 Fed. Reg. 67247), including any subsequent agreements and governing rules established pursuant thereto.

(2) The IRS Free File Program shall continue to provide free commercial-type online individual income tax preparation and electronic filing services to the lowest 70 percent of taxpayers by adjusted gross income. The number of taxpayers eligible to receive such services each year shall be calculated by the Internal Revenue Service annually based on prior year aggregate taxpayer adjusted gross income data.

(3) In addition to the services described in paragraph (2), and in the same manner, the IRS Free File Program shall continue to make available to all taxpayers (without regard to income) a basic, online electronic fillable forms utility.

(4) The IRS Free File Program shall continue to work cooperatively with the private sector to provide the free individual income tax preparation and the electronic filing services described in paragraphs (2) and (3).

(5) The IRS Free File Program shall work cooperatively with State government agencies to enhance and expand the use of the program to provide needed benefits to the taxpayer while reducing the cost of processing returns.

(b) Innovations.—The Secretary of the Treasury, or the Secretary’s delegate, shall work with the private sector through the IRS Free File Program to identify and implement, consistent with applicable law, innovative new program features to improve and simplify the taxpayer’s experience with completing and filing individual income tax returns through voluntary compliance.

ProPublica reported that this provision—combined with a previous memorandum of understanding between the IRS and the software vendors whereby the former pledged not to develop its own independent service if the latter offered these free filing service—precludes any effort to simplify tax filing directly through the government. It noted that the free services offered by these private firms are underpromoted, as evidenced by the fact that only 3 percent of eligible filers use them. In addition, it said, these companies often use the free-service program to cross-promote paid services, and the program leave taxpayers vulnerable to data breaches and identity theft. 

What's more, Pro Public suggests that the provision would also shut down longstanding efforts to get the United States to use pre-filled tax forms that are either confirmed or contested by the taxpayer, as is done in most other countries in the world.

For example, while both the United States and the United Kingdom allow for withholding income tax, in the United Kingdom, most people don't have to file a return of any sort, and if they do, then the government simply sends them a return in the mail, with some relevant information already filled in. Estonia ups the ante, meanwhile, and simply fills out the entire return automatically and taxpayers either approve the document if they agree or dispute it if they don't, a process that takes about five minutes total.

ProPublica quoted a member of the Free File Alliance, a tax prep industry group, who said that the IRS developing such a program, or any program facilitating tax preparation, may present an existential threat to their industry. A recent episode of the podcast Planet Money explained that efforts to switch to a more simple tax system tends to provoke intense lobbying from tax prep firms like Turbo Tax and H&R Block, and have been defeated each time. The podcast quotes anti-tax lobbyist Grover Norquist saying that he is against such measures because they make people hate taxes and tax day less, and therefore would be more likely to approve of tax increases, and so he basically believes it is in the taxpayers' best interests to be as unhappy with the whole system as possible. 

Republic Senator Charles Grassley (R-Iowa), the head of the Senate Finance Committee and one of the Senate bill's co-sponsors, said that this concern is misplaced, and that nothing in the legislation effectively bars the IRS from developing such a program in the future if it so chose. By contrast, ranking member Sen. Ron Wyden (R-Ore.), another of the senate co-sponsors, objected to the provision, saying that it does indeed block such a program from developing, and added that taxpayers should have the option to file directly through the IRS rather than through a private company. 

NYSSCPA members can learn more about what is happening at the IRS at the Foundation for Accounting Education's upcoming IRS Practice and Procedures Conference, scheduled for Dec. 6.

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