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Why IRS direct tax return filing is a bad idea

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Many taxpayers already are unhappy with the assistance they get from the IRS during filing season. Will that frustration be compounded if/when the tax agency implements its own direct tax preparation and e-filing system? My guess is yes. (Unsplash+ in collaboration with Getty Images)

It's the middle of July, so most of us aren't thinking about how we'll file our tax return next year.

But A U.S. senator and intern at a Washington, D.C.-based tax policy think tank are. And both oppose the Internal Revenue Service getting more directly involved in our filing lives.

Idaho Republican Sen. Mike Crapo cuts right to the chase in his column, The IRS Should Stay Out Of The Tax Preparation Business. He lists six reasons he's against the Direct File pilot program the IRS plans to operate next year.

Since Crapo's article is the first of today's Saturday Shout Out selections, I'll let you check it out at your leisure.

However, I do want to spotlight a couple of his reasons that also concern me about the IRS offering direct filing.

Dealing with inevitable errors: What happens if (when) the IRS program makes a mistake? Crapo cites the potential "bureaucratic nightmare" taxpayers would face, "with IRS auditors punishing taxpayers for mistakes made by IRS software developers."

It's not an idle concern. Errors pop up for various reasons each year in private-sector tax software. In those cases, when an inaccurate program is discovered, software companies typically follow up with taxpayers and, in the hopes of not losing clients, help them get their filings straightened out at no extra cost.

And while the taxpayers still face federal tax consequences, the free-market system comes into play here, too. The software companies usually offer to pay customers' penalty and interest charges.

The IRS does have the ability to abate some penalty charges. And it has procedures in place to abate some interest charges in certain cases.

But procedures is the key word here. Taxpayers must request, by filing Form 843 (excerpt below), that the agency reduce or waive interest due to an unreasonable error or IRS delay.

IRS Form 843 excerpt
See more tax forms and more about them at Tax Forms 2023.


Will the IRS' direct filing pilot program address the cost of software errors? More directly, will it include a more immediate way for it to eat taxpayer penalty and interest charges when its system is at fault? And is that cost accounted for in the pilot program's budget?

State tax complications: Then, as Crapo notes, there are state tax filings. This is not the IRS' bailiwick, and it is not going to mess with the 42 different state (plus the District of Columbia) income tax codes.

That means that taxpayers in every state (Washington, D.C.) is going to have to find another way to file their returns.

Most folks use commercial tax prep software, and those companies, including a handful that participate in Free File (which will remain in place while the IRS runs its direct file test), offer companion state tax return completion. That means pulling the federal information needed to file state taxes from the federal return's data.

Yes, most of the states that require annual individual tax returns offer their own free online filing programs. But without the tax software companies' consolidated federal/state tax prep option, taxpayers will have to enter all that information again to complete their state filings.

That's definitely not going to simplify tax season for the majority of taxpayers.

Complexity is the crux of the matter: The simplicity issue is what concerns Taylor Cazy, a business services trainee at Latham & Watkins LLP in Chicago. When Cazy was an intern at the Tax Foundation, she noted in post on that organization's website that The U.S. Tax Code Is Too Complex for Direct eFile to Work.

Cazy's analysis is this weekend's second Saturday Shout Out item. In it, she examines the concept of prefilled returns, where the IRS uses information it has from third-party reporting and taxpayers' previous filings. Taxpayers then would review their IRS-completed forms for accuracy, and pay any taxes owed or receive a refund.

That's been explored on state levels, but its prospects for success at the federal level are daunting.

"While a prefilled tax return may sound like it would make filing season less stressful, the current U.S. tax code is too complicated for it to work," she writes. Instead, she argues that Congress "should focus first on simplifying the tax code and strengthening existing taxpayer service before implementing a direct file program."

The IRS obviously is aware of these challenges as it works on its upcoming Direct File program. But a little reminder while there's still time to tweak the system is always worthwhile.

You also might find these items of interest:

 

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