Critics Claim The IRS Free Tax Prep Service Could Hurt Black Americans

Blacks and low-income taxpayers may potentially be harmed if the Internal Revenue Service implements a planned free online tax-filing system, those opposing or questioning it say.

That is among concerns from Derrick Plummer, spokesman for Intuit, the owner of tax-preparation software giant TurboTax. The topic has become a thorny issue since the IRS recently indicated the agency is eyeing the option for Americans and aims to begin a pilot project for the 2024 filing season.

Concerns about How Blacks Would Be Impacted by Proposed E-file System

The bottom line is industry skeptics claim the IRS’ action could have major repercussions for Black Americans and low-income taxpayers. The IRS stated in a letter in May 2023 that “Black taxpayers are audited at three to five times the rate of non-Black taxpayers,” an analysis that affirms research by Stanford University.

Industry skeptics argue that if the IRS’ new role is the tax assessor, collector, preparer and enforcer, that puts more taxpayers from vulnerable communities at risk of being treated unfairly and potentially not receiving their full tax refund. They declare that is a major point because the refund is often the largest check many taxpayers, particularly lower-income people, get annually for financial support.

Industry observers ask if the IRS controls the overall tax-filing process, how can taxpayers truly know they are getting the full refund due to them? Contrarily, they profess a tax filer working with a tax professional could have more confidence in working with that person because the business is more motivated to represent the taxpayer and provide customers quality service.

Industry onlookers contend already exposed Americans could be further hurt by a planned IRS e-file system built on bias and unfair enforcement practices. They declare that makes the tax-filing process blurrier and jeopardizes access for those taxpayers to professional, independent tax experts who can advocate and speak up for their best interests when dealing with the IRS.

Taxpayers Could Choose How to Do Taxes

The direct-file pilot participation will be voluntary and completely optional, the IRS shared with BLACK ENTERPRISE. If taxpayers are concerned about engaging with the IRS via the direct file tool, they don’t have to do it. The spokesperson added that if direct file were launched, taxpayers could still prepare the return on their own, using Free File or another filing method they choose. As part of the IRS’s Strategic Operating Plan, taxpayers and tax professionals will be able to interact with the IRS in the ways they prefer, including expanded digital, phone, and in-person assistance options.

The federal tax collector’s proposal has created much friction and discomfort from tax prep giants like Intuit and H&R Block. Critics claim the IRS plan is redundant, unnecessary, and could foster lopsidedness between taxpayers and the government.

Last year, the Inflation Reduction Act increased IRS funding by $80 billion and instructed the agency to issue a feasibility study on a direct tax-filing system.

“The proposed direct e-file system takes power away from taxpayers, especially those from vulnerable communities, and hands it to the IRS,” says Intuit’s Plummer.

The IRS  says the direct-file pilot would improve services to help taxpayers meet their obligations and get tax incentives they are eligible for, including the Earned Income Tax Credit. The IRS says it wants to ensure that taxpayers get all tax deductions and credits they are entitled to and file accurate returns.

Background On Proposed IRS Online Tax File System  

According to a recent IRS news release, the IRS has sent a report to Congress that appraises the practicability of providing taxpayers a free, voluntary, IRS-run online filing option called “Direct File.” In a letter to Treasury Secretary Janet Yellen, IRS Commissioner Daniel Werfel wrote on the costs, benefits, and operational challenges tied to applying the file. “It reflects a range of perspectives from taxpayers who were surveyed and interviewed about their preferences and tax filing experiences. The report shows  many taxpayers are interested in using an IRS-provided tool to prepare and file their taxes.”

 How IRS And Tax Preparers Could Potentially Compete More For Business

Further, critics claim the IRS action put the agency in head-on competition with tax companies, Black accountants, and others doing individual tax returns. The ante is high as tax preparation is a multibillion-dollar U.S. industry. Reportedly over 60 million taxpayers were serviced by Intuit and H&R Block.

According to the Associated Press, an analysis reveals that Intuit, H&R Block, other private firms, and advocacy groups for large tax preparation businesses, along with electronic free file backers, have supposedly spent $39.3 million since 2006 to lobby on “free-file” among their efforts.

Questions about potential costs and other aspects of IRS plan raised 

Treasury Chief Implementation Officer Laurel Blatchford has publicly stated the direct e-file program being tested “could potentially save taxpayers billions of dollars annually.” It costs around $220 to have a basic federal and state return done if you hire a tax professional, based on the National Society of Accountants. The IRS estimates the average cost for individual taxpayers is $140.

In this report, the IRS projected the annual costs of its plan may vary from $64 million to $249 million, depending on such factors as the number of users. Still, some observers continue to question the potential cost. According to this analysis, the IRS processed nearly 169 million returns for the 2022 tax year, implying the long-term cost can grow if the agency enlarges its reach.

Intuit’s Plummer contends, “An IRS direct-to-e-file system is redundant and will not be free – not free to build, not free to operate, and not free for taxpayers. A direct-to-IRS e-file system is a solution in search of a problem, and that solution will unnecessarily cost taxpayers billions of dollars.”

Further, Plummer says, “There is no question that inequities exist within the tax system, especially for low-income families, people of color, and non-native English speakers. These problems are systemic, and expanding the IRS’ reach into taxpayers’ lives through a system that not only enforces the tax laws but also determines what the taxpayer owes would likely increase these inequities.”

He added, “The IRS study cherry-picks data to support its flawed conclusion ignoring that only 12% of taxpayers said they would use a government-run system if state returns are not included. “Today, 100% of American taxpayers can file their taxes absolutely free of charge—this is free for them and the government.”

Another issue the proposed IRS free-e-file system raised from critics is it does not explain if there will be a state-tax prep option for taxpayers. They add that could complicate the tax-filing process because most people file their federal and state taxes together.

An onlooker also stated the IRS needs to be aware of gig workers and those with several jobs in different states. It was said it is important for low-income taxpayers who often work multiple jobs and may make money beyond only W-2 income. The IRS did not respond on that point.

However, the IRS did point out that the direct file pilot has not been finalized and touches on costs, operational challenges, and other details in this report.