Embedded in the Tax and Expenditure Bill passed by the Senate this weekend was a $15 million provision to examine that allows the IRS to prepare taxes.
The provision comes after Sen. Elizabeth Warren, D-Mass., and other Democrats pushed legislation to include tax returns within the agency’s purview.
The inflation-reduction bill, passed by the House of Representatives on Friday after Senate clearance — the vote was 50-50 with Vice President Kamala Harris breaking the tie — will provide nearly $80 billion to the tax agency. That would allow the IRS to hire the desired 87,000 agents over the next decade to improve tax enforcement.
A small portion of the funding includes $15 million earmarked to fund a task force studying the cost and feasibility of creating a free direct e-files program, which has been a controversial idea.
IRS AUDITS WILL BE $20 BILLION DOLLARS FROM ACHIEVEMENTS EARNING UNDER $400,000 AFTER THE INFLATION REDUCTION ACT
Not planning to wait for a task force study, Warren has already filed a bill to develop a free online tax preparation and filing service that would allow all taxpayers to file their taxes directly with the federal government instead of through private ones Prepare and submit tax advisor.
Warren’s proposal would move faster to allow applicants with simple tax situations to choose a “returnless option,” which provides a pre-prepared tax return with an income tax liability or refund amount already calculated. Proponents also say it would reduce tax fraud by submitting third-party income information to the IRS earlier in the tax season.
Warren’s bill has 22 co-sponsors among Senate Democrats. Reps Brad Sherman and Katie Porter, both California Democrats, are the main sponsors of the House version.
“The average American spends 13 hours and $240 every year filing their taxes — that’s too much time and too much money,” Warren said in July, before Senator Joe Manchin, DW.Va., announced his endorsement of the reconciliation package .
INFLATION REDUCTION ACT: WHICH TAX INCREASES ARE PROPOSED?
“Congress should pass my Tax Filing Simplification Act, and the IRS itself can and should adopt my plan to simplify the tax filing process for millions of Americans and reduce their costs,” Warren said.
However, the concept of “return-free filing,” or allowing the IRS to control tax returns for primarily low-income individuals, has critics on both sides of the political spectrum.
For one, it represents a clear conflict of interest, said Grover Norquist, president of the conservative Americans for Tax Reform.
“The IRS is the prosecutor and the judge in this system. All incentives are wrong,” Norquist told FOX Business.
On the left, a 2020 Progressive Policy Institute report argued that this system could prevent some low-income earners from receiving the Earned Income Tax Credit.
“The IRS does not have the necessary information in its databases to accurately determine a low-income taxpayer’s EITC eligibility and/or to correctly calculate the amount of credit due to the taxpayer — far from it, in fact,” the report states of the Progressive Policy Institute. “The EITC is based on a stew of residency, family relationship and income limits with complex tiebreaker rules.”
In addition, the IRS has identified numerous problems in handling its pre-existing duties, Norquist claims.
“This is an agency that needs serious reform, and this is not the time to give it more responsibility,” Norquist said. “They would say they just need more money. No more money until reformed.”
Norquist added that this system did not work when tried in the UK.
The Treasury Inspector General for Tax Administration, the IRS’ internal watchdog, reported in 2016 that IRS employees lost 1,000 laptops containing sensitive taxpayer data. In 2015, hackers gained access to the data of around 330,000 taxpayers.
In June, the Taxpayer Advocate Service, a watchdog agency within the IRS, found that the agency had 21.3 million unprocessed tax returns.
DEMOCRATS’ INFLATION REDUCTION ACT COULD MEAN LOW WAGES FOR MILLIONS OF AMERICANS
The legislation aims to expand a program first introduced for the stimulus checks to respond to COVID-19 in 2020. The checks went to everyone who submitted a tax return. For those who don’t have to file a tax return, the IRS issued a regulation to establish a “simplified filing” for those who earn too little to file a tax return.
A household could provide basic information like names and the IRS would do the rest. In 2021, the IRS used this to obtain information for the Child Tax Credit.
The legislation would make this available to all taxpayers.
“American taxpayers spend too much time and money preparing their tax returns. Chairman of the non-partisan CPA Caucus of the House of Representatives.
“The Tax Return Simplification Act represents a sensible solution to a problem that has plagued taxpayers for too long – simplifying the tax return process with fewer costs and complications.”
The IRS also has a free filing system that is outsourced to private accountants to provide free services. However, an April report by the Government Accountability Office found that only about 3% of tax-filing Americans use the system, while 70% of claimants qualify.
Warren blamed the time and expense of tax preparation on large corporations for “sabotaging the Free File program to make big profits”.
Supporters of the law say that if enacted, it would make it easier for people who qualify for the earned income tax credit and child tax credit, and also make tax preparation less expensive.
CLICK HERE TO READ MORE ABOUT FOX BUSINESS
However, a December 2021 study by PriceWaterhouseCoopers found that compliance costs for individual payers under current regulations have fallen by 40% since 2005.
“Because a significant portion of the population has self-employment income and uses a greater number of over-tax deductions, the pool of taxpayers eligible to use a non-refundable system may be limited without a significant expansion of information reporting,” the study said PriceWaterhouseCoopers says.
“Such an expansion would introduce significant new costs, not only in terms of administrative burden for taxpayers, tax administrators and third parties, but also in terms of taxpayer privacy.”