Tax Pros Say Creating a Free Federal Tax Filing System is Not Realistic With Current IRS Backlogs

Mandatory Credit: Photo by Michael Brochstein/SOPA Images/Shutterstock (12996774a)Senator Elizabeth Warren (D-MA) speaking at a hearing of the Senate Banking, Housing, and Urban Affairs Committee.
Michael Brochstein/SOPA Images/Shutterstock / Michael Brochstein/SOPA Images/Shutterstock

Recent legislation introduced in the Senate by a group of Democrats is facing backlash from several financial analysts, not necessarily for its intentions, but for its timing.

The Tax Filing Simplification Act of 2022 was introduced by Sen. Elizabeth Warren (D-Mass.) and 22 other government lawmakers on July 13 in an effort to resolve the current free tax filing system and simplify the process for millions of Americans.

The act will allow taxpayers access to an online tax preparation service without third-party provider sharing and a “return-free” option that would provide a pre-populated filing with the bill or refund already calculated, per CNBC.

“The average American spends 13 hours and $240 every year to file their taxes — that’s too much time and too much money,” Warren said in a press statement upon introduction of the bill.

However, as CNBC reports, many income tax experts are critical of putting additional strain on the Internal Revenue Service, which is already drowning in a backlog of overdue, unprocessed and errored tax returns and an understaffed workforce.

According to a recent CNBC article, most professionals, like Phyllis Jo Kubey, president of the New York State Society of Enrolled Agents, are supportive of the idea of free tax filing but are skeptical about whether the IRS can handle a new project.

“I’d love to be proven wrong, but I fear an administrative nightmare,” said Kubey. “I’m all for easy and effective free filing options for taxpayers. However, this law heaps additional requirements on an already overburdened IRS.”

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Likewise, Dan Herron, a financial planner and CPA with Elemental Wealth Advisors, says a new law and new tax filing program would be problematic for an agency already saddled with extra work due to changes to tax filing regulations established during the pandemic, per CNBC.

“They do not need this additional ‘to-do’ right now,” Herron said. “Let them work through the backlog, then have them try to implement this system.”

Democrats have been pushing against the current Free File program for years. In April, Sen. Warren and Reps. Katie Porter and Brad Sherman wrote to Intuit CEO Sasan Goodarzi, blaming his company and others for the low taxpayer participation rates.

The letter reiterates U.S. Government Accountability Office (GAO) findings that while Free File was intended to allow 70% of American taxpayers to file without complications or cost, only 3% of them participated each year.

“As we noted in 2019, deceptive practices and outright sabotage from Free File companies have driven this under-utilization, and Intuit, with approximately 60% market share in consumer tax software, bears much of the blame for these practices,” the letter stated.  

Although a National Bureau of Economic Research working paper recently found that almost half of tax returns could be completed automatically with pre-populated information, other industry experts are wary about the proposed “return-free” option covered in the Tax Filing Simplification Act.

Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Orlando, Florida feels the “return-free” option would open up filings to “all sorts of potentially damning results,” according to CNBC.

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With the current slate of deductions and credits available to taxpayers to claim, like the Child Tax Credit and the Earned Income Tax Credit, there is a greater potential for returns with errors, of which the IRS already has more than its fair share of.

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