IRS Misled Taxpayers About Free Filing Tool, Watchdog Report Says

Surveys sent by the Internal Revenue Service to taxpayers about the agency’s proposed e-file system may have been improperly designed to mislead Americans about their ability to file state taxes via direct e-file — and the agency may have downplayed the cost of implementation by billions of dollars, according to a new watchdog report.

The audit by the Treasury Inspector General for Tax Administration was initiated to assess the IRS’s compliance with a provision of the Inflation Reduction Act of 2022 requiring the agency to design and report to Congress on a system for free electronic filing of tax returns.

The IRS announced in late June that it would pilot a free tax-filing tool next year.

As of July 10, 2023, the IRS has obligated $11.1 million (74%) of the $15 million allocated by the act, according to the report.

According to IRS management, the IRS plans to spend $966,000 in salaries and benefits and $26,000 for equipment from the $3.9 million unobligated funds, the report states.

However, IRS management did not have any planned spending for $2.9 million of the $3.9 million unobligated funds.

The IRS obtained taxpayer opinions on a Direct File system.

“However, taxpayer interest in a Direct File tool may be overstated due to the design of the surveys conducted,” the report states.

For example, the Taxpayer Experience Survey “did not provide a ‘neutral’ option for participants,” according to the report.

“Research shows that developing a survey with a five-point scale, to include a neutral option, rather than a four-point scale as used by the Taxpayer Experience Survey, is preferable because it does not put taxpayers into a ‘forced choice’ response scenario,” according to the report.

Further, the IRS survey prompt “may have led taxpayers to believe that the tool would have more options than it will immediately have available, such as the ability to file state tax returns.”

The report further states that “an independent study by a Federally Funded Research and Development Center found that 60% of taxpayers would choose their current software when state tax returns are excluded from an IRS Direct File tool.”

The decision was made to proceed with a Direct File pilot based on a 72% interest in a Direct File tool, per the Taxpayer Experience Survey.

However, according to the report, only 28% were “very interested” compared with 45% who were “somewhat interested.”

Further, the IRS “could not provide TIGTA with any supporting documentation to support its cost estimates or how it determined there would be at least 5 million users,” according to the report.

As a result, TIGTA says it “had no way to identify the reasonableness of the IRS’s cost estimates.”