Debate: With Direct File, Is the IRS Inviting Conflict of Interest?

The pilot program offers eligible taxpayers in 12 states a cost-free way to submit their federal returns.

The Internal Revenue Service has introduced its Direct File tax preparation service to eligible taxpayers. 

The pilot program, currently open to taxpayers in 12 states, is available for filers with certain types of income, including W-2 income, interest income reported on Form 1099-INT, Social Security income and unemployment compensation. Only taxpayers who take the standard deduction  — including those with deductions for student loan interest or educator expenses — can use the platform. Taxpayers are ineligible if they claim credits aside from the earned income tax credit, child tax credit or credit for other dependents. 

The program, free of charge, walks taxpayers through the tax preparation process. Some critics, however, have claimed that the program will create a conflict of interest.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether the IRS pilot program creates a conflict of interest.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes
Bloink

Their Reasons:

Byrnes: The IRS is the entity that reviews, evaluates and audits federal income tax returns. Through this new pilot program, IRS agents may also be involved in providing advice to taxpayers when it comes to preparing their actual returns. This new system, by definition, is going to create a risk that taxpayers will receive conflicted advice — or advice that’s entirely insufficient. We also have to remember that millions of Americans already have access to free tax preparation services that aren’t run by the IRS.

Bloink: The IRS is providing this pilot program as a way to offer lower-income taxpayers a way to file their taxes without worrying about the costs of private software providers. Without such a tool and the associated advice of online IRS professionals, these taxpayers might otherwise have no access to professional help and would probably overlook many available credits and deductions anyway – because they’ve never heard of them. This new program could provide an extremely valuable benefit to millions of Americans in the end.

Byrnes: Private software providers that provide tax preparation services prioritize accuracy and minimizing taxpayers’ liability, even guaranteeing as much in some cases. The IRS itself has no incentive to make sure that taxpayers are fully taking advantage of available credits, deductions and other tax minimization tools.

Bloink: The IRS has the resources to minimize any conflict of interest that could arise – obviously, audit team staff won’t be tasked with providing online assistance to taxpayers participating in the pilot program. Presumably, these are entirely new departments and resources for taxpayers that will be kept separate from audit teams. 

Byrnes: What this new tool does is give taxpayers the illusion of believing that they’re using the best possible tax preparation tools when they take advantage of the IRS’ offering — because many people would believe that the entity tasked with enforcing the tax code would be in the best position to offer advisory services regarding how to best use that tax code. It’s incredibly unlikely that the IRS tools will actually provide the best tax preparation option.

Bloink: In the end, streamlining the filing process by filing directly with the IRS is likely to help the lower-income taxpayers who may simply avoid their filing obligations and forgo valuable refunds otherwise. We have no reason to believe that the advice these taxpayers will receive will in any way be conflicted. The direct file option merely gives American taxpayers another option to satisfy their tax filing obligations.

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