Taxpayers’ eagerness to use free software provided by the Internal Revenue Service to file their taxes may be exaggerated because of the way a survey was designed, according to a new report.
The report, released Wednesday by the Treasury Inspector General for Tax Administration, assessed the prospects for a free IRS-run direct e-file online tax prep system. In May, the IRS announced plans to begin pilot testing such a system next tax season after conducting a feasibility study authorized by the Inflation Reduction Act (see story). TIGTA set out to assess the IRS’s compliance with that provision of the Inflation Reduction Act.
The move to set up a free tax filing system by the IRS has been blasted by some Republican lawmakers in Congress, who have questioned the objectivity of the researchers, and tax prep software companies have also expressed concerns about the competition from a government-funded tax prep service.
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The TIGTA report found some benefits with the system. “A Direct File tool may benefit taxpayers by making tax filing a simpler and less expensive process,” said the report. “In addition, a Direct File tool may increase e-filing and thus reduce resources used to process paper tax returns.”
The IRS’s report included surveys that found strong support for such a system, with 72% of the taxpayers polled saying they are either very interested or somewhat interested in using an IRS-provided tool to prepare and file their taxes. Among taxpayers who currently self-prepare their taxes using commercial software, the survey found that 68% of taxpayers reported that they would be either “very likely” or “somewhat likely” to switch to a free IRS-provided online tool.
However, the TIGTA report found problems with the survey suggesting that interest in using such a system may have been exaggerated.
“Taxpayer interest in a Direct File tool may be overstated due to the design of the surveys conducted,” said TIGTA. “For example, the Taxpayer Experience Survey did not provide a ‘neutral’ option for participants. 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. In addition, the 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. 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 upon a 72% interest in a Direct File tool, per the Taxpayer Experience Survey. However, only 28% were ‘very interested’ compared to 45% who were ‘somewhat interested.'”
The Inflation Reduction Act provided the IRS with an appropriation of $15 million to remain available until Sept. 30, 2023, to establish a task force and deliver the report to Congress. As of July 10, 2023, the IRS had obligated $11.1 million (74%) of the $15 million allocated by the law, and according to IRS management, the agency plans to spend $966,000 in salaries and benefits and $26,000 for equipment from the $3.9 million in unobligated funds. However, the IRS management did not have any planned spending for $2.9 million of the $3.9 million unobligated funds, TIGTA found. In addition, the report noted that the IRS couldn’t provide TIGTA with any supporting documentation to support its cost estimates or how it determined there would be at least 5 million users for the direct file system, and as a result, TIGTA had no way to identify the reasonableness of the IRS’s cost estimates and survey results.
An IRS official defended the agency’s estimates. “As TIGTA acknowledges, the IRA required the IRS’s Direct File report to include information relating to taxpayer opinions, expectations and level of trust about an IRS-based Direct File system,” wrote Bridget Roberts, chief of Direct File at the IRS. “While TIGTA concluded our overall survey design led to potentially overstated taxpayer interest in direct file, we want to emphasize that we specifically flagged the potential for interest in Direct File to be overstated and influenced by a number of issues.”
The IRS had acknowledged in its report that taxpayer interest could shift based on design, functionality and other product choices. As for whether the $15 million allocation in the Inflation Reduction Act is being spent the right way, the IRS has now taken steps to create codes so employees can report their time appropriately so the IRS can capture and expense their salaries and benefits moving forward.
