As the tax filing deadline approaches on Tuesday, a large number of taxpayers are gearing up to submit their income tax returns. Traditionally, many individuals opt to purchase software from private firms like Intuit and H&R Block. Shockingly, nearly one-quarter of the American population procrastinates until the eleventh hour to file their taxes.
A potential solution on the horizon is the creation of a free electronic tax-filing system operated by the government for all taxpayers. However, major tax preparation firms are uneasy about this proposal. The idea has been a topic of discussion and controversy for a considerable period. Currently, Congress has mandated that the IRS investigate the feasibility of implementing such a system and provide a report on its potential implementation.
Implementing a government-run free-file tax return system
As part of the Inflation Reduction Act, a landmark climate and healthcare bill introduced by the Democrats, the IRS is set to receive $80 billion over the next decade. President Joe Biden signed this legislation into law last summer. The Act stipulates that the IRS must provide a report within nine months, with a budget of $15 million, on the feasibility of implementing a government-run free-file tax return system. The IRS is set to release the first of a series of reports next month, detailing how the proposed system could be established and the associated costs.
The proposal of a government-operated free electronic tax-filing system has been welcomed by some taxpayer advocates who believe it would represent good governance and be beneficial for taxpayers. However, critics are skeptical about the IRS serving as both tax collector and tax preparer, expressing concern that such a service may create an imbalance of power between taxpayers and the government. According to Robert Marvin, an IRS spokesperson, the primary objective of the investigation is to explore ways to simplify the tax-filing process. He stated in an email that Americans should have the option to choose the method that works best for them, whether that be through a tax professional, tax software, or a free option.
Implementation of the proposed government-operated free-file tax return system
The implementation of the proposed government-operated free-file tax return system could result in significant financial losses for major tax preparation firms. In 2022, Intuit, the parent company of TurboTax, and H&R Block served over 60 million taxpayers. These companies have spent tens of millions of dollars attempting to influence policymakers on this matter, as evidenced by lobbying data that highlights their substantial expenditures.
A recent analysis reveals that since 2006, both private companies such as Intuit and H&R Block, as well as advocacy groups in support of large tax preparation firms and proponents of free-file, have spent approximately $39.3 million on lobbying activities related to free-file and other issues. However, under current federal law, domestic lobbyists are not obligated to itemize expenses by a specific problem. Hence, the figures mentioned are not exclusive to free-file. Intuit, in particular, has spent roughly $25.6 million on lobbying activities since 2006, while H&R Block has spent around $9.6 million. Additionally, the conservative Americans for Tax Reform has spent approximately $3 million on lobbying efforts.
What is the objective behind the IRS investigation?
The objective behind the IRS investigation is to investigate potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law. The IRS Criminal Investigation (CI) division carries out the investigations, which is responsible for investigating potential criminal violations of the U.S. Internal Revenue Code and related financial crimes, such as money laundering, currency violations, tax-related identity theft fraud and terrorist financing that adversely affect tax administration. The CI division comprises approximately 3,000 employees worldwide, about 2,100 of whom are special agents whose investigative jurisdiction includes tax, money laundering, and Bank Secrecy Act laws. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, the IRS is the only one that can investigate potential criminal violations of the Internal Revenue Code.
The investigations are aimed at enforcing U.S. tax laws and supporting tax administration. The highest priority of the CI division is to ensure compliance with tax laws in the United States, which relies heavily on self-assessments of what tax is owed. This is called voluntary compliance. When individuals and corporations make deliberate decisions not to comply with the law, they face the possibility of a civil audit or criminal investigation that could result in prosecution and possible jail time. Publicity of these convictions provides a deterrent effect that enhances voluntary compliance.