OPINION | SCHAUER: IRS SHOULD FOCUS ON TAX CHEATS, NOT TAX PREPARATION

By Mark Schauer

The Detroit News

October 8, 2023

A recent study found that tax cheats cost the Treasury an estimated $1 trillion annually. Congressional Democrats, in partnership with President Biden, recently took aggressive steps to help close this tax gap by modernizing the IRS and ensuring that the agency has the tools to enforce the law.

But although the IRS now has the necessary resources to crack down on wealthy tax cheats so America can fund essential programs and reduce its deficits, one plan the IRS is considering may inadvertently widen the tax gap, benefiting the top income brackets at the expense of poor and middle-class taxpayers.

The IRS recently announced that it will begin preparing income taxes of some lower-income Americans through a new agency pilot program, Direct File. On its face, this initiative may sound like a good idea, but is now really the time for this?

The IRS has argued that the tax gap has widened over the years because the agency hasn’t had enough resources or staffing to go after wealthy tax cheats for gaming the system. Congress has finally answered the agency's years of pleas by giving it the funding it needs to do the job. The IRS getting into the tax preparation business — while great in theory — would be an unnecessary distraction at this time.

The Progressive Policy Institute warns that the IRS Direct File system could fail to identify many deductions taxpayers are eligible for, particularly the Earned Income Tax Credit.

Many scholars argue that the EITC is the "most effective means-tested anti-poverty program for working-age households" and is credited with lifting about 5.6 million people out of poverty in 2019. In 2021, nearly 1 million Michigan residents qualified for this credit, which put $1 billion, or an average of $2,017 per filer, in their pockets.

There is an information vortex between the IRS and the American taxpayer. The EITC, like most deductions, is based on individual circumstances. Did you get married? Did you have a child? Did you purchase a home? Did you go to school? Did you use childcare? Many taxpayers are ineligible for these deductions one year but eligible the next. How will the IRS know if your circumstances changed?

In many cases, it won’t. And the handful of taxpayers who recognize errors in the IRS’ filings will likely find it difficult to get ahold of the agency.

According to the National Taxpayer Advocate's 2020 Annual Report to Congress, the IRS had a backlog of 5.3 million pieces of mail and 2.3 million unprocessed tax returns at the end of 2020. This issue is getting worse, not better.

The most recent report by National Taxpayer Advocate Erin Collins found that taxpayers "experienced more misery in 2022" partly because of COVID-related paper processing delays. Direct File will exacerbate these hold-ups by adding to the responsibilities already on the overworked IRS’ plate.

It would also be prudent for the IRS to resolve some systemic issues within the agency before itexpands its current responsibilities.

Groups like the Leadership Conference on Civil and Human Rights and others have asked the White House to address the racial discrimination that evidence suggests is apparent in the IRS. In May, even IRS Commissioner Daniel Werfel acknowledged racial disparities in the agency's audit process, stating that "while there is a need for further research, our initial findings support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population." This is a significant concern for many cities in Michigan, especially Detroit, which has the third-most Black Americans per capita in the country.

There is no doubt that the IRS, working with the Biden administration, will soon fix these systemic issues. However, as former NAACP Director Ben Chavis argued in the Chicago Tribune, getting into the tax preparation business now will only delay the progress it intends to make.

While streamlining tax preparation may seem enticing, the list of potential adverse effects on low-income individuals is too extensive for the IRS to move forward, at least for now.

Rather than pursue this massive undertaking, the IRS should focus on closing the tax gap, making the agency’s practices more equitable, and resolving current processing days. That represents the best way of helping the people the agency is intent on serving.

Mark Schauer is a former Democratic member of Congress from Michigan.