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IRS Lacks Sufficient Cost Estimates for Direct File, GAO Says 

Posted on Apr. 10, 2024

Gaps in the IRS's cost estimates for the direct-file pilot program could hinder its progress toward implementing the initiative, according to a government watchdog agency.

The Government Accountability Office, in an April 9 report, said the IRS hasn’t been maintaining comprehensive cost estimates for the direct-file pilot, which allows eligible taxpayers in 12 states to file their 2023 federal returns directly through the agency. The IRS has budgeted $114 million for the program in fiscal 2024.

According to the GAO, the IRS’s initial estimates to Congress — which projected the annual cost of the program at $64 million to $249 million — left much to be desired. Missing from those early estimates was data reflecting start-up costs, as well as the costs of training additional customer service representatives, updating software to reflect tax policy changes, and integrating state returns into the new system, the report said.

The GAO confirmed the findings of a 2023 audit by the Treasury Inspector General for Tax Administration that found the IRS had no documentation to support the underlying data used in its direct-file cost estimates.

The GAO report comes ahead of the April 15 deadline for the pilot, which is limited in scope and intended to serve as a potential model for the development of a permanent program.

Also lacking from IRS direct-file estimates is data regarding the potential benefits of the program, the GAO said, including metrics to evaluate the benefit of reducing paper returns and errors. The IRS said it plans to survey a random sample of 5,000 pilot participants in the pilot program in fiscal 2024 and 2025, according to the report.

By better estimating the costs and benefits of the direct-file program during the pilot phase, the IRS can make more accurate decisions on the viability of the program once the pilot is over, the report concluded.

The GAO recommended that IRS Commissioner Daniel Werfel apply best practices to estimating the full cost of developing a direct-file program as well as the possible benefits to the program and that data collected from the pilot be used to inform future decisions.

Clock Ticking

In a response included with the report, Werfel agreed with the recommendations and said the IRS is working on developing more thorough estimates but emphasized that a program like direct file has never been offered before.

While the GAO emphasized that IRS officials will have only a short amount of time to consider cost and benefit data before deciding the fate of direct file, Robert Kerr of Kerr Consulting LLC said he has doubts that the agency will follow through on enhancing its estimates.

“Commissioner Werfel’s response states a full accounting of all costs ‘will be helpful’ in post-pilot decision-making, not that a full accounting will be essential,” Kerr, a former IRS employee, said in an email to Tax Notes. “Who is going to stop IRS from committing possibly hundreds of millions of taxpayer dollars based on what appears to be glaringly incomplete data?”

Kerr said the agency might be “scraping the bottom of the barrel” to suggest that the 200,000 paper filers who might be eligible for direct file would want to participate in the program.

“Perhaps cost, accuracy, and efficiency would be better served creating a truly electronic amended return process than chasing a fraction of 200K returns?” Kerr said.

Senate Finance Committee Chair Ron Wyden, D-Ore., speaking to reporters April 9, said he hasn’t yet read the report but defended Werfel’s record on transparency surrounding the program.

Werfel “has been all over the Hill, all over the country. I can tell you I’ve seen him countless places talking about the program, how it works, what the accountability requirements are,” Wyden said.

Cady Stanton contributed to this article.

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