COMMENTARY: IRS gets into the tax prep business

Most people have a love-hate relationship with their annual tax preparation and filing. Under the current system, preparing and filing taxes can be complicated, time-consuming, and expensive. But tax season also brings the potential of meaningful tax refunds and credits.

It’s been clear for years that the tax system needs a new path forward, which is why it’s so exciting that, starting this year, more than 400,000 Nevada taxpayers will have the opportunity to file their 2023 federal income taxes for free, directly with the IRS beginning online sometime on or before mid-March.

The IRS is launching a pilot for its Direct File program: a free, secure and easy-to-use digital tax preparation and filing service provided by the IRS rather than a for-profit third party. Nevada is one of 12 states participating in the pilot program. If all goes well, taxpayers across the country will have the opportunity to access this tool in the coming years.

This should be exciting news for any taxpayer. After all, Americans deserve choice when it comes to how they file their taxes. But one of the biggest benefits of this program is how it will help working families, immigrants, communities of color and lower-income filers.

Having worked at the intersection of taxes and justice for decades, I’ve seen firsthand the incredible burden that our current system places on already marginalized communities. Tax preparers are generally unregulated and, as a result, there are too many bad actors who take advantage of vulnerable households. I have seen unscrupulous tax preparers charge immigrant workers fictitious tax penalties and high fees for tax returns that were inaccurate. Critically inaccurate tax returns can put innocent taxpayers at risk.

Because our tax system is so complicated, it’s no wonder many Americans rely on assistance from tax preparation companies. Unfortunately, advertisements for free tax preparation and filing may not be what they seem. Intuit was forced to pay a $141 million settlement to 4.4 million Americans because these taxpayers were channeled into using paid services when they tried to use TurboTax’s “free” service. And just this month, Intuit was charged by the Federal Trade Commission with deceptive advertising.

To make matters worse, many unregulated tax preparers often concentrate in low-income communities to maximize their profits while exploiting the most vulnerable taxpayers. While these preparers sell themselves as experts, lack of federal oversight means that many of these preparers are at best unqualified, and at worst purposely committing fraud and misconduct. In fact, a 2014 GAO study found a 60 percent error rate from these unregulated preparers. That’s the key difference between tax preparation companies and the IRS: Because it’s a government agency, the IRS is subject to stricter regulations and scrutiny than its private counterparts.

Millions more find it too hard or expensive to file taxes at all, and miss out on credits they are owed, including up to one in five families eligible for the Earned Income Tax Credit and up to 4 million Child Tax Credit families in 2021. Again, those missing out on these benefits are disproportionately families of color.

Undoubtedly, the IRS has major hurdles ahead if it wants to more justly implement the tax code. The agency, for instance, has rightly pledged to overhaul how it conducts its audits to ensure Black taxpayers aren’t disproportionately targeted, as has historically been the case, and plans to use funding from the Inflation Reduction Act to achieve this goal. Direct File is just one of the ways that the IRS can ensure we have a tax filing system that works for all people.

I am proud to live in a state as diverse as Nevada; one in five Nevadans is an immigrant and nearly one in three people identifies as Hispanic or Latino. To better serve our communities, the Direct File tool is available in English, Spanish and other languages by request, and people with an Individual Taxpayer Identification Number — issued to those who are ineligible for a Social Security number — will also be able to use the tool.

While Direct File is available only to a portion of Nevadans now, the hope is that a successful pilot year will allow the program to expand to all Americans. If you’re looking for a free and easy way to file your taxes this year, I encourage you to check your eligibility for the Direct File pilot.

Francine J. Lipman is a professor of law at UNLV’s William S. Boyd School of Law and a former Nevada tax commissioner.