Congress

House GOP propose defunding IRS Direct File, further budget cuts to enforcement

The House Appropriations Committee proposes cutting IRS funding by nearly 18% and zero out funding for its Direct File platform.

Jory Heckman@jheckmanWFED

June 5, 2024 1:32 pm

5 min read

House Republicans are proposing defunding the IRS’ Direct File platform, which allows households to file their federal tax returns online and for free.

The IRS announced last week it will make its Direct File platform a permanent option for taxpayers to file their federal tax returns, after piloting the system this year with 12 states. The agency will invite all 50 states and the District of Columbia to participate in Direct File during next year’s filing season.

But the House Appropriations Committee released a fiscal 2025 spending bill this week that would cut IRS funding by nearly 18% and zero out funding for Direct File.

The FY 2025 fiscal services and general government appropriations bill would give the IRS a $10.11 billion budget — a $2.2 billion cut from current spending levels. The cuts would be felt mostly by IRS enforcement, which would see a $2 billion cut in funding.

The spending bill also “prohibits funds to be used for the IRS to create a government-run tax preparation software that Congress has not authorized.”

The bill cleared the financial services and general government subcommittee on Wednesday, but Congress is still in the early stages of crafting a spending deal for next year.

Lawmakers cut $20 billion in multi-year modernization funding the IRS got in the Inflation Reduction Act, as part of a comprehensive spending deal for the rest of this year.

Treasury Department spokesperson Haris Talwar said in a statement that the House Republican proposal “would increase the deficit by allowing wealthy and corporate tax evaders to avoid paying taxes owed, while increasing costs for many American families by blocking a free IRS tax filing option funded by President Biden’s Inflation Reduction Act.”

“This proposal sides with high-end tax evaders at the expense of the American people,” Talwar said.

Republican lawmakers have criticized the IRS for piloting the Direct File platform this year without seeking authorization from Congress.

IRS Commissioner Danny Werfel told the Senate Finance Committee in April that the IRS has the authority under the Internal Revenue Code “to provide taxpayer service to taxpayers and update the tools and the solutions that taxpayers use to file.”

“We lived in a world where we had only paper forms and we moved to a world where, for example, we can put a PDF form on the web, and people can fill out that PDF form on the web. We didn’t need congressional authority to do that,” Werfel said. “We worked to develop … a partnership with the Free File Alliance, with commercial software providers, to add and work with them and support their efforts to support free electronic solutions. We didn’t need congressional authority to do that.”

Congressional Republicans are also challenging the IRS for calling Direct File a “free” way to file, since the project is funded by taxpayer dollars.

Senate Finance Committee Ranking Member Mike Crapo (R-Idaho) called Direct File “wasteful and duplicative,” at the April hearing, since some tax software companies already allow taxpayers below a certain income threshold to file online for free through the Free File Alliance program.

“Were the IRS to use this year’s Direct File spending to pay third-party providers to prepare and file returns instead, literally hundreds of times the number of taxpayers could file for free,” Crapo said. “The IRS spending hundreds of millions of its finite funding to simply test the utility of doing something that can already be done more efficiently, with better outcomes, and without the very real conflicts, while simultaneously pleading for more funding, calls for more oversight.”

Werfel told reporters last week that launching Direct File cost about $31.8 million. The IRS spent about $24 million on the project while the U.S. Digital Service spent more than $7 million of its own funds.

The IRS is asking Congress for up to $75 million in its fiscal 2025 budget request to support its expansion of Direct File, depending on how many additional states opt into the program.

Subcommittee Chairman David Joyce (R-Ohio) said at a markup hearing Wednesday that the spending bill “reins in wasteful spending and take steps to prevent agencies like the IRS from unfairly targeting hardworking Americans.”

Joyce added that the IRS still has about $40 billion in multi-year funds remaining from the Inflation Reduction Act.

A Treasury official said in a statement that the IRS in FY 2023 collected $86 billion through enforcement programs, a return on investment of about $7 for every dollar in its budget.

Subcommittee Ranking Member Steny Hoyer (D-Md.) said cuts to IRS enforcement would hamper the agency’s ability to collect taxes owed.

“Make no mistake, the IRS cuts in this bill will cost taxpayers billions of dollars,” Hoyer said.

Hoyer said the IRS, “at a minimum,” needs 2025 funding next year that matches its current $12.3 billion annual budget.

“If the government requires Americans to pay their taxes, we ought to also give them a free and easy way to do so,” he said.

The overall 2025 fiscal services and general government appropriations bill proposes a nearly 10% cut to covered agencies.

Committee Ranking Member Rosa DeLauro (D-Conn.) said those proposed cuts go further than the 1% cut to nondefense discretionary spending agreed to, as part of a bipartisan debt ceiling deal last year.

DeLauro also challenged the proposal to defund the IRS Direct File platform.

“There is no logical reason why private industry must be the middleman between Americans and their government, period. Americans of all income levels should be able to cop confidently file their taxes directly with the IRS without corporations skimming profits off the top,” DeLauro said.

Werfel said last week that taxpayers who used Direct File generally spent less than an hour to file their tax returns, and that many completed their returns in as little as 30 minutes.

The IRS estimates the average American spends $270 and 13 hours filing their taxes each year.

In a survey of 11,000 Direct File users, nearly half said they paid to file their taxes last year — while 16% said they didn’t file last year at all. About 90% of respondents rated their experience with Direct File as “excellent” or “above average.”