The current administration, backed by Congressional Democrats, has actively sought to reduce this tax deficit by updating the IRS and empowering it with more efficient enforcement mechanisms. The IRS has indicated plans to pilot a new program, Direct File, to assist some lower-income citizens with their tax preparations. While this appears beneficial at first glance, the timing is worth questioning.
However, even with enhanced tools to address tax discrepancies among the affluent and consequently bolster essential programs and cut down the national deficit, the IRS’s potential new approach might unintentionally enlarge the tax disparity. This could end up favoring higher earners while disadvantaging the lower and middle-income sectors.
Implications of the IRS’s Direct File Program and its Potential Impact on Taxpayers
Historically, the IRS attributed the escalating tax gap to insufficient resources and manpower, hindering their capability to tackle affluent tax evaders manipulating the system. Fortunately, with the recent Congressional support, they’ve now secured the required funds. Yet, the idea of the IRS delving into tax preparation might be a misdirected effort at this juncture.
The Progressive Policy Institute cautions that the IRS’s Direct File could overlook various tax deductions, specifically the Earned Income Tax Credit (EITC). Recent findings reveal that tax evasions lead to a loss of approximately $1 trillion for the Treasury each year.
Numerous experts believe the EITC to be a pivotal instrument against poverty for working-age families. Its impact was profound in 2019, raising approximately 5.6 million individuals above the poverty line. In 2021, this credit significantly benefited Michigan, with almost 1 million qualifiers receiving an average of $2,017.
However, there’s a communication gap between the IRS and taxpayers. Deductions, including EITC, depend on personal situations. Life events such as marriage, child birth, home purchase, education, or utilizing childcare can alter one’s qualification. How can the IRS be certain of these changes?
In numerous scenarios, they might remain unaware. A limited number of taxpayers who notice discrepancies in IRS evaluations could face challenges addressing them.
The 2020 report from the National Taxpayer Advocate to Congress highlighted the IRS’s significant backlog, which is only worsening with time. The already strained IRS could face additional burden due to Direct File, further hampering their efficiency.
Before expanding its roles, the IRS should address inherent issues. Organizations, like the Leadership Conference on Civil and Human Rights, have urged for a scrutiny of racial biases evident within the IRS. The agency’s recognition of potential racial discrepancies in audit processes, especially affecting Black communities, remains a major concern.
While it’s anticipated that the IRS, in collaboration with the current administration, will rectify these issues, diving into tax preparation could impede this progress. Even though simplifying tax processes sounds appealing, the potential negative ramifications for low-income citizens are too numerous for the IRS to proceed immediately.
The IRS’s priority should remain on narrowing the tax gap, ensuring fairness in its procedures, and alleviating present operational delays. This direction would truly benefit the communities the IRS seeks to serve.