When Congress passed the Inflation Reduction Act (IRA), it allocated $80 billion to modernize the IRS after the agency had been historically underfunded by Republicans for decades. These funds will help the IRS target billionaires and large corporations that avoid paying their fair share in taxes. It will also make Tax Day easier for Americans by upgrading decades-old computer systems and adequately staffing the agency’s help line.
These much-needed changes will help rebuild trust with taxpayers, but the IRS still has a long way to go, especially with communities of color and low-income taxpayers. Economists recently found that “Black Americans are roughly three to five times more likely to face an IRS audit than other taxpayers.” The IRS was five times more likely to audit low-income households earning less than $25,000 a year.
The IRS exists to collect revenue to fund critical social safety net programs, and it is crucial that the agency uses its increased funding to rebuild a sense of trust with taxpayers. Unfortunately, some in Washington are once again pushing to overextend the IRS by requiring the agency prepare and file tax returns for all Americans. Low-income taxpayers stand the most to lose.
Taxpayers often make major life decisions every year, such as having a baby, getting married, or donating to their local church or charity of their choice. Our tax code rightly incentivizes these community-building decisions. But an auto-generated tax return from the IRS is unlikely to capture these unique circumstances, resulting in taxpayers missing out on the important credits and deductions they are owed and on which many depend.
As the child of a hard-working single mother, our family depended on credits like the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) to cover bills, put food on the table, and pay for child care. Low-income and middle-class taxpayers will be the ones who lose out under a government-run tax prep system since they cannot afford to pay a tax professional.
Most taxpayers would actually pay more under a government-run tax preparation system. Experts estimate that if taxpayers (excepting those in the top 5% income) accepted their pre-populated returns, “tax receipts would rise by $96 billion.”
This same report also found that a pre-populated return would only be accurate for 42% to 48% of all taxpayers. This would require more than half of taxpayers to engage with the IRS to make corrections. Many low-income workers are paid by the hour, and contacting the IRS is an arduous and time-consuming process that few have the time or patience to go.
Although some countries have developed a “return-free” system, the U.S. tax code is much more complex because it contains deductions and credits to support low-income filers. A 2021 report from Center Forward and PWC found, “Most countries that have a return-free filing system have far simpler tax systems than the United States has.”
Sens. Mark Kelly (D-AZ) and Kyrsten Sinema (I-AZ) both provided critical “yes” votes to pass the important Inflation Reduction Act last year. The funding from this bill has the potential to help the IRS rebuild trust with low-income communities and taxpayers. I urge them to stand against efforts to use this critical funding to pursue an unnecessary program that will only cost Arizonans money and cause them headaches.
Written by Devin Del Palacio for the West Valley View ~ May 15, 2023
Devin Del Palacio is a former Democratic member of the Arizona State Legislature (District 19) and currently serves on the Tolleson Union High School District Governing Board.
