Op/Ed: The direct file system will only make tax returns filing worse for Hoosiers

Few Americans — including me — enjoy preparing their annual tax returns. It is time-consuming and can be costly. Even worse is the stress associated with potentially making a harmless mistake and being made to feel like we have intentionally committed a crime against the United States. I was audited once, and I felt like I was being interrogated.

When I served as Indiana’s revenue chief from 2017 to 2020, I heard about these concerns daily. In Indiana, we did all we could to alleviate the unnecessary and silly burdens placed on our citizens. Some things we did to help Hoosiers were done entirely ourselves, or with the help of companies we hired to support our efforts, including a multi-year, $100 million modernization journey that significantly enhanced the ability to file or amend returns, submit correspondence and avoid waiting on hold for hours.

Additionally, we partnered with private-sector firms who prepare tax returns for most Americans. To help reduce tax fraud, not only did we invest in sophisticated identity theft prevention tools, but we worked with the IRS, linking Hoosiers’ state returns with their federal returns first filed with the IRS.

While no change will ever make tax filing fun for most Americans, I am confident the work we and many of our peer states have done resulted in the preparation and filing of tax returns more simple, less expensive, free in most cases and less stressful. Perfect? Certainly not.

But now, the IRS wants to unnecessarily upend our work. Political appointees in Washington have pushed the IRS to build an awkward, costly "Direct File" tax system, and they want the states (our tax dollars) to pay for it and bail them out when it doesn’t work. This is a solution in search of a problem that does not exist.

Direct File’s advocates say it's urgently needed because taxpayers need free government-run tax preparation software. It’s hard to see how that’s possible. Several free options for taxpayers are already available to prepare their taxes — both from commercial and government sources. So where is this urgency?

Moreover, it’s hard to imagine taxpayers would trust an IRS-run tax preparation software system to generate their maximum refund. The IRS’ job is to collect as much tax revenue as possible. There’s an obvious conflict of interest if the IRS serves as both tax collector and tax preparer. Contrary to what Direct File’s advocates may believe, people are not just going to gloss over that.

There are additional concerns citizens should be aware of, as well.

For years, tax fraud was out of control. Billions of dollars in false tax refunds were being paid out to scammers because of the lax security standards we all had in place. That’s a sad truth.

One of the ways states reduced fraud is by linking the federal and state tax returns to one another. Generally, if someone wants to file a state tax return in Indiana, they file their federal tax return first with the IRS, and the data in that return then flows down directly into their Indiana return. If the data doesn’t match, this indicates potential fraud.

This Direct File system the IRS will pilot this tax season — seeking participation from states — is not currently linked to the states’ tax systems, although they claim they’re working on it. Until then, Direct File should be a non-starter. Even if the IRS develops a way to link the returns, it’s still a terrible waste of our tax dollars — though I’m confident the army of consultants and third-party software engineers and developers the IRS is paying to figure it out will disagree with me on this point.

Worse, in the states that elect not to join Direct File, and unless those states already offer their own state-level free online filing solution, which most do not, there will very likely be no way for that state’s citizens to file their taxes electronically — for free or at any cost. No private software company offers a "state-only" tax product not linked to a federal return. Again, as part of a multi-year journey to fight rampant tax fraud and identity theft throughout America, tax software providers were encouraged to link the federal and state returns.

Let’s recap: we have an untested IRS tax system very few individuals will trust to generate the biggest refund that seeks to solve a problem that does not exist. And, it will break the relationship between the IRS and the states, potentially increasing tax fraud and making it impossible for millions of Americans to electronically prepare and file their state tax returns.

Who thought this was a good idea, again?

Adam Krupp served as Indiana’s Department of Revenue Commissioner from 2017-2020 and on the Board of Trustees for the national Federation of Tax Administrators, representing state tax agency leaders from across the United States. He is currently the Chief Operating Officer and General Counsel for an Indianapolis-based accounting firm.

This article originally appeared on Indianapolis Star: Why the direct file tax system tries to solve a non-existent problem