Under pressure from Congress, the IRS agreed in 2002 to let a group of private tax preparers provide online software allowing low-income Americans to file their taxes for free. This would save the IRS the trouble, and advocates of the idea said the private sector was anyway better equipped to simplify the process and help phase out paper returns. The plan hasn’t worked. This month, a class-action lawsuit was filed against the parent company of TurboTax, alleging that it duped millions of customers into paying unnecessary fees.

Electronic filing has increased dramatically since the free-file program began, but less than 2.5% of the 70% of taxpayers eligible for the service are getting it at no charge. The suit argues that TurboTax hid the free version of the software it promised to provide and guided users to similar-sounding products with fees. Reporting by ProPublica suggests it wasn’t the only company to do so.

The principle that low-income taxpayers should be able to file for free is surely right. The question is how to deliver. Some have argued that the existing program just needs better policing. This makes little sense. The IRS could easily provide the necessary software itself, and at relatively modest cost. The truth is, the free-filing program wasn’t just badly supervised; it was flawed in principle. It was never realistic to suppose that the tax-prep firms would willingly provide free service to so many taxpayers.

Regardless of whether the IRS provides free-filing software itself, the agency needs a multiyear funding plan to upgrade its IT systems and improve customer service. Only a fraction of that increase in resources would be required to develop software for the 100 million taxpayers who qualify for free filing. After all, the IRS already transposes the tax code into taxpayer forms. The online part of the task should be pretty straightforward.

In fact, the IRS shouldn’t stop there. It should send all taxpayers returns pre-filled with income data the agency has already gathered from employers and others. Tax agencies in many other countries manage to do this. Taxpayers could then review the information, correct it if needed, and send it back, greatly simplifying the process. Those with more complicated affairs might still prefer the help of a professional, but for the great majority of Americans this shouldn’t be necessary.

Bipartisan legislation to “modernize” the IRS is currently before Congress. Sadly, it doesn’t address these issues. Indeed, one of the bill’s provisions affirms the continued outsourcing of the free-file program. Lawmakers ought to think again and require the IRS to do the job it should never have been allowed to outsource in the first place.

—Bloomberg

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