Last week, I told MarketWatch that the process for issuing another round of Economic Impact Payments (EIPs) as required by the Phase IV COVID relief package should be less cumbersome than it was under the 2020 CARES Act. After all, I noted, “the infrastructure has been set up for this distribution method and has been tested already.”
So much for great expectations. Unfortunately, earlier this week IRS officials acknowledged that some of the $600 EIPs issued over the past several days ran into snafus for several reasons. Payments sent by mail may end up in limbo due to incorrect or outdated addresses – a problem largely due to sacrificing oversight and accuracy for speed. Payments sent electronically ran into bank accounts that were closed or otherwise not active. And, unlike the months following the CARES Act’s passage when a filing season was already underway and had been extended, the 2021 tax filing season is, as of this writing, still scheduled to open in a few weeks.
The upshot is that many taxpayers who might otherwise qualify for fast delivery of EIPs will have to file their tax return for last year and claim it that way (while possibly having to reconcile the earlier CARES Act payment as well). Once again, millions of taxpayers will be kept waiting for payments that were supposed to be rapid.
The IRS’s online Q&A regarding the “Get My Payment” finder tool is not terribly encouraging either. Visitors are told that they “may get a ‘please wait’ or error message” on the website due to the high volumes coming in.” They are also warned, “there is a limit to the number of times people can access Get My Payment each day.”
The taxpayer experience throughout the pandemic could have been much worse had the private sector not come to the rescue. One early challenge after passage of the CARES Act was getting the first round of EIPs to Americans who, for one reason or another, did not need to file a tax return in 2020. By the IRS adapting the platform of the Free File Alliance, a public-private consortium providing online tax return filing at no charge, millions of taxpayers could access the payments that were lawfully due them.
Given the documented success of the Free File Alliance for its original purpose, and its value since the pandemic hit, it is all the more puzzling why proposals have persisted to put the IRS directly into the tax form preparation and filing business. As a 2019 analysis from Demian Brady of National Taxpayers Union Foundation put it:
Equally concerning is another long-standing scheme to establish a “Return-Free” system, which would have the IRS send pre-filled tax forms to citizens for their signatures. Advocates of this proposal … fail to consider the IRS’ perpetual technological problems, its history of repeated abuse of power, and ongoing staffing challenges to ensure that IRS employees are adequately trained regarding taxpayer rights. …
In addition, the system could potentially short-change taxpayers of considerable savings. It is true that the IRS generally has a complete picture of a taxpayer’s income, but it rarely has a complete picture of what credits or deductions for which they might qualify. And naturally, it has no incentive to encourage taxpayers to take full advantage of provisions that could lower their tax bills.
Organizations across the ideological spectrum agree with skepticism that a Return-Free system would be desirable in the U.S. Dr. Michael Mandel, Chief Economic Strategist for the Progressive Policy Institute, wrote late last year:
…Return-free filing has often been thought of as a free lunch, where the IRS makes use of information that it already has to make life easier for low- and middle-income taxpayers and to save money. But the reality is starkly different from the rhetoric, and the often-claimed benefits for the working poor could in fact turn into another burden.
Ironically, one reason the Free File Alliance was created in 2003 was because the IRS could not, on its own, come anywhere close to meeting the electronic filing goals for tax returns that were first set five years before by the NTU-backed IRS Restructuring and Reform Act. And while e-filing is now common, the IRS’s longstanding IT problems have simply embedded themselves in other parts of the tax system. Hopefully, the incoming Biden Administration and (assuming she is confirmed) Treasury Secretary Yellen will recognize the futility of Return-Free and embrace the value of Free File. There are already far too many technological headaches at the tax agency; why create a self-inflicted migraine that will ultimately leave taxpayers in more pain?