In the Media

REUTERS: How the Tax World Has Responded to Stanford’s Study on Black Audit Rates

08. 03. 2023

"Even though the Tax Code is race-neutral on its face, its impacts aren’t."

This story was originally published by Thompson-Reuters.

At the end of this tax filing season, Werfel announced the IRS is developing tax filing tool to allow taxpayers to complete their returns without the need of a middleman. Next tax season the IRS will launch a pilot program for what it is calling Direct File, an optional trial run certain taxpayers can opt into. More specifics on who will be eligible will be made available before then, but Werfel indicated some simpler returns can be pre-populated, likely meaning some taxpayers with straightforward income streams such as through a single Form W-2 can be told what their refund or tax liability is without much of the legwork—and sign off on it free of charge.

After the announcement, 200 national, state, and local organizations came together to join a letter supporting the IRS development of a direct file tool. The letter was sent by the Coalition for Free and Fair Filing, a coalition spearheaded by the Center for the Study of Social Policy, Code for America, the Economic Security Project, Groundwork Action, NETWORK Lobby for Catholic Social Justice, Public Citizen, and RESULTS.

In the July 19 letter to Werfel, the group expressed its staunch support of Direct File, which it hopes will undercut predatory practices by major players in the tax prep industry, especially Intuit, which made settlement payments to customers in a legal battle over misrepresentations of the “free” version of TurboTax.

“Today, it is far too difficult for American families to file tax returns,” read the letter. “The IRS estimates that an average taxpayer spends 13 hours and $250 annually fulfilling their filing obligations. These families miss out on critical benefits administered through the Tax Code, like the [EITC] and the Child Tax Credit [CTC]. Moreover, the burden of these high costs and missed benefits fall disproportionately on people of color and other communities who are marginalized and excluded from support …”

The Economic Security Project released a supplemental fact sheet expanding more on how the tax filing system disfavors families of color. Pulling from IRS data on the agency’s website, the document states about one in five eligible families don’t receive their EITC due to filing barriers. “Nearly every part of the tax code interacts with race and ethnicity in ways that aren’t written into the code but which have very real racially disparate consequences,” it continues. “Some policies, like the EITC and CTC carry the promise of outsized impacts for households of color, but the lion’s share of tax policies actually create significant disadvantages to people of color compared to white people—from marriage bonuses to preferential tax treatment for capital gains, homeownership, and retirement savings.”

Economic Security Project’s Vice President of Campaigns and Political Strategy Adam Ruben told Checkpoint in an interview that his organization’s involvement on the issue of government-automated tax filing and later participation in the Coalition began with work stemming back to 2017. Then, they were looking at refundable tax credits like the EITC and the CTC, including at the state level.

“We were trying to figure out how do you put more money back in working, middle-class people’s pockets and we realized … ‘Okay, these tax credits are one of the kind of tools that we have to do that’” and “had been very successful, but we could make a much bigger and more inclusive way of reaching more people and also boosting the racial equity of those credits,” Ruben said.

He added that this led to the conclusion that a simpler tax filing system where federal and state governments are more proactive and pay “out the credits to you automatically” is necessary for cutting filing costs and time for low-income taxpayers and taxpayers of color. Ruben recalled before the pandemic, staffers on the House Ways and Means and Senate Finance Committees were “literally laughing out loud at the idea” of the IRS just sending checks to eligible taxpayers. The pandemic proved the IRS’ decades-old systems could be updated to issue stimulus checks and monthly CTC checks, which made the prospect of Direct File more feasible and potentially a reality, according to Ruben.

After the announcement of the pilot, the Economic Security Project reached out to other organizations that had been working on refundable credits, as there was already a sort of pre-installed network of different groups at various levels, he explained.

“I think even though the Tax Code is race-neutral on its face, its impacts aren’t and a lot of families of color are locked out of valuable tax benefits, like the [CTC] and the [EITC],” said Ruben. “It’s stressful, particularly so for low-income families and people with language barriers.”

Ruben and the Coalition estimate 87 million taxpayers “lose as much as $13 billion of their refunds to tax prep companies for something that ought to be free” and that 76% of surveyed taxpayers support Direct File despite claims from the industry that it is unpopular.

“Filing taxes is complicated now, but it doesn’t have to be.”