I witnessed the inception of the e-filing movement since my days as an unenrolled return preparer and more intimately during my service as the National Taxpayer Advocate.  At the time I entered the IRS, Treasury and the White House wanted the IRS to create a free direct filing program that would be accessible through the WhiteHouse.gov website.  Commissioner Rossotti and Terry Lutes, then director of electronic tax administration, argued the IRS did not have the bandwidth to develop such a project itself and proposed entering into an agreement with commercial software companies to offer their products for free to share of the individual taxpayer population.  This decision was driven by two concerns:  (1) the Congressional mandate to achieve 80% e-filing of all federal tax and information returns by 2007 (IRS Restructuring and Reform Act of 1998 §2001(a)); and (2) the IRS’s limited capacity to handle another major IT project, given it was digging itself out from a major debacle of the 1990s, in which it blew through $4 billion on a tax systems modernization program without much to show for it.  Thus, the Free File Alliance was born.

At the time, I objected, pointing out that putting off direct filing would just end up with us (the taxpayers), twenty years hence, without any free e-filing product available to all taxpayers, once the commercial companies had established market dominance and then pulled out of the agreement.  This has pretty much come to pass.

The concept of direct e-filing has been around for quite some time; here is a post from Les discussing some background and current developments.  In fact, as I reported in my 2012 National Taxpayer Advocate Annual Report to Congress, in the IRS Restructuring Reform Act of 1998, Congress directed the IRS as follows:

Not later than December 31, 2006, the Secretary of the Treasury or the Secretary’s delegate shall develop procedures for the implementation of a return free tax system under which appropriate individuals would be permitted to comply with the Internal Revenue Code of 1986 without making the return required under section 6012 for taxable years beginning after 2007.   (RRA 98 § 2004)

Not later than December 31, 2006, the Secretary of the Treasury or the Secretary’s delegate shall develop procedures under which a taxpayer filing returns electronically (and their designees under section 6103(c) of the Internal Revenue Code of 1986) would be able to review the taxpayer’s account electronically, but only if all necessary safeguards to ensure the privacy of such information are in place.  

RRA 98 § 2005

My thinking about direct file is governed by some first principles that are worth reviewing, before examining some of the arguments raised in opposition to the tax agency providing free direct filing and also sharing an example of what some tax systems are able to deliver to their taxpayers.

First and foremost, no one should have to pay for the privilege of preparing and filing their tax returns.  Let’s not forget that taxes are a public good; they are not a commercial product like potato chips or an airline ticket.  I don’t care how much or how little taxable income you report; the government has an obligation to provide a method for you to prepare and file your tax returns without having to pay someone to help you – if you are so inclined.  Sure, lots of people don’t want to prepare their own tax returns and are perfectly willing to pay someone to do it for you.  I know this because I prepared returns from 1975 right up until I joined the IRS in 2001.  Each year I would try to convince my clients with the simplest returns that they could do it themselves, but still they wanted to pay me to prepare their tax returns for them.  Other taxpayers are comfortable preparing their own return with the assistance of commercial software, that links to their investment or business accounts, or just guides them through the tax maze. Still others use their annual trip to their return preparer as a financial check-up; they discuss retirement or business planning, or just saving for a rainy day.  That’s fine too, but if you don’t want to (or can’t) shell out money for the purpose of contributing to the public fisc, the government needs to provide a way for you to prepare and file your tax returns for free.  Period.

This brings us to the second underlying principle: choice of filing options is good.  The over 160 million US individual taxpayers are a very diverse lot and, as outlined above, they have very different filing preferences.  Their economic position widely varies – from wage-only/non-itemizing returns (about 59.3 million in Tax Year 2016, or 40% of all returns – see Annual Report research study here for more data) to sole proprietors (including gig economy workers) to taxpayers with complex pass-through income and investments.  This large and diverse tax population can and will support a variety of tax products, including one available for free that is provided by the federal government.

This brings us to our third principle: taxpayers should have access to their own tax data.  In the 21^st century, data is increasingly available to tax administrators.  According to the IRS Data Book, in Fiscal Year 2022, the IRS received 5.4 billion information returns reporting data about income, deductions, and basis in assets.  Although taxpayers have the responsibility for complying with the tax laws, a fundamental principle of maintaining and increasing voluntary compliance is making it easy for taxpayers to comply.  That includes providing them with the income and other data the IRS receives about them, in order to avoid mistakes and omissions.

Now, the tax world is not static, and neither is the tax preparation environment.  What was not possible for tax agencies, technologically, back in the year 2000, is de rigueur for tax agencies today.  I have visited with many tax agencies over the decades and have witnessed how far ahead of the IRS they are in delivering free and easily accessible taxpayer accounts and tax preparation vehicles.  While some offer fully pre-populated returns, many others offer taxpayers the ability to see the income information the tax agency has about them, and either enter that information into a free online filing app, to be supplemented by other information such as sole-proprietorship income, or download the information to provide to one’s return preparer or import it into commercial tax preparation products.

If you are interested to see what a government-provided tax account with free online filing might look like, take a look at this demo of the Australian Tax Office’s taxpayer account here.  You can access the app on your smart phone, tablet, laptop, etc.  Australia has been building this in chunks since, oh, the early 2000s.  It takes about 15 minutes for taxpayers to file a return on this app, compared to the 8 hours the IRS estimates under the Paperwork Reduction Act for the non-business returns (3 hours for actual preparation).  Australians have choice, but about 37.5% (4.5 million out of 12 million) of individual filers prepare their return via the app for free.  (Les and I visited with ATO officials in late March/early April this year, for a Center for Taxpayer Rights project, and they kindly shared this demo with us then.)

So, what do the critics say about all this?  Some of the arguments are re-hashed from back in the 2000s.

1. Direct filing with the IRS will enable the IRS to see all the changes you make in the process of preparing your return.  First of all, this argument shows ignorance of the powers Congress has granted to the IRS to administer the tax law.  The IRS is able to issue summons for any document or record (including electronic records) that is relevant to its investigation of a tax return.  The attorney-client privilege doesn’t apply to return preparation, and there is no absolute federal return preparer privilege.  So, regardless of whether you file electronically or on paper directly with the government, or through a software product, or through a return preparer, if the IRS wants to see the documents, drafts, etc. of what went into preparing a tax return, generally, it can get it.  As the NTA Annual Reports demonstrate year after year after year in reporting on the most litigated issues, quashing an IRS summons through the courts is very difficult.
2. Direct filing with the IRS will enable the IRS to impose upon you the government’s interpretation of law.  The fear here is the IRS will build into the software certain rules such that will prevent some taxpayers from claiming a particular deduction or credit via an e-filed return.  To some extent this is already happening today – e.g., the IRS rejects e-filing of returns (commercially or otherwise prepared) where the taxpayer or dependent has been claimed on an earlier e-filed return for that year.  The IRS still allows the taxpayer to file a return on paper claiming the child, and then sorting out who is entitled to the child-related benefits later on in the process.  This approach violates the Beard v. Commissioner rule of what constitutes a return.  My understanding is Treasury is aware of this issue.  The way to address this issue is to require open source access to the underlying assumptions of the direct filing tool – that way the tax community can identifying assumptions built into the program.  Another protection is to replace the e-file rejection with a simple pop-up notifying the taxpayer of the issue (duplicate filing of a child, claim for a credit in excess of the number of years allowed, etc.) but allow the taxpayer to proceed with e-filing the original return if they choose to do so.  There are solutions to these concerns that will protect the rights of all taxpayers, not just those who use the IRS direct filing tool.
3. Direct filing with the IRS competes with the private sector.  This proposition is similar to saying the Government Printing Office has been and is competing with the private sector by printing paper tax forms, instructions, and publication.  Geez, folks, it is a federal tax code, not a private commercial tax code.  In the 21^st century, an IRS direct file option is the digital analog to the government-printed paper return of the 20^th century.
4. There already is a free direct filing option – namely, filing on paper.  This argument was floated by a spokesperson for Intuit.  The National Taxpayer Advocate has called paper kryptonite for the IRS.  Anyone who has been anywhere other than hiding under a rock for the last three years knows we need to eliminate as much paper as possible from our tax filing system.  Moreover, for those who rely on refundable tax credits and other refunds in order to meet basic living expenses, filing on paper is not a justifiable option., given the significant delays, even in the best of times, that are associated with paper tax return processing.
5. Nobody wants to use an IRS direct filing option. This is what the Wall Street Journal editorial and Fox News reported as the ultimate findings of the leaked Mitre survey. I have not seen this survey – I assume it will be provided to Congress and made public along with the IRS and other third party report due May 16th – so I can’t vouch for the accuracy of what is being reported. But taking the reported numbers at face value, the survey actually shows a substantial level of support for an IRS direct filing option. Here are a few data points the media reported: When asked if they would use direct e-file if it included preparation of state returns, 15% of respondents said they would direct e-file; 48% said they would use their current software; and 37% said they would prefer the IRS to automatically file their individual taxes for them (the pre-population option).  (Without the state option, 12% said they would use direct e-file and 60% would use current software.)

So let’s parse these numbers.  In Fiscal Year 2022, the IRS received over 160.5 million individual income tax returns.  Of those, 3.2 million were prepared and filed via the free Free File Alliance option, the products offered up in 2001 as an alternative to the IRS direct filing proposal.  15% of 160.5 million is over 24 million taxpayers, or a 750% increase in free electronic preparation and filing.  12% is 19.2 million taxpayers, or an over 600% increase.  Contrary to how this data has been presented in the press, the survey responses show that a significant number of taxpayers find a direct filing option very desirable, while allowing for alternative choices.  In fact, when including the 37% who say they would like the IRS to automatically calculate their taxes, a majority of US taxpayers see an IRS role in return preparation as a positive thing.

Since 2002 or so, I have publicly advocated for the IRS to provide a free, direct electronic return preparation and filing app that allows taxpayers to download their tax data either into that application, or into commercial and tax preparers’ return preparation products.  This approach honors the government’s fundamental obligation to the taxpayers who fund it, while protecting taxpayer choice and transparency.  Less inclusive approaches impose burden and cost on taxpayers, which in turn breeds taxpayer resentment.  Moreover, the direct filing option is an immediate and natural outgrowth of a robust online taxpayer account, which everyone agrees is a necessary component of a modern tax system.  So, unless you want a tax system that is mired in the mid-20^th century, it would be good to keep an open mind when reviewing the upcoming IRS Direct File report.

The US Supreme court held in the 1985 US v. Boyle case that a taxpayer could not have its late filing or late payment penalties abated for reasonable cause because the taxpayer’s accountant failed to timely file tax returns or timely pay taxes for the taxpayer.  In other words, Boyle created a “bright line” rule that a taxpayer cannot delegate his or her duty to timely file and timely pay taxes to an accountant or professional tax preparer.  Under a broad reading of Boyle, a taxpayer is always liable for late payment and late filing penalties if their accountant or professional tax preparer fails to electronically file a return, regardless of how or why a taxpayer relied on their accountant or professional tax preparer to timely and properly file an electronic return.  Technical errors like software bugs, network connection issues, or any of the myriad of issues that can prevent the proper electronic filing of a tax return are irrelevant under a broad reading of Boyle. 

The broad reading of Boyle has come under attack in recent litigation.  Taxpayers have argued that Boyle was decided at a time when taxpayers mailed paper returns rather than electronically filed returns, so courts should not obtusely apply the Boyle holding to situations where taxpayers relied on their accountant to electronically file returns. The taxpayers argue a simple, bright line reading of Boyle made sense in a world where all that was generally required to timely meet tax obligations was to stick a tax return in a mailbox on or before April 15^th (or March 15^th, September 15^th, or October 15^th).  Taxpayers have argued in today’s world some nuance may be in order because filing a return in today’s world often involves the use of software and computers that are more complex than the hinge of a mailbox.   Taxpayers have also argued they exercised ordinary business care and prudence when they received assurances from their accountants and tax preparers that their accountants and tax preparers electronically filed returns.  The courts have generally not accepted these arguments, but they have not always categorically dismissed these arguments either. At times courts possibly left the door open for taxpayers to successfully distinguish Boyle as in Padda.

The Appeal of Fisher (2022-OTA-337P) involves a familiar fact pattern that many of us have come across.  The appellant taxpayers retained an accountant to file their 2016 tax returns.  The appellant taxpayers received confirmation from their accounting firm that the accounting firm electronically filed the appellant taxpayers’ returns before the deadline.  The accounting firm, however, did not receive any confirmation from the State that the 2016 return was either accepted or rejected by the State.  The software the accounting firm used would typically send a notice to the accounting firm indicating a return’s acceptance or rejection by the State.  The appellant taxpayers disputed their late filing penalties arguing they had reasonable cause for not timely filing their 2016 California State tax return. 

Like some other states, the California late filing penalty statute is substantially similar to IRC §6651.  Both the California statute and IRC §6651 use a “reasonable cause” standard in determining whether late penalties are applicable.  The Fisher opinion, as well as other California opinions regarding late filing and late payment penalties, cite Boyle and other federal precedents.  The Fisher opinion also uses the ordinary business care and prudence standard cited by the federal treasury regulations. (See Treas. Reg. §301.6651-1(c)(1)).

The Fisher Opinion took a few approaches in its ruling against the appellant taxpayers.  It first determined that the ordinary business care and prudence standard is not satisfied when taxpayers delegate the task of electronically filing a tax return to their accountant. According to Fisher, the ordinary business care and prudence standard also requires taxpayers to follow up with their accountant.  According to Fisher, the ordinary business care and prudence standard requires taxpayers to make sure returns are “successfully transmitted” and take “corrective action” if the returns are not successfully transmitted. 

The Fisher Opinion then cited recent federal court cases for the proposition that the advent of electronic filing did not create grounds to distinguish Boyle.  The Fisher Opinion reiterates the recent federal case law still takes the hard, “bright line” approach that Boyle non-delegation applies regardless of whether returns are mailed or electronically filed.  The Fisher opinion argues taxpayers still have the option mailing paper returns rather than using complex tax software.  It neglects to address how professional tax preparers are generally required to electronically file most returns.

The Fisher Opinion then finally addresses the argument the taxpayers made that electronically filing a return was analogous to mailing a paper return.  The Fisher Opinion dismissed this argument stating penalties are abated when a taxpayer mails a paper return only when the taxpayer produces the required proof of timely mailing like a certified mailing receipt.  In the Fisher case, the taxpayers had no proof of electronic filing because their accountant never received confirmation their tax return was transmitted to the State.

While the taxpayers in the Fisher Opinion did not prevail, the Fisher Opinion’s approach does potentially leave the door open for the case law to eventually accommodate taxpayers who reasonably rely on their accountants and professional tax preparers to electronically file returns.  Two aspects of the Fisher Opinion leave room for reasonable cause.  First, the OTA sides against the taxpayers because they did not adequately follow up with their accountants.  Under the Fisher decision approach, a taxpayer may be deemed to exercise ordinary business care and prudence if they get some assurance their accountant or tax preparer successfully transmitted to their return or take some other reasonably prudent follow-up measures with their accountant or professional tax preparer. 

Second, Fisher sides against the taxpayers because they did not have any proof of electronic filing.  A taxpayer who timely obtains some proof of timely electronic filing may be able to distinguish Fisher.  The taxpayer may be able to successfully argue not only did they exercise due diligence by obtaining a record of timely electronic filing from their accountant or professional tax preparer, but the unsuccessful electronic filing is more analogous to a mailed paper return because the taxpayer has a proof of filing comparable to a taxpayer that timely mailed a return and had proof of mailing. 

The OTA like other courts has used the Boyle doctrine to rule against taxpayers who mistakenly believed their accountants timely filed electronic returns.  However, the OTA is showing there are potential cracks in the wall of the Boyle doctrine and its application to electronically filed returns.  The Fisher decision suggests that Boyle can be contoured to allow a taxpayer to rely on their preparer provided there is appropriate follow up or diligence on the part of the taxpayer.