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WASHINGTON — The Biden administration’s $80 billion overhaul of the Internal Revenue Service is facing a new line of attack, this time from lobbyists representing tax preparers who fear that the agency’s growing power will cripple their businesses and infringe upon taxpayer privacy.
The fight is over a potential plan for the I.R.S. to create its own tax-filing system that would allow taxpayers to submit their returns directly to the federal government at no cost. That type of free service could diminish the need for those provided by tax preparation companies like H&R Block and TurboTax. The idea, which is still being studied, is stoking backlash from Republicans and business groups who argue that President Biden’s plans to bolster the I.R.S. will give it even more power over ordinary taxpayers.
The I.R.S. received a giant infusion of money as a result of the Inflation Reduction Act, a sweeping climate and energy bill that Congress passed last year. That legislation set aside $15 million for the I.R.S. to conduct a study to determine how it could develop a program that would let Americans file their tax returns directly with the agency.
The I.R.S. is expected in the coming days to release its plan for how it intends to spend the $80 billion that it was allocated as part of that legislation. Republican lawmakers have maintained firm opposition to the funding, which will help the agency hire 87,000 employees, and have been taking steps to claw it back.
Treasury Secretary Janet L. Yellen has defended the investment in the I.R.S. in recent hearings, and the Biden administration has tried to play down the idea that more funding will increase audits or investigations. Officials instead have talked up customer service improvements that it expects the new money to facilitate. But those efforts are also drawing complaints from an industry that profits from a byzantine tax code that prompts many Americans to seek out professional help.
Democrats have long pushed to make filing free for everyone, seeing that as a way to make the process easier and less costly. But that ambition could upend the business models of the multibillion-dollar tax preparation industry, which earns hefty fees for helping people navigate the tax code.
Several companies already provide free tax-filing services through the I.R.S. website to those who earn less than $73,000, and the agency provides forms that taxpayers who do not need any guidance can use to file their returns for free. Some other software platforms offer limited free services for simple tax returns that also do not offer guidance through the process.
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Initially, a tax-filing system developed by the I.R.S. would be similar to the existing free options. But proponents of the idea believe that over time it could evolve to become a more comprehensive system that would provide taxpayers with returns that are already filled out based on wage data that the I.R.S. tracks. At that point, taxpayers could just sign off on their returns as easily as responding “yes” to a text message.
Top Republicans on the House Ways and Means Committee wrote a letter to the I.R.S. early this month expressing alarm about the study and claiming that political bias was already taking place. The research is being conducted by the left-leaning New America Foundation — which has supported the idea of free tax filing — and that has raised concern that the Biden administration has decided to move ahead with the plan. The Republican lawmakers, Representatives Jason Smith of Missouri and David Schweikert of Arizona, warned that the administration wanted to hand the I.R.S. control over both the filing and auditing of tax returns and requested documents and communications related to the study.
“The perception is that the administration has already predetermined that a government-directed e-file system should exist regardless of what might be found in a truly nonpartisan, independent, third-party review of the feasibility, the cost to develop and operate such a system, the I.R.S. capacity to run such a system, or taxpayer opinions on the matter,” they wrote.
The letter came amid pushback from the tax preparation industry, which has been urging lawmakers to prevent the government from becoming a competitor. Lobbyists for the tax preparation industry and the companies argue that creating a free, federal tax-filing system is redundant and would give the agency too much power over the filing process.
“This is not the first project for the I.R.S. to do,” Stephen Ryan, the general counsel for the Free File Alliance, a group of tax software companies that works with the I.R.S. to help taxpayers file their returns, said in an interview. “They don’t have the authority to become a tax software company.”
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Intuit, the company that operates TurboTax, said that Americans already had options to file their taxes for free and that an I.R.S. system would be a waste of money.
“A direct-to-I.R.S. e-file system is a solution in search of a problem,” said Tania Mercado, a spokeswoman for Intuit. “And that solution will cost taxpayers billions of dollars.”
And a group of right-leaning tax policy organizations called the Taxpayers Protection Alliance, which includes Grover G. Norquist’s Americans for Tax Reform and the Club for Growth, wrote a letter to Congress in November urging lawmakers to stop the expansion of the I.R.S. into the lives of Americans with its own tax preparation and filing system. The agency, they said, was already struggling to carry out its existing responsibilities.
“Government-run tax preparation would create a significant conflict of interest in which the I.R.S. would be responsible for calculating a filer’s tax liability and for managing contested tax returns,” they wrote. “This incentivizes the I.R.S. to overcharge taxpayers or withhold information from filers to maximize revenue.”
Mr. Norquist argued that if the I.R.S. took over the filing process, it would lead to more audits and less privacy.
“If the government does your taxes for you, they have to know everything about you,” he said. “It is the end of economic privacy.”
Democrats and Republicans have talked for years about simplifying the tax-filing process. Senators Ron Wyden of Oregon and Elizabeth Warren of Massachusetts, both Democrats, have called for legislation that would create a free filing system through the I.R.S.
Interest in such a system intensified after a 2019 investigation by ProPublica that found the tax preparers that were working with the I.R.S. to provide free filing were actually pushing taxpayers toward paid services.
“No one should have to pay for the privilege of filing their tax returns,” said Nina E. Olson, the national taxpayer advocate from 2001 to 2019, who added that many countries offered free tax filing.
A report published last year by the Government Accountability Office found that the existing free filing system that is run through the I.R.S. has been floundering. Although 70 percent of taxpayers are eligible to use it, only 3 percent do so. H&R Block and Intuit abandoned the program in recent years, and the G.A.O. recommended that the I.R.S. begin developing an alternative.
“By not managing these risks through the development of additional free online filing options for taxpayers, I.R.S. may be unable to achieve its strategic goal to empower all taxpayers to meet their tax obligations,” the report said.
As part of the G.A.O. report, the I.R.S. expressed skepticism about the cost and viability of creating its own system and suggested that it would not “significantly improve the taxpayer experience.”
Ms. Yellen is aware that the study is continuing but has not yet taken a position on whether the I.R.S. should move forward.
The agency is expected to share the results of the study with Congress this year and lay out how the filing program might work and what it would cost.
“It’s important that Americans have choices that work best for them when preparing their taxes, whether it’s by using a tax professional, tax software or free options,” said Jodie Reynolds, an I.R.S. spokeswoman.
The effort by lobbyists to block an I.R.S. tax-filing initiative before it gets off the ground foreshadows the fights to come as the agency tries to modernize its technology and hire more staff and agents to crack down on tax evasion.
“Democrats are simply operating under the proposition that Americans shouldn’t have to pay out the ear to follow the law and file taxes, but every time we’ve pursued a free file system, industry spends millions and sends armies of lobbyists to quash it,” Mr. Wyden said. “The reality is, the status quo is indefensible, but special interests raking in profits are willing to spend a lot of time and money defending the indefensible.”
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