When Americans think of the Internal Revenue Service, they think “taxes.” Yet, given that the IRS is the nation’s largest administrator of anti-poverty benefits for workers and families with children, it’s time they start thinking “benefits” as well.
This year, a very-low-income family with three children could easily receive more than $20,000 from the IRS, more than six times what they would have received in recent years. With so much money on the line, it is time for the IRS and for Congress to embrace the expanded role the agency now serves. That means identifying where the IRS falls short as a provider of benefits and implementing both systemic and technological solutions to better serve families most in need. This should include creating a new, government-run, simplified tax-filing option to bring marginalized families into the tax system, as well as greater recognition and commitment to the dual mission of benefits access and tax enforcement. This reform is all the more urgent given the recent announcement by Intuit that it will no longer participate in Free File, a program that was supposed to provide free tax filing to low- and moderate-income American families.
The IRS’s role as a benefits administrator is not new. Over the past three decades, as welfare programs have shrunk, the federal tax system has taken their place. In the United States, the earned income tax credit, or EITC (a tax credit that is calculated based on wages and household size), became the country’s largest anti-poverty program for workers with children over a series of expansions in the 1980s and 1990s. With the child and dependent care tax credit, the adoption tax credit, the American opportunity credit, the lifetime learning credit, and more, the federal government subsidizes workers, children, child care, education, and health care premiums through the tax code.
The American Rescue Plan in 2021 expanded the IRS’s benefits portfolio even further, increasing the EITC for childless workers, establishing a new round of relief payments, and overhauling the child tax credit—which can now be worth up to $3,600 per child. The value of these credits is immense: In 2021, the IRS will pay more than $700 billion in EITCs, child tax credits, and relief payments combined. For reference, federal expenditures on traditional “welfare” (officially known as Temporary Assistance for Needy Families) are $16.5 billion per year. As a benefits provider, the IRS is surpassed only by the Social Security Administration, which pays out more than $1 trillion annually, largely to seniors.
Administering benefits through the tax code has real advantages. While traditional benefit programs force families to complete onerous applications with documentation requirements—which can take months or even years to finalize—families who file taxes get their tax benefits nearly automatically, frequently within days of “applying” (that is, filing a return).
But there is a huge gap in this tax-centric safety net: Many of the most vulnerable do not file taxes. This represents up to 5 million EITC-eligible families annually, at least 9 million adults eligible for COVID relief checks in 2020, and up to 5 million child tax credit–eligible children this year. The most disadvantaged families largely don’t file because they don’t need to; single people earning under $12,400 and married couples earning under $24,800 are not required to file their taxes. Unfortunately, many who are not required to file either believe they are prohibited from doing so or that it doesn’t matter if they do, since they don’t think they are entitled to benefits.
As all Americans know well, doing your taxes is an unreasonably difficult process. Tax forms are not user-friendly, and the IRS has historically outsourced the job of making them accessible to private tax preparation companies. These companies may charge hefty fees (low-income families pay on average $400 to file a return) and have little incentive to seek out the poorest families. The Free File program, which was supposed to provide free tax filing options to low- and middle-income families, never functioned well (70 percent of Americans were eligible, but only 2.4 percent of Americans used it), and with the recent announcement that Intuit will be withdrawing from the alliance, it seems even that meager resource will become unavailable.
There is, however, a way forward. In 2020 the IRS launched a simplified tool to help families access their relief payments even if they were not required to file their taxes. This year, the IRS revamped the tool to accommodate the new child tax credit expansion. The tool has some weaknesses—it’s hard to use, isn’t hosted on a government website, and doesn’t accommodate the EITC—but it does provide a solid foundation to build upon. If this tool were repurposed as a government-run, simplified tax-filing system that requests just enough information to issue IRS anti-poverty benefits, it would create the easy access to benefits low-income families need. Over time, this tool could be expanded to generate pre-filled tax returns, like those available to taxpayers in most European nations (and as proposed by Sen. Elizabeth Warren). That in itself would be a benefit for all Americans.
Some may disagree with the notion that the IRS is the future of efficient access to anti-poverty benefits. For example, the Social Security Administration was considered potentially the most appropriate infrastructure and mandate to take on additional benefits distribution, specifically the expanded child tax credit. However, this view obscures the reality: that the IRS has already assumed this responsibility and is equipped to improve delivery of benefits further. Additionally, by packaging benefits as “tax credits” administered by the IRS, they are more likely to avoid the conservative opposition to “welfare” programs.
By focusing not only on enforcement but also on benefits delivery, the IRS could take significant steps to ensure people are better served and that government programs are more effective. A government-run tax option would not only improve the safety net but also make the IRS work better for all Americans.