IRS to probe Free File program

The Internal Revenue Service is launching an investigation of the Free File program amid complaints that tax software companies are making it difficult for qualified taxpayers to access free tax prep software, as Los Angeles and New York State also take action.

Timothy Fadek/Bloomberg

The move comes after a series of reports on the investigative news site ProPublica found that searches for truly free versions of Intuit’s TurboTax and H&R Block’s tax software were difficult to reach through search engines like Google because of the way the websites were coded. Instead, taxpayers needed to access the software through the Free File Alliance portal, which is operated in a partnership between the Internal Revenue Service and the tax prep industry. Recent IRS reform legislation that has already been passed in the House would codify the Free File Alliance and delay the IRS from developing its own free tax prep software.

The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent a letter Monday to IRS Commissioner Charles P. Rettig encouraging him to review the Free File program and probe any potential impropriety by participants.

“Recent news articles have alleged deceptive advertising practices and practices involving search-engine manipulation by some of the private-sector participants in this program,” they wrote. “Once the IRS has completed its review of these allegations, we request that you review the IRS’ memorandum of understanding with the program’s participants (known as the ‘Free File Alliance’) to ensure industry compliance, and take any necessary actions to ensure the integrity and purpose of the Free File program, including amending the memorandum as necessary to bar whatever deceptive acts and practices the IRS might uncover as a result of its investigation. The Free File program was implemented in 2002 with the goal of making it easier for low- and middle-income taxpayers to file their taxes. If participants of the Free File program are actively inhibiting the ability of taxpayers to file for free, corrective action must be taken so that the entire program better serves low- and middle-income taxpayers.”

They noted that since 2002, the IRS has partnered with a coalition of 14 private-sector tax software providers to offer free tax prep and electronic filing options for individual taxpayers. Generally, taxpayers with adjusted gross incomes of $66,000 or less can qualify to use the Free File service. That makes 70 percent of U.S. taxpayers eligible to take advantage of free online tax prep services. In the past decade, 40 million taxpayers have filed their federal taxes through Free File. Taxpayers of any income level can also access the IRS's Free File Fillable Forms, which allow taxpayers to fill out the necessary forms on the IRS's website and file the forms, doing a limited amount of math calculations for them. Nevertheless, the overall Free File program has become difficult to access by many taxpayers, and what starts out as a seemingly free process often turns out to be one that taxpayers are forced to pay a fee to complete because of restrictions imposed by different vendors depending on the complexity of the return and the forms being filed.

Last week, Sen. Elizabeth Warren, D-Mass., and a group of other lawmakers also called for an investigation by the IRS and the Federal Trade Commission (see Warren asks agencies to probe tax companies’ free-file services).

The IRS confirmed it is looking into the program. “The IRS is reviewing the concerns raised about the Free File program,” said the agency in a statement posted by ProPublica. “We take these issues seriously, and a senior leadership team was assembled to review the current Free File program. As part of this process, the IRS reached out to the software companies and others. The IRS continues to believe it’s critical to provide wide access to free electronic filing of tax returns, particularly for lower-income households. The IRS team will take fast action to ensure the integrity of the program.”

Intuit and H&R Block denied any impropriety. “Any suggestion that Intuit does not support the IRS Free File Program is flat wrong,” said Intuit spokesperson Rick Heineman. “We stand behind our actions as being both appropriate and consistent with our values. More people have filed their taxes for absolutely free with TurboTax than all other tax prep software companies combined. We are committed to offering Americans the ability to file their taxes for free, and we’re committed to the IRS Free File program. We look forward to working with the IRS and private industry to improve the Free File program and help it continue to grow.”

“H&R Block is proud to have helped millions of Americans with our four free tax filing options, including the IRS Free File program, our free online product, our MyFreeTaxes partnership with the United Way and our partnership with Military One Source,” said a statement from H&R Block forwarded by spokesperson Susan Waldron. “We are pleased that consumers’ use of H&R Block’s Free File program grew eight percent this tax season, exceeding the Free File program growth of 6 percent. We support the review of the program by the IRS, as called for by Chairman Grassley, Ranking Member Wyden and the IRS, and we look forward to participating in the review.”

However, the companies are coming under increasing pressure from state and local lawmakers. The city of Los Angeles filed a lawsuit Monday against the companies, saying, “Under the IRS’s 'Free File' program, the lowest earning 70 percent of taxpayers based on Adjusted Gross Income (“AGI”) (currently anyone with an AGI of $66,000 or less) are eligible to prepare and file their federal tax returns, no matter how complicated, through any of several commercial providers at no cost. But only a tiny fraction of eligible taxpayers actually benefit from the IRS and private industry’s ‘Free File’ agreement. While more than 100 million taxpayers were eligible to file for free through the Free File program in fiscal year 2018, fewer than 2.5 million—less than 2.5 percent of eligible taxpayers—actually did so.”

Last week, New York Governor Andrew Cuomo also complained about the Free File program and called for an investigation. "The allegations against these major tax return preparers are disturbing, and New York will not stand idle as the public's interest is undermined in order to pad the profits of wealthy corporations," Cuomo said in a statement. "I am calling on the Department of Financial Services and the Department of Taxation and Finance to investigate these claims to help ensure New Yorkers are protected. We have zero tolerance for these deceptive practices and those responsible will be held accountable for these egregious actions."