The Internal Revenue Service has announced that it has reached an agreement with Free File, Inc. (FFI). According to the IRS, the deal will help make the Free File program more taxpayer-friendly while strengthening consumer protections in several key areas.
(You can read the agreement, which downloads as a PDF, here.)
“This updated agreement is part of a larger effort by the IRS to help taxpayers meet their tax obligations,” said IRS Commissioner Chuck Rettig. “It continues to show the partnership we enjoy with the Free File partners and the commitment we both share in helping taxpayers since the program’s creation 18 years ago. The improved process will make Free File stronger and give taxpayers another reason to consider this valuable software option.”
Free File is a public-private partnership with the IRS. It was developed to provide free e-filing services to a majority of taxpayers; the idea was that it could help the IRS meet the 80% e-file target established by the Restructuring and Reform Act of 1998.
At the time, with the internet just heating up, many wondered: why was the federal government partnering with the private tax prep industry instead of creating its own software? In 2002, Treasury Secretary Paul O’Neill made it clear to then-IRS Commissioner Charles Rossotti that the agency should partner with the private sector. He explained that he didn’t intend “for the IRS to get into the software business, but rather to open a constructive dialogue with those who already have established expertise in this field. In the end, this effort should come up with a better way to save time and money for both taxpayers and the government.” As a result, the government entered into a memorandum of understanding wherein the federal government pledged not to enter the tax return software and e-file services marketplace.
Since that time, e-filing has increased, but the boost is not attributable to FreeFile. Taxpayers aren’t flocking to the IRS website to file for free: in fact, many have argued that it’s just the opposite. In 2016, Forbes’ Sam Sharf wrote an account of why, even though she qualified for free filing, it cost her $118.64 to file my 2014 tax return with TurboTax in 2015.
She wasn’t alone. In 2019, ProPublica wrote a series of articles focusing on the lengths that it claims tax software companies took – like extensive lobbying and hiding free options – to get you to pay for services. In April of 2019, ProPublica noted that “Intuit has changed the code on its Free File page so that the actually free version of TurboTax is no longer hidden from Google and other search engines.” H&R Block was also accused of purposefully steering taxpayers away from free products made changes to its coding.
Now, as part of the IRS agreement, tax preparation software companies are prohibited from hiding free filing services from Google or other search results pages. Companies must also provide taxpayers with a link to the IRS Free File website “at the earliest feasible point in the preparation process if they do not qualify for the [company’s] Free File offer.” Additionally, the agreement requires those companies to do random surveys throughout the season and provide register reports to the IRS.
“These steps will help further protect taxpayers and make important improvements to the program,” Rettig said. “The IRS is committed to improving the Free File program and providing a great option for taxpayers to consider when preparing their taxes.”
The agreement also removed the IRS’ prior promise not to compete against the existing tax prep software. That means that the IRS could offer its own free tax-filing service. That doesn’t mean that the IRS has any plans to do so – at least not that they are making public. But the idea that they could is certainly interesting – and in direct contrast to a provision introduced last year that some allege would have barred the IRS from creating its version of the FreeFile program (Senator Mike Kelly (PA) disputed that characterization in an op-ed).
“The IRS and FFI will also continue to work together to identify and explore ways to better help low- to moderate-income taxpayers and to pursue meaningful opportunities to enhance taxpayer awareness and use of the Free File Program beyond the 2020 filing season,” Rettig said.
With FreeFile, taxpayers with income below $69,000 in 2019 typically have access to free tax prep software (eligibility may vary). That means that up to 100 million taxpayers, or 70% of filers, are eligible to use Free File. While 70% of taxpayers could use the program, the actual use is closer to 3%. Taxpayers with income above $69,000 have access to fillable, electronic versions of the paper forms.