Inspector general faults IRS Free File program

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The complexity and insufficient oversight of the IRS’s Free File program, which is supposed to provide free tax software to most taxpayers, results in low taxpayer participation in the program, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, comes in the wake of controversy that erupted over the Free File program last year and led to changes for this tax season. A series of articles by the investigative news site ProPublica found that some of the tax software vendors that participated in the program such as Intuit and H&R Block were making it difficult to find the free versions of their software by manipulating search results. People in search of the free tax software could find it by going through the official Free File portal, but search engines like Google would favor the vendors’ own sites. In late December, the IRS announced that it had signed a new agreement with Free File Inc., formerly known as the Free File Alliance and opened the revamped Free File program last month (see our story). The Free File program covers the majority of taxpayers, whose adjusted gross income was $69,000 or less in 2019.

Under the new agreement, tax software vendors who are part of the Free File program won’t be allowed to exclude their Free File landing page from an organic internet search. They have agreed to ensure a link on their sites is available to return taxpayers to the IRS Free File website at the earliest feasible point in the preparation process if they don’t qualify for the Member's Free File offer. They have also agreed to regularly survey taxpayers who have successfully e-filed a tax return through the Free File program and will report their results on a quarterly basis to the IRS.

The new report released Wednesday by TIGTA found that the complexity, confusion and lack of taxpayer awareness about the operation and requirements of the Free File Program are contributing reasons why many eligible taxpayers don’t participate in it. Last year, only 2.5 million (or 2.4 percent) of the 104 million eligible taxpayers obtained a free return filing through the program. In contrast, more than 34.5 million taxpayers who met the Free File program criteria used the members’ commercial software to file their tax returns.

TIGTA contacted a sample of 200 taxpayers who met the Free File program criteria but used a Free File member’s commercial software and was informed by 87 of the taxpayers (that is, 43 percent) they were charged a fee to prepare and e-file their federal tax return. Based on these results, TIGTA estimated that more than 14 million taxpayers met the Free File Program criteria and may have paid a fee to electronically file their federal tax return in the 2019 filing season.

TIGTA found that not enough actions have been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website. IRS and Free File management told TIGTA that, to participate in the program, taxpayers need to access the Free File web page and choose a link on the web page directing them to a Free File member’s website. However, that provision isn’t in the earlier memorandum of understanding between the IRS and Free File Inc., and most taxpayers are unaware of this requirement.

In addition, TIGTA found the IRS doesn’t provide adequate oversight to ensure that the Free File Program is operating as intended and in alignment with the memorandum of understanding. Taxpayers aren’t made aware of protections in the old MOU and don’t have a process to report their concerns.

TIGTA made nine recommendations, including that the IRS develop and implement a comprehensive outreach and advertising plan to inform eligible taxpayers about the Free File Program and how to participate, ensure that management performs quality reviews of MOU adherence testing that Free File Program analysts conduct on Free File Inc. members’ websites and software, clearly inform taxpayers of their rights and protections in the Free File Program, and develop a process for taxpayers to provide feedback or concerns on their experience using Free File.

IRS management agreed with six of TIGTA’s recommendations and partially agreed with the other three recommendations. The IRS also pointed to its new agreement with Free File Inc. to make it easier to locate the free tax software. “To implement program improvements in advance of the 2020 filing season, the IRS and Free File Inc. (FFI), our partner in the Free File program, executed an updated agreement on Dec. 26, 2019, that will make the program more taxpayer friendly and will strengthen consumer protections in several key areas,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report.

He noted, however, that a report that the IRS commissioned from a government contractor,

He pointed to the above changes in the agreement, but pointed to a report that the IRS commissioned from MITRE Corp., a government contractor, that found many taxpayers seek free tax prep and filing services by using terms like “free tax filing” in commercial search engines.

“The current Memorandum of Understanding provides the means for a satisfying taxpayer experience when they navigate to Free File member sites directly, through links, or through search engines,” Corbin noted. “It is also important to recognize that taxpayer preferences for return preparation and filing options are influenced by factors that may include discomfort with self-preparation of their tax returns or a desire to take advantage of refund products or other services offered by paid tax return preparers and firms.”

Sen. Ron Wyden, D-Ore., the top Democrat on the Senate Finance Committee, criticized the IRS in response to the report. “The TIGTA report confirms recent reporting—the Free File program is a mess,” he said in a statement Wednesday. “The IRS has done a poor job promoting the program, which is why few eligible taxpayers even know it exists. Working folks end up shelling out money to for-profit companies for services that should cost nothing. It’s unacceptable. The good news is that recent IRS reforms to the program do right by taxpayers, barring participating companies from using shady practices to steer eligible taxpayers toward paid products and taking a step toward a free public filing service, which I have long pushed. The IRS must be vigilant in enforcing these reforms, and Congress must provide the IRS the resources to develop a free public service.”

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