Online tax preparation services are using the Internal Revenue Service's Free File program to promote "get rich quick" schemes and overpriced refund anticipation loans to low-income taxpayers, some lawmakers have charged.In a sharply worded letter to IRS Commissioner Mark Everson, Senate Finance Committee chair Chuck Grassley, R-Iowa, placed much of the blame for these practices on the IRS officials who negotiated a new contract with 20 online tax prep companies to provide taxpayers with free electronic tax preparation and filing services during this tax season.
"I'm not confident that the IRS put taxpayers first when negotiating the latest Free File agreement," Grassley told Everson. "I'm also worried that the IRS isn't providing enough protection for taxpayers" from the misleading marketing tactics employed by some in the Free File Alliance.
Under the new agreement, negotiated last October, members of the four-year-old FFA may no longer offer free filing services to all taxpayers - only those qualifying under a new "means test" that excludes taxpayers with adjusted gross incomes over $50,000.
That restriction effectively denies free filing services to 40 million taxpayers, and "is counterintuitive to the principle that no one should be forced to pay to electronically file a tax return," Grassley said.
But even taxpayers who qualify under the new means test may discover that the use of free file services "may be anything but free," he told Everson.
A Finance Committee staff analysis of the services offered by Free File members found that taxpayers who sign up for free e-filing may be slapped with unexpected charges for using certain IRS forms, and stiff fees for a variety of other services from the tax prep firm.
While taxpayers don't have any obligation to buy goods and services marketed on the sites - and in fact, the IRS noted that Free File users should be sure to read the fine print - many of the private vendors routinely offer users expensive add-on services.
According to that report, alliance providers market a variety of fee-based services, including "professional tax return reviews" priced between $29.95 and $49.95, telephone technical support at $15 per call or $29.95 per return, and "consultations" with a tax pro that range from $5.95 to $14.88 per question.
Taxpayers seeking free e-filing from members of the alliance are also barraged with offers for RALs that carry upfront application fees of between $19.95 and $104.95, in addition to interest rates that range from 31 percent to 227 percent APR, the report charged.
Grassley was particularly irked by the marketing tactics of one Free File Alliance participant that features an Internet link offering taxpayers an e-filing tax preparation franchise for $15,500 - "no experience necessary." The franchise, which comes complete with "banners, signs and start-up kits," also includes details on how to branch out into lucrative sidelines such as RALs.
Allowing a Free File Alliance participant "to attempt to mislead taxpayers into buying a $15,000 tax preparation franchise under the guise of helping taxpayers profit" suggests an "obvious lack of oversight" by the IRS, Grassley said.
Noting that "the IRS offers no other electronic filing option other than the Free File program," Grassley called on Everson to renegotiate its contract with the alliance members: The IRS, he said, "has an obligation to taxpayers to make sure 'free' really means 'free.'"
