New York State accuses tax prep companies of hiding free software

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New York State’s Department of Financial Services issued a report saying five tax prep software companies have been making it difficult for taxpayers to access the free versions of their software, even though they belong to the Free File Alliance.

A series of reports over the past year by the investigative news site ProPublica have documented how Intuit and H&R Block have steered search engines like Google away from the free versions of their tax software, although they are still available to users who go directly to the IRS’s Free File web page.

Taxpayers who earn less than $69,000 in annual adjusted gross income are entitled to file their taxes for free with many of the participating vendors, although some of the products, like Intuit’s TurboTax, limit the availability of their software to those who earn $36,000 or less. H&R Block has announced its intention to leave the Free File program in October. The other tax prep software vendors named in the report are TaxSlayer, TaxHawk and Drake Enterprises.

The report came after a year-long investigation into the low participation rates in the Free File program. The report found that the five tax prep companies deliberately hid website landing pages for the Free File Program, and the lack of federal oversight and funding undermined the program, leading to low participation in the program, with only 2.5 million of 100 million eligible taxpayers having used the program last year.

“The Free File Program is broken and was exploited by commercial tax preparer companies to drive their own profits at the expense of low-income taxpayers,” said Linda A. Lacewell, New York State’s superintendent of financial services, in a statement Wednesday. “This is yet another blow to the public trust. Consumers who most needed a no-cost simple means to file their taxes were left in the cold. We call upon the federal government to work with states to develop a fair, accessible, and modern tax filing system.”

The report examines the low participation rate last year, but doesn't explore this year's extended tax season, which ended Wednesday. Last December, in response to the ProPublica reports and after complaints from lawmakers in Congress, the IRS revamped the Free File program and struck a new deal for this year’s tax season with the tax prep vendors under which they agreed to make their free software easier to find through search engines (see story).

Intuit said it has made changes in how its software can be accessed. “Intuit appreciates and fully cooperated with NY DFS’s review of the IRS Free File program,” said a statement forwarded by Intuit spokesman Rick Heineman. “Intuit fully supports Superintendent Lacewell’s recognition that the IRS Free File program deserves sustained financial support from the federal government so that the IRS can do more to promote the program to low- and middle-income taxpayers. The agreement the IRS reached with private industry requires the IRS — and the IRS alone — to promote the Free File program to American taxpayers. Even though it is under no legal obligation to do so, as the report acknowledges, TurboTax alone among its competitors (and the IRS) pays to advertise the IRS Free File program.”

He noted that last year, 593,021 New York tax returns were filed completely for free using TurboTax software, including 73,944 through TurboTax’s IRS Free File program offer, and Intuit has long sponsored the Volunteer Income Tax Assistance (VITA) program to provide low and middle-income taxpayers with free, in-person tax filing assistance in New York and cities across the country.

“Respectfully, TurboTax disagrees with many of the opinions expressed in the DFS report, which are based almost exclusively on out of context snippets of years-old public statements that reflect the simple reality that TurboTax’s Free Edition product is free for taxpayers with simple returns, and that customers who use that free product often return to TurboTax as their taxes grow more complex and select a TurboTax paid product in subsequent years,” said Intuit. “This is what ‘monetization’ means. TurboTax prominently and transparently discloses the price of its paid products and is at all times clear and fair with its customers.”

Some software vendors contend that the memorandum of understanding that they signed with the Free File Alliance required them to avoid directing search engines to the Free File versions of their programs. Instead search results are supposed to go to the IRS’s Free File page.

“The Free File MOU for the years in question, as well as IRS public statements, make it clear the IRS intended all Free File program returns must start with the IRS Free File site,” said John Sapp, vice president of strategic development at Drake Software. “Drake followed the MOU.”

H&R Block, TaxSlayer and TaxHawk did not respond to requests for comment.

The report claimed the five tax prep software vendors “deindexed,” or deliberately edited, the computer code in their landing pages under the Free File Program to hide them from taxpayers' search engine results, contraventing the spirit of the program. Deindexing made it more difficult for taxpayers to access the free tax software. Nevertheless, the tax software companies created and marketed their own products as “free” in order to lure customers away from the Free File Program while upselling those same customers into paying for more costly products. Taxpayers have been confused when trying to navigating through commercial tax prep software makers’ websites while in search of the Free File option. In addition, according to the report, the IRS provided insufficient oversight, funding and marketing of the Free File Program.

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