IRS faces new pressure to develop free online tax-filing system

Following two chaotic tax filing seasons resulting in tens of millions of unprocessed returns, the IRS is being urged to develop more free online tax filing tools instead of doubling down on a decades-old program that prevented the agency from competing with private tax preparers.

Since 2002, the IRS has been bound by a noncompete clause in an agreement with Free File Inc., a group of private tax preparation companies that until recently included industry giants H&R Block and Intuit, maker of the popular software TurboTax.

Critics of the Free File program have long accused it of duplicity, saying that while it compels private companies to offer free filing options to lower and middle-income taxpayers, it’s actually designed to keep them using commercial products they shouldn’t have to pay for.

Now, the Government Accountability Office (GAO), the U.S. government’s internal watchdog, is saying the IRS should reconsider a range of requirements in the program and work instead to “develop additional options for free online filing of tax returns that would reflect current guidelines for federal digital services.”

In a report published Thursday, the GAO said that “stakeholders had different views on whether maintaining the current program or IRS developing its own online filing system would provide a better experience for taxpayers. Regardless, IRS is not managing the risk of relying on the Free File program as the way it helps taxpayers file for free online.”

The report recommended that the IRS consider canceling a provision that forces the agency to alert private companies immediately if it should decide to fund free tax tools.

It also urges the IRS to generally get up to speed with website modernization legislation passed in 2018.

The 21st Century Integrated Digital Experiences Act, passed under the Trump administration, made numerous requirements relating to digitizing government services and forms that the IRS should get in line with, according to the GAO.

While about 70 percent of taxpayers are eligible to use the program to file taxes free of charge, only 3 percent actually do, a statistic that backs up criticism that the program is a stalking horse for the tax prep industry.

“Congress needs to prohibit the IRS from having this arrangement with the private sector tax prep industry,” Frank Clemente, director of the left-leaning advocacy organization Americans for Tax Fairness, said in an interview. “It needs to authorize the IRS to create its own free filing program using pre-populated information, and to give it to us like most countries do, and it ought to be pre-prepared. There should not be competition with the private sector on this. It should be a public service.”

Some conservative tax advocacy groups have long stood behind the Free File program, arguing the private sector is needed to deal with the complexity of the tax code. Right-leaning group Americans for Tax Reform even sought to make the program permanent during the Trump administration.

“The Free File system is an innovative public-private solution to tax complexity,” the group wrote in a letter to then-Treasury Secretary Steve Mnuchin in 2017.

“The tax code is more than 75,000 pages long and contains over 2.4 million words. This complexity forces American families and businesses to spend more than 8.9 billion hours and $400 billion complying with the code every year. Free File is critical to addressing this complexity,” the letter said.

Major tax prep companies Intuit and H&R Block have since left the Free File consortium of companies. Intuit cited the program’s “limitations” and “conflicting demands from those outside the program” as reasons for leaving.

The Los Angeles City attorney sued H&R Block and Intuit in 2019, alleging “these companies intentionally took advantage of the low-income residents they pledged to help.”

Just last month, the Federal Trade Commission (FTC) also sued Intuit for what it called a deceptive ad campaign. The FTC lodged a complaint against the company for “deceiving consumers with bogus advertisements pitching ‘free’ tax filing that millions of consumers could not use.”

Lawmakers seem open to the possibility of new government-run online tools that could simplify filing taxes, though ideas on the matter are still inchoate. While tax simplification is an often-repeated phrase on Capitol Hill, the mechanics of actual rule changes tend to make both parties nervous.

“It would be great to give taxpayers a tool to file their taxes more easily, to understand them better,” Rep. Elaine Luria (D-Va.) said in an interview. “We’ve been getting calls all through COVID, because of the delays and the backups at IRS because of COVID. So, I would love the opportunity to provide more resources to the IRS and to give taxpayers a better and easier interface to file their taxes and track the status of it. The technology exists that could make it a lot easier for people.”

Lou Correa (D-Calif.) could also envision a “website where you can just put in how much you made, your standard deductions, and then you file,” adding that such functionality “would be wonderful. My kids would love it, I would love it, my constituents would love it.”

However, he said that part of the reason such a thing doesn’t already exist “is that the tax code changes every year, and people have a vested interest in changing the tax code every year. Otherwise, you’d put all the tax preparers out of business, and tax attorneys.”

Ways and Means Committee member Mike Kelly (R-Penn.) was even more skeptical of the prospect of a high-functionality online tax forms.

“What does that universe look like? I don’t know.” he said in an interview. “How complicated is it? I don’t know what other people’s tax programs are like, but I know this one’s awfully complicated. We tried to simplify it, but that didn’t seem to make anybody happy. We have greater tax revenues now than we’ve ever had. It’s just fact, that’s the fact of it.”