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Senate subcommittee: IRS should increase oversight of tax-prep companies in Free File program

by Naomi Jagoda - 06/09/20 2:11 PM ET

The leaders of the Senate Permanent Subcommittee on Investigations on Tuesday released a bipartisan memo finding that the IRS had conducted little oversight until recently of its Free File partnership with tax-preparation companies.

The memo, unveiled by subcommittee Chairman Rob Portman (R-Ohio) and ranking member Tom Carper (D-Del.) and prepared by the subcommittee’s staff, comes as the Free File program has come under increasing scrutiny in the past year.

“To support Free File, the IRS should increase its oversight of [Free File Alliance] members and dedicate funding—including increased funding from Congress, if necessary—to market the Free File program,” subcommittee staff wrote in the memo.

The Free File program is a partnership between the IRS and tax-prep companies in the Free File Alliance to have those companies offer free tax-filing software to low- and middle-income taxpayers.

Lawmakers raised concerns about the program after the investigative news outlet ProPublica last year published a series of articles reporting that tax-prep companies had taken steps to hide their free options under the program, such as by hiding those options from web search results. The IRS also directed an outside contractor to review the program.

The investigations subcommittee’s report is based on briefings that subcommittee staff had with government agencies and tax-prep companies, as well as information provided to the subcommittee.

The memo noted that the IRS Advisory Council in 2018 found IRS oversight of the Free File program to be inadequate and that Treasury Inspector General for Tax Administration found earlier this year that complexity and lack of awareness of the program has resulted in low participation levels from eligible taxpayers.

IRS officials told subcommittee staff last year that the agency conducts formal tests at the beginning and middle of the filing season to ensure that tax-prep companies are complying with their agreement with the IRS, and that violations are typically due to programming glitches. Free File Alliance executives told the subcommittee last year that they think the organization is tougher on its members than the IRS is, according to the memo.

IRS officials also told the subcommittee last year that the agency doesn’t have a budget for marketing the Free File program, and that Congress had not specifically given the agency funds for this purpose, according to the memo.

The memo noted that the report from the IRS contractor found last year that five of the 12 companies in the Free File program had used coding that prevented search engines from including their Free File websites in search results.

The subcommittee staff found that three of the companies — TaxHawk, Drake Software and TaxSlayer — had long prevented their Free File webpages from appearing in organic search results, while Intuit and H&R Block took steps to do so in 2018. Several of the companies had told the subcommittee that they believed taxpayers should get to their Free File websites through the IRS website, according to the memo.

Drake voluntarily left the Free File Alliance in 2019, and the other companies said that they have since removed coding that prevented their Free File pages from showing up in search results.

In December, the IRS and the Free File Alliance updated their agreement to prohibit tax-prep companies participating in the program from excluding their Free File landing pages from web search results. IRS officials told the subcommittee staff in January that it has started doing web searches to determine whether any of the tax-prep companies have violated this new rule.

The subcommittee staff wrote in their memo that despite the challenges with the Free File program, the program “continues to provide a valuable service for millions of Americans.”

The memo recommended that the IRS ensure that tax-prep companies avoid similarities in the branding of their Free File products and their products that customers have to pay for, in an effort to reduce confusion for taxpayers.

“To ensure the effectiveness of the Free File program as taxpayer habits change, Congress, the IRS, and the [Free File Alliance] should work together to maximize opportunities for Americans to find and use free tax filing services,” the subcommittee staff wrote.

The deadline for filing 2019 tax returns was extended from April 15 to July 15 because of the coronavirus pandemic. Portman and Carper encouraged eligible taxpayers to use the Free File program before the July 15 deadline.

Portman said in a statement that he’s “encouraged” that the IRS and Free File Alliance have been working to address the issues raised in the memo and are working to increase awareness of the program. Carper noted in his own statement that the memo stresses the need for the Congress to give the IRS “the resources it needs to improve oversight and the Free File program to ensure it better serves eligible Americans as Congress intended.”

The IRS said in a statement that it “has taken important steps to improve the Free File program to assist more taxpayers.”

“These changes took effect for the current tax season, and the significant surge in Free File usage this year is an encouraging sign,” the agency said. “The IRS will remain focused on working with the Free File Alliance and others to continue enhancing this program.”

Free File Alliance Executive Director Tim Hugo said that the alliance looks forward “to continuing this public-private partnership between the IRS and the Free File Alliance to continue improving the Free File Program for the benefit of the American taxpayers.”

H&R Block said in a statement that it is reviewing the Senate subcommittee report, and “will continue to provide expertise and care to millions of taxpayers this tax season and into the future.

Intuit said that the memo “acknowledges Intuit’s voluntary investment in paid advertising of Free File” and that the company’s emails with costumers are “beyond what is required.” Intuit also said that it supports the recommendations that the IRS contractor had made, many of which were enacted in December.

Tags IRS Rob Portman taxes Tom Carper