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Tax prep companies under fire over 'free file' program

Tax prep companies under fire over 'free file' program
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Tax-preparation companies are under mounting pressure over allegations that they hid free tax-filing services from customers.

The IRS is reviewing concerns about its partnership with the companies, such as Intuit and H&R Block, and lawmakers from both parties have called for the agency to take action.

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State and local governments are also launching their own investigations, with the Los Angeles city attorney’s office announcing this week that it filed lawsuits against Intuit — which makes TurboTax — and H&R Block.

“We’ve alleged that they have purposely misled low-income taxpayers into spending their hard-earned money needlessly for services they’re entitled to get for free from those very companies,” Los Angeles City Attorney Mike Feuer said during a press conference Tuesday. “We’re alleging that these companies have intentionally taken advantage of low-income taxpayers they pledged to help.”

Feuer said that he wants the companies to permanently stop the alleged unfair practices and provide restitution to California taxpayers who needlessly spent money on tax-prep services, and to face penalties.

The IRS has a partnership with tax-prep companies, known as Free File, under which the tax-prep companies offer free filing software to low- and middle-income taxpayers. The IRS agrees under the program not to offer its own free online filing service, but it can terminate the program with 12 months’ notice. Most taxpayers who are eligible to participate in the program do not do so.

The program, which began in 2002, has faced new scrutiny in recent weeks as a result of a series of articles from the investigative news outlet ProPublica.

ProPublica last month called attention to a provision in a bipartisan IRS reform bill to codify the free-file program, hours before a House vote on the measure. A number of freshman House Democrats raised concerns about taking action that could hurt the IRS’s ability to offer its own free online filing service. The bill, which also included a host of provisions designed to help low- and middle-income taxpayers, still easily passed the House by voice vote, but has now stalled in the Senate over the free-file provision.

Since then, ProPublica has written several articles reporting that tax-prep companies have taken steps to conceal their free options, such as by hiding them from web search results.

Those articles prompted new concerns from lawmakers. Several Democratic lawmakers — including Sens. Elizabeth WarrenElizabeth WarrenWorld passes 3 million coronavirus deaths Poll: 56 percent say wealth tax is part of solution to inequality Democratic senators call on Biden to support waiving vaccine patents MORE (D-Mass.), Bernie SandersBernie SandersOvernight Energy: Treasury creates hub to fight climate change through finance | Sanders, Ocasio-Cortez introduce 'Green New Deal for Public Housing' | Don't attack Zoom for its Bernie Sanders federal tax bill Sanders, Ocasio-Cortez introduce 'Green New Deal for Public Housing' MORE (I-Vt.) and Cory BookerCory BookerBass 'hopeful' on passing police reform: 'Republicans that I am working with are operating in good faith' Progressive lawmakers press DHS chief on immigration detention Democrats battle over best path for Puerto Rico MORE (D-N.J.) and Rep. Tim RyanTimothy (Tim) RyanBusinessman Mike Gibbons jumps into GOP Senate race in Ohio Biden's gun control push poses danger for midterms Trump faces test of power with early endorsements MORE (D-Ohio), who are all running for president — on Friday urged the Federal Trade Commission to investigate tax-prep companies and called on the IRS to remove companies that have hidden their free options from the Free File program.

The IRS said late Friday that it has assembled a team of senior leaders to review the Free File program. Senate Finance Committee Chairman Chuck GrassleyChuck GrassleySenate aims to pass anti-Asian hate crimes bill this week 'Real Housewives of the GOP' — Wannabe reality show narcissists commandeer the party This week: Democrats move on DC statehood MORE (R-Iowa) and ranking member Ron WydenRonald (Ron) Lee WydenGOP senator: Raising corporate taxes is a 'non-starter' Democrats get good news from IRS IRS chief warns of unpaid taxes hitting trillion MORE (D-Ore.) jointly sent a letter to the IRS after it announced its review, asking the agency to “take any necessary actions to ensure the integrity and purpose of the Free File program.”

The issue has also gotten considerable attention from some state and local politicians as well. In addition to the Los Angeles city attorney filing a lawsuit, New York Gov. Andrew Cuomo (D) has asked departments in his state to investigate the tax-prep companies.

Tax-prep companies have said that they’re committed to giving taxpayers options for free tax filing and have defended their actions related to the Free File program.

“We stand behind our actions as being both appropriate and consistent with our values,” Intuit said in a statement late Monday. “Any suggestion that Intuit does not support the IRS Free File Program is flat wrong.”

H&R Block said in a statement Tuesday that it “is proud to have helped millions of Americans with our four free tax filing options, including the IRS Free File program, our free online product, our MyFreeTaxes partnership with the United Way and our partnership with Military One Source.”

Critics of the current Free File program are encouraged that the program is getting more scrutiny and is being reviewed by the IRS and state and local governments.

“We owe it to consumers to hold these tax-preparation companies accountable for rigging the system to put profits over people,” Ryan said in a statement Tuesday.

Emily Peterson-Cassin, project coordinator of Public Citizen’s Bright Lines Project, said the findings in the ProPublica articles show “that even when good policy is there, it can be distorted and really ruined by being in the wrong hands.”

Many of those who are critical of Free File want Congress to pass legislation to instruct the IRS to offer its own free online filing system and even offer pre-filled returns for those with the simplest tax situations. Warren and other Democrats have introduced legislation on this topic.

“Senator Warren has been a leader in the fight to rein in the deceptive practices of the big tax file companies, and her Tax Filing Simplification Act would make it easier for hardworking Americans to claim the refunds they’re entitled to, like [the earned income tax credit],” said Adam Ruben, director of Economic Security Project Action.

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Steve Wamhoff, director of federal tax policy for the left-leaning Institute on Taxation and Economic Policy, said that it’s inevitable that when private companies are tasked with offering a public service, they will do things to maximize their profits.

A free tax-filing service “would be carried out more efficiently publicly rather than privately,” he added.

But there are obstacles to getting the IRS to create its own free filing system.

Republicans are skeptical of giving the federal government more responsibilities. GOP lawmakers haven’t been the biggest fans of the IRS in recent years, following revelations in 2013 that the agency subjected conservative groups’ applications for tax-exempt status to extra scrutiny, and the IRS saw its budget cut significantly in the beginning part of this decade.

Some tax experts also said that it would be challenging for the IRS to offer pre-populated tax returns because many people don’t have very simple tax situations.

Former IRS Commissioner John Koskinen, who was appointed by former President Obama, said that at the agency, “there’s a large number of [information technology] projects that have a higher priority” than creating its own free filing service.

Koskinen said he thinks it’s appropriate that the IRS review the Free File program “to make sure it’s running appropriately” and said it was his experience that the program worked well.

Mark Mazur, a former Obama-era Treasury Department official who now serves as director of the Tax Policy Center, said that it will be interesting to see what comes out of the IRS’s review.

He hopes the agency can eventually encourage more people to use the existing service.

“My hope is they try to reinvigorate the Free File program,” Mazur said.