By: Bridget Harrington
When you know that Tax Day is approaching, you carve out some time to file your return. The software you need is only a few clicks away on your laptop, so you search “free file taxes,” or some similar terms. Up pops a series of different services, so you click on a website with a name you recognize–maybe one you know from television commercials, or maybe you’ve even used its services in the past. The format seems simple enough, with straightforward questions guiding you through uploading your W-2 and 1040, maybe a 1098 or 1099. You reach the end of the questions, input your direct deposit information, and then suddenly are hit with a surprise: a paywall on a website that had consistently told you it was free.
The time-consuming and frustrating process of filing tax returns has garnered ire from an incredibly broad base across the political spectrum, from President Ronald Reagan to Senator Elizabeth Warren, from comedians to regulators. At the end of 2001, one possible resolution to this process was in sight. The US’s Office of Management and Budget and the Internal Revenue Service (“IRS”) sought to encourage e-file of tax returns for the sake of efficiency and cost-reduction. In doing so, the IRS investigated the possibility of creating its own online software, giving taxpayers a free and direct manner of filing individual returns. That idea didn’t sit well with some software companies, however, which used this as an opportunity to lobby the government for a private sector solution. The negotiating between these private companies and the federal government resulted in the formation of the Free File Alliance. The Alliance was a group of private companies which agreed to provide filing services to certain taxpayers at no cost in exchange for the IRS’s pledge that it would not create its own software.
The companies which once comprised the Alliance did not commit to developing this software with charitable intent: Intuit, the maker of TurboTax, stated in its 10-K filings with the Securities Exchange Commission from the 2012 fiscal year that its tax software “faces significant competition from the public sector” where “federal and state taxing authorities developing software . . . to facilitate tax return preparation and electronic filing at no charge” would substantially threaten its revenues.
The Alliance claims that 70% of all individual taxpayers are eligible to file for free through some affiliated Free File program, but as of 2019 only 3% of those eligible taxpayers made use of it. Many of those otherwise eligible taxpayers needlessly continued contributing to the revenues of companies like TurboTax, which concurrently offered on its main site a “free” version where users often hit a paywall upon their attempt to take certain deductions.
The minimal use of Free File programs is owed in part to Intuit and other companies’ attempts to hide the free version by preventing search engines from indexing the truly free sites. The Free File section of the IRS’s website was the only reliable place to access any software which was not indexed. That was forced to change in 2020, when an IRS addendum to the Free File agreement, which required that companies not engage in practices preventing free software from appearing in web searches. Not unsurprisingly, H&R Block left the program in 2020, and TurboTax announced they would drop out after the 2021 tax season, leaving filers in 2022 scrambling to find a truly free option.
This exodus also follows the passage of the 2019 Taxpayer First Act, which prevents the IRS from ending the Free File program outright. While the Act’s ability to continue to bar the IRS from developing its own software has been disputed, the IRS’s decision to develop a program may permit the remaining companies to end their participation as well.
So, how can the IRS ensure that a free e-file option remains available? That depends on how quickly it can develop and roll out its own version of e-file software. Ideally, the IRS would be prepared to give notice of its plans about a year in advance, after which they could terminate the Free File agreement. However, the federal government could be exposed to legal challenges for a violation of the agreement now that the Taxpayer First Act likely bars the outright termination of the agreement. Taxpayers would be best served if Congress amended the Act to more clearly and affirmatively assert that the IRS maintains the power to develop its own software and terminate the agreement after it provide a specific amount of notice to tax preparation companies. The intent of the agreement has been obviated by the departure of some of the largest companies originally in the Free File Alliance, which now rely on their assertion of being “free” while using fine print to deny taxpayers a truly free return. Congressional action barring the advertisement of tax preparers’ services as free when their genuinely free services are exceptionally limited would also help to protect taxpayers and enable them to make informed choices about how to file their returns.
In the meantime, taxpayers can continue to use the Free File site to find one of eight participating tax preparers for federal and state taxes, provided that the individual qualifies based on income, age, and state residency.
Student Bio: Bridget Harrington is a second-year law student at Suffolk University Law School. She is a staffer on the Journal of High Technology Law. Bridget received a Bachelor of Science Degree in Accounting and Finance from the University of Massachusetts Dartmouth.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
