Momentum Possibly Building for IRS To Provide Online Filing Options For Taxpayers

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IRS has not been in the business of directly providing taxpayers with the ability to e-file tax returns. Of course, taxpayers whose incomes are below a certain threshold can use the Free File program provided by IRS and Free File, Inc. (FFI), a consortium of tax preparation companies. 

We have discussed Free File, and its failings, many times before. In this post, I highlight some recent developments in this space, developments that I believe make the case for a robust and user-friendly government based online tax portal that will be free, secure, and make lives easier for taxpayers.

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GAO Report on Free File

Last month the GAO released its latest report on Free File, IRS Free File Program: IRS Should Develop Additional Options for Taxpayers to File for Free. The report  (1) describes demographic characteristics of Free File users; (2) evaluates IRS’s oversight of taxpayer experience provisions; and (3) identifies key challenges and alternative approaches that may exist for IRS to help taxpayers file online at no cost.

It paints a bleak picture of Free File, finding “that the vast majority of taxpayers eligible for the program used other filing methods, which they may have paid to use.” For tax year 2020, approximately 4.2 million or about 4 percent of eligible taxpayers used Free File.

GAO offers recommendations to improve Free File, which IRS agreed with. GAO also recommends that IRS “identify and develop additional options for free online filing by the time the current Free File agreement expires.” IRS did not agree with that recommendation.

Research Paper on Benefits of IRS Populated Tax Returns

A recent paper Automatic Tax Filing: Simulating a Pre-Populated Form 1040 by Lucas Goodman,  Katherine Lim,  Bruce Sacerdote & Andrew Whitten (Lucas and Andrew are at Treasury’s Office of Tax analysis) details just how beneficial the provision of prepopulated returns would be for taxpayers:

Our baseline results indicate that between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return. Accuracy rates decline with income and are higher for taxpayers who have fewer dependents or are unmarried. We also examine 2019 non-filers, finding that pre-populated returns tentatively indicate $9.0 billion in refunds due to 12 million (22 percent) of them.

Dylan Mathews at Vox discusses the paper in his article Over 60 million Americans have taxes so simple the IRS could do them automatically.  In addition to saving current filers vast amounts of time and money, a true simple prepopulated return option would open the doors to the millions of nonfilers who miss out on benefits due to burdens that our current tax system fails to address:

Pre-populated returns could also help people who aren’t currently filing taxes. In the US, many people are not required to file an income tax return, usually because they earn too little money to trigger that requirement or because the money they do get is from a partially exempt source like Social Security. But those people often would benefit from filing a return because of benefits like the earned income and child tax credits. Those credits are refundable, meaning that you don’t have to have a positive income tax burden to receive them; the earned income tax credit (EITC) in particular is designed to mostly go to low-income people who don’t earn enough to owe income taxes.

As the Vox piece highlights, the paper notes that “7.2 million tax units who aren’t required to file are owed refunds, averaging some $411 each. Those units would be likelier to get their refunds under a pre-populated filing system.”

To be sure, as the Vox piece highlights, the paper discusses why a majority of taxpayers would not be able to exclusively rely on a pre-populated return. Schedule C filers, itemizers and others in a complex tax system such as ours would render a pre-populated system unable to satisfy all of the individualized filing responsibilities under our current system.  Yet such a system could help those taxpayers meet their responsibilities and would be a game changer for the millions whose returns could be accurately, and easily, done with information that the IRS already has at its disposal

CRS Study on History of Free File

If you want to know how we are in this mess, unlike citizens of many other countries, in The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues the Congressional Research Service details the history of how IRS decided decades ago that it should not be in the business of directly providing online filing options.  It discusses the two sources for FFI, RRA 98, which directed the IRS to get to 80% e-filed individual returns within ten years, and a 2001 OMB Task Force to implement President George W. Bush’s E- Government Initiative.

The CRS briefing discusses how IRS, in reaction to the OMB Task Force, unsuccessfully tried to develop a digitized version of Form 1040 that could be accessed through WhiteHouse.gov. A lack of resources led then Treasury Secretary Paul O’Neill to ask IRS Commissioner Charles Rossetti to partner with the private sector so lower-income taxpayers could e-file for free. That directly led to the government/private sector partnership, the Free File Alliance.

Further background on the origins and evolution of IRS’s involvement with Free File are in many of the NTA’s annual reports to Congress, including for example the discussion of the most serious problems from 2018 Annual Report, The IRS’s Free File Offerings Are Underutilized, and the IRS Has Failed to Set Standards for Improvement.

The back story as to why IRS failed to develop its own system is interesting.  A 2001 Washington Post article, IRS Told Its Efforts May Step on Toes Of Private Industry, discusses Republican efforts to ensure that the IRS did not offer a true government housed online filing portal.

Those 2001 efforts to jettison a true government housed online filing portal were championed by then Congressman Randy “Duke” Cunningham of California, whose district was home to Intuit. Representative Cunningham, who later pleaded guilty to conspiracy and tax fraud, was called by the San Diego Tribune in Corruption and lava lamps: The saga of Randy ‘Duke’ Cunningham as “not just the most corrupt member of Congress when he was convicted in 2005. He also was one of the more colorful Capitol Hill criminals — in a most sad and tawdry way.” (As the Tribune piece discusses, Trump pardoned Cunningham in one of his last acts as President).

Intuit Agrees to Pay $141 Million to Settle Charges Based on Deceiving Customers

Last week the New York Attorney General announced a 50 state agreement with Intuit for the company to pay $141 million to customers who paid for return filing services that they should have received for free as part of Free File.

The accompanying press release from the AG’s office discusses Intuit’s actions:

“Intuit cheated millions of low-income Americans out of free tax filing services they were entitled to,” said Attorney General James. “For years, Intuit misled the most vulnerable among us to make a profit. Today, every state in the nation is holding Intuit accountable for scamming millions of taxpayers, and we’re putting millions of dollars back into the pockets of impacted Americans.

The attention on Intuit’s unfair practices were detailed in a 2019 Justin Elliott and Paul Kiel Pro Publica series Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free.

The NY Attorney General press release discussed the states’ findings, which were mostly initially detailed in the Pro Publica piece:

The OAG’s multistate investigation found that Intuit engaged in several deceptive and unfair trade practices that limited consumers’ participation in the IRS Free File Program. The company used confusingly similar names for both its IRS Free File product and its commercial “freemium” product. Intuit bid on paid search advertisements to direct consumers who were looking for the IRS Free File service to the TurboTax “freemium” product instead. Intuit also purposefully blocked its IRS Free File landing page from search engine results during the 2019 tax filing season, effectively shutting out eligible taxpayers from filing their taxes for free. Moreover, TurboTax’s website included a “Products and Pricing” page that stated it would “recommend the right tax solution,” but never displayed or recommended the IRS Free File program, even when consumers were ineligible for the “freemium” product.

Conclusion

Most can agree that the current system does not serve taxpayers well. There is disagreement as to whether the solution is likely to come from a different arrangement with the private sector (such as a government contract with software providers to offer services to taxpayers, as the NTA recommended in Legislative Recommendation Number 4 in the 2021 Purple Book) or a true government sourced online platform as Senator Warren has proposed in The Tax Filing Simplification Act. (To watch an interesting exchange from this past February between the Senator and NTA, see here).

For now, the system is broken, with millions of taxpayers wasting time and money filing returns that should be seamlessly uploaded and more readily processed with accurate information. The only winners in the current system are the private sector companies still phishing money from unsuspecting taxpayers and those who want to make tax filing as painful as possible to weaken trust in government and further erode support for the IRS.

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Looks like Intuit and Turbo learned from the IRS how to capitalize on the taxation industry. Now who’s calling the kettle black?

  2. Sandra Mertens says

    As someone who personally uses Free File Forms to file, it is very tedious to have to input the W-2 information when I know the IRS has it all in their files and I entered the same information last year. Not to mention the only errors I’ve had in prior years is from missing some small entry on the Form W-2 like the identifier number. Illinois e-filing has managed to pre-populate information from your prior return so there is no reason the IRS cannot do so.

    I also note several audits my firm has handled have involved questions as to how a taxpayer filled out the questionnaire provided by the accountant or online provider like TurboTax. If the IRS instead put itself into that position, it would be able to access information about how the taxpayer provided the information, rather than be faced with obtaining information from third parties or guessing how a taxpayer input information into the software. It could also make criminal prosecutions easier if the IRS could demonstrate from its own records that the taxpayer actually answered questions a certain way (e.g., checking “no” for foreign accounts).

  3. The argument that the IRS could prepopulate tax returns makes good sense. However, when can the IRS provide the relevant tax information during the tax year? Currently, wage and income transcripts are not available until late May or June. Is this a technology issue where the information is not available to the IRS or taxpayers? If so, I suspect the IRS couldn’t prepopulate tax returns until well after the April filing deadline.
    For the IRS to create automatic tax returns, it will need to access W-2s and 1099s data within its systems when submitted by employers and others required to file these forms. If the IRS can access wage and income data early in the year, it should be available to all taxpayers.

  4. Bob Kamman says

    Or, the defenders of private enterprise and supporters of individual choice could just enact a $200 tax credit for return preparation services – maybe phased out above $100,000 AGI. Instead, they repealed even the itemized deduction for fees.

    My experience is that many ordinary people file simple returns for five or ten years, then come across a situation that I can’t answer without some time for research. I get bored doing easy returns until I remind myself that doctors must get bored doing annual checkups for healthy people. Don’t tell me your plan for average people with simple returns, without telling me your plan for average people with off-the-wall questions.

  5. Richard G Stack says

    I’m not surprised by the unholy alliance between the IRS and private software firms in making it more difficult and expensive for taxpayers to e-file tax returns. In true American, “free enterprise” fashion, the software providers get to overcharge taxpayers for a service that should be free for everyone.

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