BRIEF HISTORY

Topic one of the PSI Memo discusses the Free File Program history. In 1998, Congress directed the IRS to work with the tax preparation industry to ensure at least 80% of all federal tax returns were electronically filed by 2007. In 2002, the IRS entered into the Free Online Electronic Tax Filing Agreement with several electronic tax prep companies that had banded together as the Free File Alliance (“FFA”).  Under this agreement, FFA members committed to offering free online tax prep and filing services, known as Free File. The IRS and FFA also agreed to coordinate for the marketing of these free offerings to “provide uniformity and maximize public awareness.” In 2005, the IRS and FFA also developed a Memorandum of Understanding (“MOU”) to identify the service standards for Free File members and the procedures for resolving disputes.  The most recent version of the MOU runs through October 31, 2021.

Pursuant to the FFA agreement, private-sector tax prep providers agree to provide tax prep and e-filing services to vulnerable taxpayers at no cost to the taxpayer or the government; in exchange, the government agrees to not compete with FFA members by refraining from offering free online tax prep or e-filing services. Since its inception in 2002, the IRS reports the Free File Program has produced “more than 53 million free returns e-filed and an estimated $1.6 billion in savings to taxpayers.” Despite each stakeholder’s vested interest in the success of the Free File Program, the PSI Memo highlights that the program has come under scrutiny repeatedly for falling short of its objectives. The PSI Memo finds that “[u]ntil recently, the IRS conducted little oversight of the Free File program.”

Topic two of the PSI Memo provides a summary of IRS oversight of the Free File Program in the last decade. The PSI Memo highlights the fact that “[t]hree different independent entities have reviewed the Free File program since 2018 and provided recommendations for improvement, but the program continues to struggle to serve eligible taxpayers.” The PSI Memo reports that TIGTA’s 2007 review of “the effectiveness of the Free File program […] found that the IRS could improve its efforts to evaluate, promote, and administer the Free File program.”

RECENT IRS IMPROVEMENTS TO FREE FILE

Next, I’ll discuss topic five and three of the PSI Memo together. Topic five is an analysis of recent changes the IRS has made to strengthen the Free File program, and topic three discusses the importance of online search engine results in helping taxpayers choose a tax preparation software.

Prior reports revealed that some FFA members had taken deliberate actions to reduce access to the Free File Program by using coding to prevent the program from being populated in organic online web searches, a practice known as de-indexing. This is particularly troublesome because, as the MITRE 2019 assessment report (“MITRE 2019 Report”) of the program revealed, “[m]ost taxpayers find their preferred tax preparation product through online searches using an online search engine.”

The PSI Memo found:

[f]or the first 15 years of the Free File program, the IRS declined to take a position on whether FFA companies should index Free File websites to appear in online search engines, nor did FFA companies seek guidance from the IRS on whether their indexing practices complied with the MOU. As a result, participating FFA companies took different approaches in deciding whether to code their Free File program.

MITRE found that five of the twelve FFA members engaged in non-indexing their Free File websites. Upon questioning by MITRE, “most [FFA] members” stated that they “believed” this practice complied with the MOU terms. The PSI Memo emphasizes that TIGTA agreed with the IRS that the MOU did not explicitly prohibit de-indexing, but stated “it was against the spirit of the Free File program.” Indeed, this practice seems inconsistent with the FFA’s clear mission of providing low-income taxpayers with tax prep services for free, and its agreement with the IRS to “provide uniformity and maximize public awareness.”

Following public reports exposing the FFA members for using coding in this way, in December 2019, the IRS and FFA members agreed to an addendum to the Free File MOU prohibiting any practice that would exclude Free File websites from organic searches and standardizes the naming of Free File offerings to “IRS Free File program delivered by (Member company name or product name).” The PSI memo notes that FFA executives said that they “discover more program violations than the IRS and believe [the FFA] is tougher on their members than the IRS [… and] added that members do “a lot of self-policing” and report violations by other members.”

Recent news of the departure of one of the FFA members has raised many questions. After being a 20-year member, H&R Block recently announced its withdrawal from the FFA. H&R Block was one of the FFA members that engaged in the de-coding practice aimed at steering taxpayers away from the Free File Program. H&R Block will continue to offer its own free-filing options on its website, but it will remove its return filing software from the IRS’s Free File website after the extended filing season ends on October 15, 2020. Nina Olson, executive director of the Center for Taxpayer Rights, told Tax Notes (subscription required) that the withdrawal “is a perfect storm of things—the cumulative effect of the negative articles, the TFA, the [IRS] nonfiler portal, etc.”  Perhaps H&R Block’s performance of MOU requirements or stated position regarding certain requirements foreshadowed its recent announcement to exit the program.  Specifically, the PSI Memo highlights H&R Block’s position regarding marketing, stating it does not believe it should be marketing the program “in any manner;” therefore, it does not engage in any efforts to market the Free File program. H&R Block sends one reminder email, as required by the MOU, to individuals who used the company’s Free File product the prior year. Whereas, Intuit sends six to eight reminder emails each year to previous Fee File users.  

Although H&R Block will withdraw from the FFA, it will continue to benefit from the collective bargaining benefits of the agreement with the remaining eleven members because the IRS will continue to honor its commitment to not compete against the FFA members. H&R Block will have all of the benefits and none of the oversight or accountability. What is to stop other members from following suit?

The MOU addendum is a great step in the right direction, however, as the PSI memo highlights, there is still much more that needs to be done to ensure the program meets the needs of taxpayers.

FUTURE-PROOFING FREE FILE BENEFITS

The PSI Memo notes that,

[d]espite these challenges, the Free File program continues to provide a valuable service for millions of Americans. To support Free File, the IRS should increase its oversight of FFA members and dedicate funding—including increased funding from Congress, if necessary—to market the Free File program. The IRS should ensure FFA members comply with new guidance that attempts to avoid similarities between Free File branding and branding for commercial tax preparation products that could confuse taxpayers.

These recommendations echo those made previously by TIGTA, MITRE, and the National Taxpayer Advocate.

Increase Member Oversight and Accountability

A February 2020 Treasury Inspector General For Tax Administration Report (TIGTA 2020 Report) concluded that complexity, confusion, and a lack of taxpayer awareness about the Free File program led to low levels of eligible taxpayer participation, and that this was partially due to the IRS’s insufficient oversight of the Free File Program. These findings are consistent with those in the NTA 2019 Annual Report to Congress (“2019 ARC”), presented in a section titled, “Substantial Free File Program Changes Are Necessary to Meet the Needs of Eligible Taxpayers.” 

Among other things, TIGTA recommended that IRS management update its testing review guide to ensure adherence to the MOU by FFA members. Increasing member oversight and accountability will help ensure consistency to the FFA mission that will benefit the program. The IRS partially agreed with this recommendation.

Dedicate Funds to Marketing

Topic four in the PSI Memo is a discussion of the IRS marketing strategy for the Free File program. The PSI Memo finds that “[a] lack of investment in marketing by the IRS likely led to a lack of consumer awareness that hampered participation in the Free File program.” The TIGTA 2020 Report explains that in addition to deterring effects of the confusion of the Free File Program, the lack of taxpayer awareness about the operation and requirements contributes to lack of participation by eligible taxpayers.  The TIGTA Report explains that insufficient actions have been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website.  “To participate in the Program, taxpayers must access the IRS.gov Free File web page and select a link on this web page directing them to a Free File Inc. member’s website. However, this provision is not in the […] MOU and most taxpayers are unaware of this requirement.” The PSI memo also highlights that the lack of taxpayer awareness is directly related to the fact that the IRS has no budget for marketing the Free File program, and Congress has not appropriated funds for it. 

TIGTA made several recommendations connected to marketing and taxpayer education. First, TIGTA recommended that the IRS “develop and implement a comprehensive outreach and advertising plan to inform eligible taxpayers about the Free File program and how to participate.” (Recommendation 1) The IRS agreed with this recommendation. Second, TIGTA recommended that the IRS.gov Free File page contain comprehensive eligibility criteria for each product. (Recommendation 2) The IRS agreed, but stated this was already the case. Importantly, TIGTA also recommended that the IRS inform taxpayers of their right to be free from cross-marketing or upselling of fee-based services on Free File program software. (Recommendation 7) This practice confuses taxpayers and gives the specious impression of IRS endorsement. The IRS agreed with this recommendation, and in response created a new webpage, Know Your Protections Under the IRS Free File Program. Whether taxpayers will find this information without additional marketing seems doubtful. We will hopefully see the new comprehensive outreach and advertising plan by the next filing season.

CONCLUSION

I personally have used Free File software, and I definitely saw how certain parts can be confusing. Thanks to my experience as a VITA volunteer and coordinator, I was able to work through it, but it is unlikely that most eligible taxpayers have VITA training and experience.

One example of a confusing surprise that confronts taxpayers is the fee for a state tax return. Free File allows eligible taxpayers to file their federal tax return for free, but there can be a fee ranging from $14.99 to $54.95 to prepare your state tax return for some taxpayers. When the payment request popped up for my state return, I backtracked to the first page to double check if there were any disclosures about payments associated with state tax returns or if I had unknowingly navigated away from the Free File program. The main page says “free state return options are available,” but nothing about payments. The payment is disclosed once you choose a product to use. The products generally break down into two groups—the first group says “No free state tax preparation in any states,” and the second group says “Free state return, for some states.” California is not on the list of states eligible for free state tax preparation.

However, I recommend checking the website of your state taxing authority for free state tax preparation software if your state is not eligible for free state tax preparation services. California, for example, provides CalFile to e-file your state tax return directly to the Franchise Tax Board for free. Realistically, I think most eligible taxpayers will eat the costs to avoid going through the daunting task of preparing their state tax return from scratch when the federal tax software can transfer the information over to the state if they pay.

Another point of confusion is the constant upselling gimmicks promising a better refund gives the impression that the Free File program may be inferior to the paid software, giving me cause to think that my refund could be higher if I paid for another product. Thankfully, I know better, but these gimmicks are likely to successfully steer vulnerable taxpayers with little or no understanding of tax preparation away from the beneficial Free File program that will save them a substantial sum of money.

Given the enormous potential of the Free File Program to meet its mission of best serving vulnerable taxpayers’ needs, one can only hope the IRS heeds the constructive criticism outlined in the PSI Memo, which echoes previously reported issues. The IRS has risen to the challenge of meeting taxpayers’ needs many times before, e.g., the implementation of IRS Settlement days and the commendable rapid mobilization and implementation of the EIP initiative in response to COVID-19. I’m confident the IRS can rise to the challenge of making the necessary improvements to the Free File Program to meet the needs of eligible taxpayers. The question is, when?