IRS Free Tax Return Preparation Remains Out of Reach
Deleting a single sentence from the IRS’s recently modified agreement with the Free File Alliance might once have opened a new era of no-cost tax return filing and taxpayer services for millions, according to one taxpayer watchdog.
But that new era almost certainly won’t happen, said Dennis J. Ventry, former chair of the IRS Advisory Council. “Striking the noncompete clause from the [IRS-Free File Alliance memorandum of understanding] 15 years ago would’ve been a whole lot more valuable and more consequential than it is today,” Ventry said. “But [an IRS free filing option] just isn’t realistic right now, for a whole lot of reasons.”
The IRS and the Free File Alliance (FFA) signed an updated memorandum of understanding late last year that IRS Commissioner Charles Rettig hailed in a December 30, 2019, statement as “more taxpayer-friendly while strengthening consumer protections” for the free, IRS-sponsored retail tax software preparation service. Removed from that MOU was a sentence that has frustrated Free File critics virtually from the day the public-private partnership debuted in 2003: “In recognition of [the FFA’s] commitment, the federal government has pledged to not enter the tax return software and e-file services marketplace.”
However, the IRS continues to observe that part of the agreement. “The IRS has no . . . efforts underway to create its own Free File program,” the agency told Tax Notes in a statement January 17. “We will continue to assess our existing priorities for modernization and improving the taxpayer experience.”
The updated MOU came after a year of media and congressional scrutiny of Free File tax return companies accused of steering taxpayers eligible for free return preparation into the companies’ paid services. Former National Taxpayer Advocate Nina Olson said, “Certainly the last tussle over the Taxpayer First Act” — when Free File advocates tried to insert a provision making the program a permanent part of the IRS — “signaled to FFA that their ‘my way or the highway’ tactics of the past just don’t resonate anymore.”
“Elimination of this [noncompete] paragraph is very good,” Olson said. “The IRS can contract with a private entity — like the IRS does with every other IT project it has ongoing today — to program a simple version of the 1040,” with links to instructions and publications, the capability to perform basic math, and then file the return electronically, she said.
‘No Longer Relevant’
Yet after the noncompete clause, it seems to be “business as usual, no change whatsoever,” Ventry said, when it comes to replacing the Free File program with even the most basic government-run tax return filing program. The IRS has neither the money nor leadership commitment for a truly free tax return filing program, and retail tax return preparation and software interests could be expected to oppose the competition from one, he said.
“If this was a valuable concession by the FFA, it simply would not have happened, the same way it didn’t happen the last 18 years,” Ventry said.
Timothy Hugo, executive director at Free File Inc., said, “The [noncompete] ‘pledge’ contained in the MOU regarding the IRS not offering a free tax-software solution had become outdated, and really was nothing more than a talking point for those who oppose the Free File Program and want the federal government to take over this function.” Its removal “really doesn’t represent a change in policy.”
Intuit, the maker of TurboTax return preparation software, referred Tax Notes to Intuit’s December 30, 2019, blog post, which called the noncompete clause “no longer relevant” now that 90 percent of taxpayers file their returns electronically, and expressed confidence that its “exceptional product” would enhance consumer choice.
Mark Steber, vice president of tax at Jackson Hewitt Tax Service, noted that his company is not a member of the Free File Alliance but has its own free filing options for taxpayers. The cost of developing an IRS free filing program might generate “some pushback from some elected officials to spend additional new money or use precious IRS current resources for something [Free File] that already works pretty well,” he said.
“Even if all elected officials in D.C. and IRS did agree and did have free unlimited resources and new budget money, it would still take time to build, test, and implement such a system,” Steber said. “At the end I think we are still some time out from IRS delivering even a modest tax return preparation platform, given the other competing issues and tax administration challenges,” he said.
“But we are watching the issue closely,” Steber added.
Maybe a Preparer?
Olson said the IRS already has a product that almost fits her bill for an agency-established free tax form — the Free File Fillable Forms website on IRS.gov. “It is still clunky, but the IRS could build on that,” she said. “I use it personally, and have for years, [and] also complain about it every year, and suggest improvements,” she added.
But a free fillable forms website would not be enough to meet most taxpayers’ needs, Olson said. The IRS would also need to make Forms W-2 and 1099 available to Circular 230 tax professionals and taxpayers. About 30 percent of taxpayers would be able to use those services to pre-populate their forms and submit their returns to the IRS with a press of a button, she estimated.
Steber noted the importance of state tax return filings to any free tax return filing process. “If the IRS builds a new tax service platform, would the IRS also build 43 state platforms, too?” he asked. “Some taxpayers could choose to do the free federal tax return and just ignore the state” return, he said. “What happens then?”
“The IRS program would not have all the bells and whistles that commercial software has, nor should it,” Olson said. Modern commercial tax software packages integrate with bookkeeping and other software products, she noted.
Olson said, “To me, taxpayers will have a choice: Do they want the bare bones [free return preparation], or are they so nervous they want to go through the Q&A that software provides? Or do they need additional services that would lead to a more sophisticated product?”
“Or do they want to go to a preparer?” Olson said.