Menu
Tax Notes logo

The Failed Free File Program Should Be Reformed, Not Codified

Posted on July 16, 2018
[Editor's Note:

This article originally appeared in the July 16, 2018, issue of Tax Notes.

]
Dennis J. Ventry Jr.
Dennis J. Ventry Jr.

Dennis J. Ventry Jr. is a professor at UC Davis School of Law.

In this report, Ventry argues that the Free File program has failed because of the misconduct of Free File Alliance companies. He details how these companies up-sell paid products, violate taxpayer privacy laws, strip taxpayers of legal rights, and use software vulnerable to cyberattacks. To save the program, lawmakers should authorize the IRS to verify that Free File Alliance companies disclose up-selling activities and revenues, reveal to whom they sell users’ return information, observe taxpayer privacy laws, and ensure users’ legal rights. Alternatively, the IRS should terminate the program and launch its own free e-filing service.

I. Introduction

In April the House unanimously passed the Taxpayer First Act, which includes a provision to codify the IRS Free File program.1 Making Free File a permanent part of the Internal Revenue Code would likely mean that the IRS and its private sector Free File partners — organized as the Free File Alliance (FFA) and prominently including Intuit and H&R Block2 — would no longer periodically renegotiate the terms and conditions of the program as reflected in memoranda of understanding.3 The proposed change to Free File would severely hamper the IRS’s ability to monitor a program that is designed to provide free e-filing services to the lowest 70 percent of taxpayers based on income.4

For that reason alone — preventing the IRS from verifying that FFA companies deliver free e-filing services to taxpayers as promised — codifying Free File is a terrible idea. Even worse, codification would permanently enshrine a failed program that, as currently conceived, inflicts substantial harm on taxpayers and tax administration.

Only about 3 percent of eligible taxpayers use Free File in any given year.5 Of that fraction, less than half use Free File the following year, indicating some combination of dissatisfaction with the service, confusion over inconsistent offerings from FFA companies (the 12 companies use different eligibility criteria based on income, age, and state residence),6 and the common practice among FFA companies to push Free File users toward their paid products.7

The FFA has peddled a far rosier narrative in touting the program to Congress. So far, lawmakers have been receptive to industry’s account of Free File, undoubtedly persuaded by FFA members’ largesse: H&R Block has spent $3.4 million lobbying the current Congress, while Intuit has paid out $3.1 million. This election cycle, those companies and their employees have also contributed more than $500,000 to congressional candidates, political action committees, and parties.8

According to Tim Hugo, executive director of the FFA, Free File “is a philanthropic endeavor.”9 Purported charitable acts include offering free e-filing of federal returns and some state returns for 70 percent of taxpayers;10 saving taxpayers money, at least $1.5 billion since 2003, based on ascribing a $30 preparation fee to each of the 51.1 million Free File returns;11 and further saving the IRS “hundreds of millions of dollars” from lower processing costs associated with e-filed returns versus paper returns.12

The FFA’s propaganda obscures a gloomier reality. For starters, the FFA’s estimates of how much money the Free File program saves taxpayers is misleading. It is well documented13 that FFA companies view Free File as a bundled “free-to-fee” marketing package with advertised free federal returns serving as the loss leader providing opportunities to sell “value-added” services. Sen. Elizabeth Warren, D-Mass., a vocal critic of Free File,14 cuts to the chase: “Let’s call the so-called Free File Alliance what it really is — a front for tax prep companies who use it as a gateway to sell expensive products” to unwitting taxpayers.15 No data exist on how much up-selling occurs (FFA companies do not share that information). But after accounting for industry’s rapacious practices,16 the FFA’s estimated $1.5 billion in cost savings for taxpayers is closer to zero and might even result in an aggregate net loss.

The FFA’s claim that Free File saves the IRS “hundreds of millions of dollars” is equally disingenuous. The FFA derives the alleged cost savings from the erroneous assumption that if Free File users filed their taxes without Free File they would file paper returns rather than electronic returns. But it is overwhelmingly more likely that they would file electronically. More than 90 percent of all federal returns are e-filed,17 including those filed by Free File’s target population of low- and middle-income taxpayers.

From its origin, the Free File program has obligated FFA companies to provide free tax return preparation and e-filing services to “economically disadvantaged and underserved populations at no cost to the individual or the government.”18 FFA companies have repeatedly failed to uphold this obligation. As noted above and reported widely in the press, FFA companies engage in aggressive up-selling of their paid products to Free File users. Equally true but so far under-investigated, FFA companies (1) violate taxpayer privacy laws regarding disclosure and use of Free File users’ tax return information, (2) strip Free File users of legal remedies in the event of disputes with FFA companies, including their right to file a lawsuit, seek a trial by jury, or aggregate claims in a class action, and (3) negligently expose Free File users to malicious cybersecurity threats.

Beyond harming taxpayers, the misconduct and woeful service record of FFA members significantly harm the IRS. In taxpayers’ minds, the IRS is an accomplice to the misconduct of the FFA companies doing business under a program marketed as “IRS Free File.”19 That conclusion is not without merit. The IRS can be said to possess actual knowledge of FFA companies violating the terms and conditions of the program because of related news coverage and investigative reporting.20 Yet as far as anyone knows, the IRS has made no effort to investigate or stop the misconduct.

Overall Recommendation: Free File must be reexamined and fundamentally restructured rather than codified. The existing Free File program does considerably more harm than good. Congress should restructure the program to focus on providing absolutely free e-filing services to low- and middle-income taxpayers. To assist in its restructuring efforts, Congress should request the Government Accountability Office to provide a top-to-bottom assessment of the program. Congress should also authorize the IRS to verify — before, during, and after each tax season — that FFA companies (1) faithfully uphold the terms and conditions of the revamped program, (2) disclose all up-selling activities and revenues, and further disclose to whom they sell taxpayers’ private return information, (3) observe all federal taxpayer privacy laws, (4) preserve the full range of taxpayers’ legal rights and remedies in the event of disputes with FFA companies, and (5) safeguard taxpayers from cyber threats associated with security lapses in FFA companies’ Free File software.

II. The FFA Harms Taxpayers

Since the first MOU, signed in 2005, the stated objectives of the Free File program have obligated the FFA and its members to “work in concert with the IRS to increase electronic filing of tax returns, which includes extending the benefits of online federal tax preparation and electronic filing to economically disadvantaged and underserved populations at no cost to the individual or the government.”21 In return, the IRS “pledged to not enter the tax preparation software and e-filing services marketplace.”22 The original obligations of the parties remain unchanged and are reflected in the existing MOU, which is effective until October 31, 2020.23

For its part, the IRS has honored its obligations under the Free File MOUs and periodic agreements,24 remaining steadfastly outside the tax prep and e-filing marketplace.

Meanwhile, the FFA has repeatedly violated the stated objectives and terms of the Free File program. FFA companies (1) engage in predatory up-selling of paid products to Free File users, (2) violate taxpayer privacy laws, (3) deceptively strip Free File users of legal remedies in the event of disputes with FFA companies, and (4) negligently expose Free File users to cyberattacks.

A. The FFA Up-Sells Paid Products

We know25 that FFA companies view Free File as a bundled “free-to-fee” marketing package with ostensibly free federal returns serving as the loss leader providing opportunities to sell so-called value-added services (including return prep and filing services) to unsuspecting Free File users.

We also know that FFA companies engage aggressively in these up-selling techniques26 with the IRS’s tacit approval. In the early years of the program, the Free File MOUs allowed FFA companies to sell refund anticipation loans (RALs) to Free File users,27 a practice that conflicted with the program’s command that FFA companies provide “federal tax preparation and electronic filing . . . at no cost to the individual.”28 Similarly, the original MOU allowed FFA companies “to offer commercial products and services”29 to Free File users as long as the companies complied with section 7216 by obtaining users’ “knowing and voluntary” consent.30

Also, the current MOU facilitates FFA companies’ up-selling of tax return preparation and filing services for state returns. FFA companies must offer free tax prep and e-filing of state returns, but only in those states participating in a state Free File program.31 These programs — offered in just 22 states and Washington, D.C.32 — offer “free preparation and e-filing of individual tax returns based on criteria that are materially consistent with the federal Free File program,”33 but they do not include programs in the 28 non-Free File states “that have their own taxpayer-funded online software for tax preparation and e-filing.”34 Taxpayers in those states must pay a fee to FFA companies if they wish to file state returns through the Free File portal, and FFA companies can charge these taxpayers whatever they want for those services.35 Also, the MOU prohibits the IRS from providing links to non-Free File state revenue departments on its website.36 In fact, linking to non-Free File state revenue departments — all of which facilitate free e-filing of state returns — is grounds for the FFA “to immediately dissolve its obligations in this MOU.”37

There are other ways FFA companies up-sell their fee-based products to Free File users under the distinctly unwatchful eye of the IRS. First, and as a threshold matter, the Free File MOU expressly permits an FFA company to alert taxpayers landing on its Free File homepage (or “landing page” in the MOU’s parlance) of the company’s fee-based services. It also countenances that companies will entice taxpayers with “value added buttons” to leave a company’s Free File landing page for the company’s “Paid Service Offering Page.”38

Second, many taxpayers begin preparing a return through an FFA company’s free services only to learn at some point during the filing process that they are ineligible for the free service. At this point, the MOU requires FFA companies to “unequivocally inform” taxpayers that they are ineligible to file for free on that company’s Free File site, and, further, to notify taxpayers that they may (1) return to the company’s Free File landing page, (2) return to the IRS Free File website,39 or (3) pay a fee and continue filing their federal or state returns with the company.40 Another part of the MOU reiterates that under these circumstances, FFA companies may offer their fee-based filing services, or, as the MOU euphemistically characterizes the offering, “the right to pay a fee for the Member’s return services.”41

We don’t know how many taxpayers experience this mid-filing choice between two equally unsatisfactory alternatives: on one hand, starting the filing process all over again with another FFA company (perhaps only to experience the same notice of ineligibility) and, on the other hand, paying a fee to complete a process that taxpayers were led to believe was free. The IRS doesn’t ask, and the FFA doesn’t tell.

Third, still other Free File users approach completing their federal return with the help of an FFA company when they receive a prompt from the company’s Free File site, “We notice that you have income subject to the state income tax in State X,” or something to that effect. “We can help you prepare and file your State X tax return upon completing your federal return.” The taxpayer accepts the offer, completes the preparation of her federal return, completes the preparation of her state return, and then receives a message indicating that she owes $29.99 (the cost of TurboTax State), to file her state return. The alternative to paying the $29.99, the taxpayer is told, is “deleting” her return. Deleting which return? Her state return? Federal return? Both? Also, the initial offer of assistance to prepare and file her state return might not have indicated that it would cost $29.99. This taxpayer is in a pickle. She is, at the very least, confused about the alternatives as presented, and she is upset about the prospect of paying for a service that she was led to believe would be free. Her anxiety about filing her federal and state tax returns likely overcomes these other emotions, and she forks over the $29.99.

To compound matters, the MOU does not require FFA companies in these circumstances to alert the taxpayer that she could file the return for free through a state Free File offering that the company supports. Nor does the MOU require an FFA company to provide a link back to the company’s Free File landing page, which would alert the taxpayer to the state Free File offerings that the company supports as well as the states for which the taxpayer must pay a fee to file a state return.42

We don’t know how many taxpayers experience this kind of mid-filing choice, if it can even be called a choice; that is, refuse to pay the fee for filing the state return but run the risk of having one or both of the federal and state returns deleted and not filed. The IRS doesn’t ask, and the FFA doesn’t tell.

Fourth, and for yet another way that FFA companies up-sell fee-based products to Free File users under the unwatchful eye of the IRS, consider this common marketing practice among FFA companies. Every year, FFA companies peddle their fee-based tax return preparation and filing software to taxpayers who used their Free File website in a prior year.43 These taxpayers receive emails early in the filing season from the FFA company (or companies, depending on whether a taxpayer has used more than one FFA company in prior years) informing them that the company has their information on file and would be happy to help file their returns for the current tax year. But the email also includes a link to a webpage that is not the company’s Free File landing page, but rather a webpage containing the company’s paid services. Taxpayers might not realize that the products being marketed to them are neither Free File offerings nor otherwise free services.

We don’t know how many taxpayers are contacted and solicited in this manner. Moreover, we don’t know how many would otherwise qualify to file their federal returns for free through Free File, either through the soliciting company’s Free File site or another company’s Free File site. The IRS doesn’t ask, and the FFA doesn’t tell.

It turns out that FFA companies’ practice of marketing paid services to taxpayers who previously used a company’s Free File services is governed by a provision in the MOU. Specifically, companies may market paid tax return preparation services to previous Free File users if “the taxpayer has affirmatively opted to receive such offerings.”44 This necessity reflects the consent requirements in section 7216,45 which, in combination with Rev. Proc. 2013-14,46 requires “knowing and voluntary”47 taxpayer consent for tax return information to be used for any reason other than the preparation of the tax return on which the information appears, including for marketing purposes. Moreover, the MOU explicitly reminds FFA companies of section 7216’s command when it states that FFA companies “shall only use or disclose the tax return data Members collect in provision of Services to taxpayers in accordance with the provisions of Section 7216 of the Code.”48

Those protections are well and good, but how many FFA companies receive knowing and voluntary consent from Free File users before they market paid products to those users? We don’t know. The IRS doesn’t ask, and the FFA doesn’t tell.

The IRS provides almost no oversight of the Free File program. Before FFA companies’ Free File websites go live during the filing season, the IRS provides a modicum of administrative supervision. According to the MOU, the IRS’s primary supervisory function before the filing season begins involves verifying that individual FFA companies are capable of offering basic filing services49 and that they are following industry best practices regarding security and maintaining taxpayer privacy.50

Once the filing season has started, the IRS makes no independent effort to verify that FFA companies are upholding the terms of the MOU, including whether companies remain in compliance with terms that the IRS previously verified before the filing season. Moreover, and inexplicably, the IRS conducts no checks on FFA companies’ Free File software during the filing season. At the very least, the IRS should conduct spot-checks on all companies’ Free File services, and prepare mock returns on companies’ software to verify that companies are not engaging in impermissible behavior governed by the MOU, including, for instance, up-selling paid services to Free File users, violating section 7216 by failing to receive “knowing and voluntary” consent from taxpayers before marketing paid services, neglecting to maintain the required levels of security and privacy of Free File websites and software, and failing to provide the free services as offered on companies’ landing pages.

Rather than perform meaningful oversight of the program that bears its imprimatur, the IRS appears to rely solely on the unreliable assumption that FFA companies will police each other. In other words, the IRS has turned over responsibility for ascertaining filing season compliance or noncompliance with the terms and conditions of the Free File MOU to its counterparty in the MOU. That abdication of responsibility is illogical. Moreover, it recklessly turns over to FFA companies — all of which are tax return preparers — the tax regulator’s core duty to enforce compliance with tax laws regarding tax preparers. The phrase “fox guarding the henhouse” seems appropriate here.

Recommendation: The Free File MOU should be radically restructured to focus on providing absolutely free federal e-filing services to the program’s target taxpayers. It should also require the IRS to verify — before, during, and after each tax season — that FFA companies strictly uphold the terms and conditions of the restructured program. It should further require FFA companies to disclose all up-selling activities and revenues.

Equally disconcerting, the terms of the MOU make it hard for anyone — including Congress — to ascertain whether FFA companies are upholding or violating the terms of the MOU. From the very beginning of the Free File program to its current incarnation, the MOU has obligated the IRS to frustrate Congress, federal inspectors general, the national taxpayer advocate, governmental agencies and entities, and private citizens wishing to obtain information about whether individual FFA companies are complying with the MOU’s terms and conditions. Specifically, the IRS must “promptly notify the Executive Director [of the FFA] in writing if a governmental agency or entity, including but not limited to the Congress, any Inspector General, or Taxpayer Advocate, or a private party is requesting aggregate data concerning individual Members.”51 Moreover, upon receiving the IRS’s notification, the executive director “may immediately advise Members that they can cease providing the indicator”52 to the IRS, a tool that compiles data on each FFA company’s Free File website regarding user traffic.

The IRS has further pledged to alert its Freedom of Information Act office to be overly protective of requests for information regarding FFA companies. As the MOU explains, “The IRS will ensure its Freedom of Information Act office is aware of [FFA] concerns about disclosure of company specific data, and actively afford notice and opportunity to intervene by [FFA] and [the] impacted company as is required by statute and regulation.”53 That’s right: FFA companies get special treatment from the IRS FOIA office, making it that much more difficult for anyone — including members of Congress, government agencies, and private citizens — to hold FFA companies accountable to the negotiated terms and conditions of the program.

Recommendation: The Free File MOU should not contain any provision that shields FFA companies from being held accountable by taxpayers, the IRS, Congress, or government agencies and entities for noncompliance with the terms and conditions of the MOU. Any such provisions contained in the current MOU should be excised.

B. The FFA Violates Taxpayer Privacy Laws

As mentioned above, section 7216 requires tax return preparers to solicit and receive “knowing and voluntary”54 taxpayer consent before, and in each instance,55 a preparer discloses or uses a taxpayer’s tax return information for any reason other than the preparation of the tax return on which the information appears. Violations of section 7216, a criminal provision, are punishable by up to $1,000 and a year in prison. The code also provides a related civil penalty for unauthorized disclosures or uses of a taxpayer’s information furnished in connection with preparation of a federal tax return.56 Violations of section 6713 are punishable by a penalty of up to $250 per disclosure or use, not to exceed $10,000 in any year.57 Also, as noted, the IRS does not verify — and the FFA does not disclose — whether FFA companies comply with the requirements of section 7216 before using taxpayer information provided by Free File users to market paid services to those users, either in the same year the FFA company acquired the user’s taxpayer information or in future years.

To the extent FFA companies are not receiving “knowing and voluntary” taxpayer consent before marketing their paid services related to the federal income tax,58 they are in violation of sections 7216 and 6713. They are also violating analogous state privacy laws regarding taxpayer information.59

Further, if the procedures that FFA companies use to receive “knowing and voluntary” taxpayer consent under sections 7216 and 6713 are invalid, so too are the consents. Intuit’s coercive procedures and the resulting misinformed and involuntary consents exemplify this problem.

Free File users who choose Intuit’s “TurboTax All Free” from the IRS Free File website land on Intuit’s “TurboTax Freedom Edition” website. After answering as few as one question regarding adjusted gross income, the user is taken to a page that asks the user to provide an email address, phone number, user ID, and password. Immediately below those prompts, the user finds a large and colorful “Create Account” button. Time to file your taxes!

Not so fast. Under the conspicuous button, in considerably smaller light-grey lettering, Intuit whispers to the Free File user: “By clicking Create Account, you agree to the Turbo Terms of Use, TurboTax Terms of Use and have read and acknowledged our Privacy Statement.” If the user recognizes the existence of that sentence, she might notice that the three documents (Turbo terms of use, TurboTax terms of use, and privacy statement) to which she is about to provide her purported knowing and voluntary consent are linked to underlying documents, buried in which lurk an array of blanket clauses limiting and denying the taxpayer’s rights to her privacy and return information.

For instance, Intuit’s Turbo terms of use state that the user agrees “that Intuit may use your information . . . to provide you with the Services or to improve the Services” in various ways, such as to “use and disclose your information so you can see offers for other products and services, including from third-parties (both current and future), that may be relevant or of interest to you,” as well as to “see general-interest offers for products or services.” Also, the user consents to services that “include a feature that automatically shares with current and future third-party partners your personal information — in a way that cannot be used to identify you — so that you can see relevant or personalized offers.”60

For its part, Intuit’s TurboTax terms of use inform the user that she “may be offered other services, products, or promotions,” and, further, that the user grants Intuit “permission to use information about your business and experience to help us provide the Intuit Services (including other products and services you might be interested in), to develop new products and services, and to enhance the Services.”61

Finally, Intuit’s Privacy Statement purports to limit and deny Free File users’ rights to their privacy and tax return information in other ways. Intuit “may use your information to communicate with you about our Services and to give you offers for third party products and services that we think may be of use to you”; share information with Intuit entities “in order for us to be able to offer our products and services to you”; and “share information about your creditworthiness, your transactions, and experience.”62

To use Intuit’s Free File software — the TurboTax Freedom Edition — the Free File taxpayer in our example above must consent to those disclosures and uses of the taxpayer’s tax return information. If the taxpayer does not click “Create Account,” the taxpayer cannot file her taxes with Intuit’s Free File services.

For many reasons, Intuit’s procedures for obtaining consent to disclose or use a Free File taxpayer’s tax return information come nowhere near meeting the consent requirements under sections 7216 and 6713.

First, Intuit has conditioned receipt of its services on Free File users providing open-ended and limitless consent to disclosure and use of their return information. The regulations promulgated under section 7216 state clearly, however, that “conditioning the provision of any services on the taxpayer’s furnishing consent will make the consent involuntary, and the consent will not satisfy the requirements of this section.”63

Second, the circumstances under which Intuit intends to use taxpayer return information are overly broad and ambiguous. Intuit’s sweeping consent waiver violates the section 7216 regulations, which require preparers to identify with specificity a taxpayer’s tax return information that they intend to disclose or use.64 The regulations further require preparers — and Intuit further neglects — to specify the purposes of the disclosures and uses of the taxpayer’s return information.65 Additional IRS guidance requires that if the taxpayer does not specify the duration of the taxpayer’s consent, the consent is valid for only one year from the date the taxpayer signed the consent.66 As noted, Intuit considers the consents as potentially perpetual.

Third, Intuit’s sweeping and open-ended consents to disclosure and use of taxpayer return information do not comport with IRS guidance and regulations requiring specific consents regarding specific and separate disclosures and uses of a taxpayer’s return information.

Rev. Proc. 2013-14 specifies the format and content of taxpayer consents to disclose tax return information as well as consents to use tax return information. Among other requirements, Rev. Proc. 2013-14 mandates that for consent to be valid, a taxpayer must consent separately in written documents to each separate disclosure and to each separate use of tax return information. Moreover, each of those separate consents must be reflected on separate documents. The regulations under section 7216 contain a special rule for multiple disclosures or uses within a single consent form. Even then, a single written document cannot authorize both disclosures and uses: One document must authorize disclosures and a separate document must authorize uses. Meanwhile, consents authorizing multiple disclosures or multiple uses “must specifically and separately identify each disclosure or use.”67

Intuit’s policies and procedures for soliciting taxpayer consent to disclosure and use of tax return information violate those requirements as well.

Consent solicited and provided in electronic form (which reflects the solicitation and provision of consent under Free File) is subject to additional requirements. Consent regarding disclosure or use of tax return information must not be accompanied on a taxpayer’s computer screen by unrelated information, except for computer navigation tools. The text of the consent, moreover, must be the same size or larger than the standard text used by the website or software regarding directions, communications, or instructions. And there “must be sufficient contrast between the text and background colors” on the computer screen.68

Also, taxpayers must be able to sign and date the consent with an electronic signature. For electronic consent to be valid, IRS guidance requires that it be “furnished in a manner that ensures affirmative, knowing consent of the taxpayer to each disclosure or use.” Requesting a taxpayer simply to click a button does not constitute valid consent. Rather, preparers must obtain electronic signatures consenting to disclosure and use of tax return information in one of three ways: (1) assigning a personal identification number to the taxpayer (at least five characters long), and requiring the taxpayer to manually type in the PIN; (2) requiring the taxpayer to manually type in the taxpayer’s name before hitting “enter”; and (3) using “any other manner in which the taxpayer affirmatively enters 5 or more characters unique to the taxpayer that the tax return preparer uses to verify the taxpayer’s identity.”69

Once more, Intuit’s policies and procedures for soliciting taxpayer consent to disclosure and use of tax return information violate these requirements.

Finally, the IRS requires mandatory statements to be included in every consent to disclose or use Form 1040 series tax return information. Separate and slightly different mandatory statements are required of consents to disclose such information as well as consents to use such information. Moreover, all consents must include another mandatory statement informing the taxpayer how to report unauthorized disclosures or uses of their tax return information to the Treasury Inspector General for Tax Administration.70

You guessed it. Intuit’s policies and procedures for soliciting taxpayer consent to disclosure and use of tax return information violate these requirements. And to the extent Intuit — and other FFA companies — are soliciting and receiving invalid consents to disclose and use tax return information, they may be violating federal and state laws each time a Free File user clicks “Create Account.”

Recommendation: The IRS should immediately and vigorously investigate to what extent FFA companies are violating federal taxpayer privacy laws, particularly those reflected in sections 7216 and 6713 (and the regulations promulgated thereunder) as well as Rev. Proc. 2013-14. State governments should conduct similar investigations to the extent their privacy laws regarding taxpayer information are analogous to federal law. And Congress should require FFA companies to disclose to whom the companies sell Free File users’ tax return information.

C. The FFA Strips Taxpayers of Legal Rights

FFA companies deny Free File users legal remedies in the same deceptive way they obtain invalid consent waivers.

Recall that taxpayers using Intuit’s TurboTax Freedom Edition bind themselves to the Turbo terms of use and Turbo Tax terms of use simply by creating an account, a perfunctory process that involves providing an email address, phone number, user ID, password, and clicking “Create Account.” Recall, too, that the nearly imperceptible sentence informing taxpayers that they will be bound by the terms of these documents by clicking “Create Account” appears after the much larger “Create Account” button and in a light-grey font that is drastically smaller than other writing on the page. Intuit’s legerdemain might be humorous if it did not result in countless taxpayers unknowingly agreeing to be bound to Intuit’s terms of use and service (and its privacy statement).

One of the terms to which Intuit’s sleight of hand binds taxpayers pertains to disputes between Intuit and Free File users. In short, Intuit’s two terms of service agreements that Free File users “accept” by clicking “Create Account” include mandatory arbitration clauses that result in the Free File user waiving the right to file a lawsuit, the right to a trial by jury, and the right “to participate in a class action or litigation on a class-wide basis.”71 Very explicitly, these clauses result in low-income and middle-income taxpayers losing their day in court in the event a dispute arises between them and Intuit.

As insidiously, the traditional rationale for arbitration clauses is absent in the context of free tax return preparation and filing.

The conventional rationale emphasizes the benefits of a freely entered-into commercial transaction reflecting choice and purpose of the parties.72 But filing one’s taxes is not analogous to a freely entered-into commercial transaction. Taxpayers have no choice but to file annual tax returns. And Free File users, an unsophisticated taxpaying cohort, are in no position to negotiate terms of service with FFA companies. The compulsory nature of taxpaying coupled with no meaningful government alternative to e-filing federal returns compounds the coercive effects of arbitration agreements in the context of tax filing.

Those clauses also arguably encourage negligent and malicious behavior among FFA companies. Specifically, the companies know that the cost and inconvenience of arbitration will almost certainly discourage individual Free File users from going it alone in the event of a dispute.

Recommendation: The IRS should investigate to what extent FFA companies are currently using deceptive practices to bind Free File users to the companies’ terms of service and use. The IRS should further evaluate whether binding Free File users to mandatory arbitration clauses under any circumstances is appropriate in the tax context, particularly when those clauses result in taxpayers waiving their rights to file a lawsuit, seek a trial by jury, and aggregate claims in a class action.

D. The FFA Exposes Taxpayers to Cybercrime

A 2016 study revealed that nearly half of FFA companies failed to adequately protect taxpayer information from cybercriminals.73 The study, conducted by the nonprofit organization Online Trust Alliance (OTA), found that six of 13 FFA companies “failed due to poor site security and not taking steps to help protect consumers from fraudulent and malicious email.”74 As a result, the OTA warned that “taxpayers need to think before filing” with Free File.75

It bears emphasis that the IRS and FFA had nothing to do with the study’s findings. Rather, it took a third-party watchdog and not the parties running the Free File program to detect, disclose, and remedy the program’s significant security lapses.

Those privacy and security breakdowns are distressing enough, but the Free File MOU also requires that information about such breaches be kept secret. Before the annual filing season, FFA companies undergo “penetration and vulnerability assessments” conducted by private sector vendors agreed upon by the IRS and FFA.76 In the event a company’s Free File site is found to suffer from security or privacy vulnerabilities, the company can be delisted (that is, removed from the IRS Free File website) until the company remedies the vulnerabilities. Information regarding the FFA company’s security exposure is shared only with the executive director of the FFA, the IRS, and the affected company.77 Free File users and other taxpayers never learn of the security lapses, nor does Congress or the Taxpayer Advocate Service or TIGTA.

Recommendation: The IRS and FFA should expand its penetration and vulnerability assessments to include active testing of FFA companies’ Free File websites during the filing season. The results of these penetration and vulnerability assessments should be shared with Congress, TAS, TIGTA, and, most importantly, the taxpaying public that entrusts its tax return information to FFA companies.

III. The FFA Harms the IRS

The behavior and actions of FFA companies described in this report reflect negatively on the IRS. It is after all the “IRS Free File” program.78 Every year, moreover, the IRS touts the benefits of using the program,79 and hosts the official Free File website.80 Thus, when taxpayers think of Free File, they naturally think of the IRS.

Moreover, taxpayers’ association of Free File with the IRS extends to taxpayers’ experience with the program. When FFA companies engage in predatory up-selling of paid products, or violate taxpayer privacy laws, or strip taxpayers of their right to meaningful remedies in the event of a dispute with FFA companies, or negligently fail to protect taxpayer information from cybercriminals, taxpayers are more likely to associate that malfeasance and unlawful conduct with the IRS than with the companies that actually engage in the misconduct.

In the eyes of taxpayers, the IRS is an accomplice to the misconduct of FFA companies. That conclusion is not without merit. The IRS can be said to possess actual knowledge of FFA companies violating the Free File MOU from the extensive news coverage and investigative reporting on the subject.81

When taxpayers visit IRS.gov to initiate the tax return filing process through Free File, they bring the reasonable expectation that they will be treated fairly. They also reasonably believe that Free File is in fact free. They further believe that their private tax return information will be protected to the full extent of the law, and not used for commercial purposes. They believe still further that using Free File will not deny them the right to file a lawsuit, to seek a trial by jury, or to participate in a class action. And they certainly believe that the filing software offered by FFA companies is not unduly vulnerable to security and privacy breaches.

Recommendation: It is incumbent on the IRS to ensure that FFA companies treat taxpayers fairly. That obligation can be accomplished only by holding FFA companies to the negotiated terms of the Free File program. It is also incumbent on the IRS to share with taxpayers and other interested parties information about FFA companies whose violations of the negotiated Free File MOU harm taxpayers and tax administration. Finally, to the extent the IRS believes that it does not currently have the authority to investigate and enforce the terms of the MOU, the IRS should seek that authority in the next MOU or, if relevant, in a codified version of the Free File program.

IV. The FFA Blocks Truly Free E-Filing

The Free File MOU obligates FFA companies to provide free tax preparation and e-filing services to “economically disadvantaged and underserved populations” and to focus on “covering the taxpayers least able to afford e-filing their returns on their own.”82 In exchange for FFA companies providing free services to the target population, the Free File MOU requires the IRS to refrain from “enter[ing] the tax preparation software and e-filing services marketplace.”83 In this way, the Free File program shields the tax software industry from competition from the IRS. The current congressional effort to codify the Free File program would extend that prohibition permanently.84

There is nothing inherently objectionable about the IRS agreeing to (or Congress mandating that the IRS) leave certain tax administration tasks to the private sector. However, if the private sector fails to carry out those tasks satisfactorily or harms taxpayers in the process of carrying out those tasks, continuing to allocate those tasks to the private sector is misguided. And if the IRS could in fact do a better job of carrying out those tasks, taxpayers and tax administration would be better served if the IRS performed the functions itself.

As demonstrated by this report, FFA companies have failed to uphold their obligations under the Free File program. Rather than faithfully serving the program’s target taxpayers, FFA companies have exploited them for commercial gain. They have unlawfully disclosed and used Free File users’ tax return information. They have wrongly stripped Free File users of legal remedies in the event disputes arise with FFA companies. And they have negligently exposed them and their tax return information to cybercriminals.

The current Free File program disserves and harms taxpayers. FFA companies have defied the objectives of the program as originally conceived and as reflected in the Free File MOUs. These companies have demonstrated an inability to satisfactorily perform the tax administration task of facilitating and easing the tax filing process.

Recommendation: Unless Congress restructures the existing Free File program along the lines recommended in this report and authorizes the IRS to provide meaningful oversight of the program and FFA companies, the IRS should offer its own free e-filing services to taxpayers by leveraging the IRS’s increasingly robust online taxpayer accounts.

If the IRS eliminates the Free File program,85 it should be prepared to provide the tax administration function that FFA companies have failed to deliver. The capability of the IRS to provide that service is not far-fetched, particularly given the significant modernizations in tax filing and e-services already achieved under the IRS future state initiative.86 Moreover, the IRS possesses a natural competitive advantage and core competency in tax filing that enables it to bring significant efficiencies to the filing process and to ease the annual filing burden on taxpayers.

Tax filing represents one of the few places where government can overcome the so-called Baumol Effect.87 Named after Princeton economist William Baumol, this phenomenon explains the difficulty in increasing output in non-capital-intensive industries despite ineluctably rising unit costs. Baumol first applied the theory to the performing arts, where its effect is readily discernible. For example, it takes four highly skilled musicians in 2018 the same amount of time to perform live a Beethoven string quartet as it did in 1800, even though other costs of production have gone up in the meantime.

Government, another labor-intensive industry, suffers from a similar “productivity lag,” such that public goods (for example, education, law enforcement, healthcare) typically get more expensive relative to private goods but fail to achieve commensurate productivity gains. The result is that taxpayers pay more in taxes but receive less in return.

Not in the context of tax filing, however, in which the government is uniquely positioned to reap productivity gains from increased infrastructure investment. The equally unique result is a higher-quality product for taxpayers at lower cost. Permitting the IRS to provide free e-filing — ideally through online taxpayer accounts — would deliver benefits simply unattainable through private sector alternatives.

For the last several years, the IRS has been developing secure, online taxpayer accounts (and tax professional accounts, too) as part of its future state initiative.88 Launched in late 2016, the new taxpayer accounts allow users to perform a variety of functions, including viewing unpaid tax balances; making and reviewing prior tax payments; entering into and managing installment agreements; receiving payment reminders regarding installment agreements; receiving notifications of payments received; and accessing tax records from prior years. The IRS continues to increase the functionality of these accounts with the goal of having them serve as a clearinghouse of tax return information as well as a way for taxpayers to communicate more effectively and efficiently with the IRS.

The new online taxpayer accounts could serve as a portal for filing one’s taxes. At this point, there is no indication that the IRS has plans to use taxpayer accounts for this purpose. But once the accounts achieve more robust functionality — permitting, for instance, the uploading and downloading of documents and tax materials, importing reported income from Forms 1099, and containing real-time tax information from government agencies and third parties — giving taxpayers the option of downloading all that information onto a tax return and hitting “send” seems like a no-brainer.

Conceivably, the IRS could partner with the tax software industry to facilitate the process of getting a taxpayer’s account information onto a tax return. Having said that, if the Free File experience provides any indication of how the tax software industry might respond to such a partnership, collaborating with industry would result in taxpayers paying unnecessary fees for the service.

Alternatively, the IRS could develop its own filing software, and thus fulfill Free File’s broken promise of truly free tax filing. Such an alternative would mean no up-selling of “value added” services to taxpayers; no violations of taxpayer privacy laws (assuming the IRS comports its behavior to section 6103 and protects taxpayers’ confidential return information89); no relinquished legal rights; and no negligent exposure to cybercriminals, identity theft, and pilfered tax return information.

This hypothetical tax-filing scenario won’t happen for some time, but it is more than a glimmer in the eye. And while the IRS is not yet positioned to provide taxpayer accounts through which taxpayers could satisfy the annual filing obligation, the agency should at least be studying the possibility.

Two caveats and one commendation are in order. First, the current MOU provides that should the IRS at any point “commit funding to offer Services for free to taxpayers the IRS shall notify [FFA] immediately,” notification of which permits the FFA to terminate the MOU.90 Thus, the IRS needs to have sufficient infrastructure to support free e-filing to taxpayers before it makes any affirmative decisions to accomplish what the current Free File program has failed to deliver.

Second, the House Appropriations Committee recently approved a bill that included language attempting to bar the IRS from piloting innovations to tax filing by way of pre-populated returns.91 The report accompanying the approved bill characterized these “pre-filled” or “simple” tax returns as a “bill presentment model,” and expressed the expectation of the committee that “the IRS will not begin work on a simple tax return pilot program or associated systems without first seeking specific authorization and appropriations from Congress.”92 Even if the bill passes the full House (and Senate93), it is debatable whether attempting to legislate through an appropriations bill could impede the IRS from undertaking such a pilot program or related programs,94 such as a free, government-run e-filing initiative. Moreover, it is unclear to what extent the committee’s language reflected disfavor of pre-populated returns specifically or government-run e-filing programs more generally.95

At the same time, members of the House have contemplated involving the IRS in future filing reforms, at least insofar as those efforts also involve the tax software industry. In a bill that formed the basis of the Free File provision in H.R. 5444, the previously introduced Free File Permanence Act of 2017 directed the IRS and tax software industry to “support and promote improvement within [Free File] by mutually testing, piloting, and offering innovative solutions to,” among other areas of tax filing, reducing taxpayer compliance burdens and maximizing the use of electronic technology.96 Those efforts could conceivably include a public-private collaboration to deliver free e-filing services to taxpayers that leverage online taxpayer accounts established by the IRS.

Nevertheless, and as outlined in this report, unless Congress radically restructures the Free File program to protect taxpayers from the misconduct of FFA companies and to authorize the IRS to enforce those protections, the IRS should sever its relationship with the FFA and offer its own free e-filing services.

FOOTNOTES

1 See Taxpayer First Act, H.R. 5444, 115th Cong. (2017-2018), section 202. See also infra text accompanying note 84.

2 In 2012 the FFA changed its legal name to Free File Inc. when the IRS granted the renamed organization tax-exempt status. See 2014-2015 Free On-Line Electronic Tax Filing Agreement Amendment (Oct. 30, 2014). However, for public-facing purposes, the organization continues to go by Free File Alliance or FFA.

3 The Free File program is currently operating under its seventh MOU, effective until October 31, 2020. SeeSeventh Memorandum of Understanding on Service and Disputes Between the Internal Revenue Service and Free File Inc.” (Mar. 6, 2015) (2015 MOU).

4 Id. at art. 1.5, at 2.

5 Max A. Cherney, “100 Million Americans Can File Their Taxes for Free, Yet Only 3 Million People Do It,” MarketWatch (Apr. 17, 2017).

6 See IRS, “Free File Software Offers.”

7 Jacob Goldin, “Participation in the IRS Free File Program,” Tax Notes, Oct. 23, 2017, p. 543 (reporting that only 44 percent of Free File users who also qualify for Free File the following year (and in fact file a tax return) use the program again and discussing “the common practice of software companies marketing the non-Free File versions of their software to taxpayers who filed with them in the prior year through Free File”). See also Section II.A.

8 See Center for Responsive Politics, “Profile for 2018 Election Cycle,” OpenSecrets.org.

9 See Cherney, supra note 5.

11 Id. Congressional supporters of Free File also tout the program’s alleged savings to taxpayers. See, e.g., Free File Permanence Act of 2017, H.R. 3641, 115th Cong. (2017-2018), introduced by Peter J. Roskam, R-Ill., with 132 cosponsors (estimating that Free File has saved taxpayers $1.5 billion in return preparation fees).

12 Kate Ackley, “Tax Software Companies Push IRS Free-Filing Bill,” Roll Call (Apr. 11, 2016). Congressional supporters of Free File also refer to the program’s alleged savings to the IRS. See H.R. 3641, id. (estimating that Free File has saved the federal government “about $125,000,000 in processing costs”).

13 See, e.g., Tik Root, “Why Are Millions Paying Online Tax Preparation Fees When They Don’t Need To?” ProPublica, June 18, 2018; staff of Sen. Elizabeth Warren, “Tax Maze: How the Tax Prep Industry Blocks Government From Making Tax Day Easier” (Apr. 4, 2016); Samantha Sharf, “You Call That Free? What TurboTax and the Free File Alliance Cost One Millennial,” Forbes, Feb. 8, 2016; Jessica Huseman, “Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It.” ProPublica, Mar. 20, 2017; and Laura Sanders, “Why ‘Free File’ for Taxes Isn’t So Popular: Here’s How to Navigate the Maze of Offerings and Avoid Charges,” The Wall Street Journal, Jan. 30, 2014. See infra note 25 for more examples.

14 See Dylan Matthews, “Elizabeth Warren Has a Great Idea for Making Tax Day Less Painful,” Vox, Apr. 14, 2018; Janna Herron, “Here’s How Elizabeth Warren Wants to Save You Money on Tax Day,” Fiscal Times, Apr. 13, 2016; and Warren’s staff, supra note 13.

15 Huseman, supra note 13.

16 Detailed in Section II.A.

18 “Memorandum of Understanding on Service and Disputes Between the Internal Revenue Service and Free File Alliance LLC” (Dec. 20, 2005) (2005 MOU), art. II, at 4. See also 2015 MOU, art. II, at 5.

19 See IRS, “Use IRS Free File to File Taxes for Free,” IRS Tax Tip 2017-01 (updated Feb. 16, 2018).

20 See supra note 13.

21 2005 MOU, art. II, at 4.

22 Id.

23 See 2015 MOU, art. 2, at 5.

24 There have been five agreements since 2002, which largely complement and reinforce the MOUs.

25 See supra note 13. See also Matthews, “Why I’m Boycotting TurboTax This Year,” Vox, Apr. 14, 2018; Chris Morran, “Why Isn’t It Easier to File Your Tax Return for Free? Thank TurboTax, H&R Block,” Consumerist, Mar. 20, 2017; Farhad Manjoo, “Would You Let the IRS Prepare Your Taxes?” The New York Times, Apr. 15, 2015; Liz Day, “TurboTax Maker Linked to ‘Grassroots’ Campaign Against Free, Simple Tax Filing,” ProPublica, Apr. 14, 2014; Liz Day, “How the Maker of TurboTax Fought Free, Simple Tax Filing,” ProPublica, Mar. 26, 2013.

26 See supra note 13 and Section II.A.

27 See 2005 MOU, art. 4.2 to 4.2.8, at 6-7. See also Free Online Electronic Tax Filing Agreement (Oct. 30, 2005), II(A), at 2-3 (2005 agreement) (“recogniz[ing] that refund anticipation loans (RALs) may be offered by Alliance members,” and providing loan terms); and Treasury, IRS, “IRS’ Intent to Enter Into an Agreement With Free File Alliance LLC,” 67 F.R. 67247, 67248 (Nov. 4, 2002) (acceding to the use of RALs by FFA companies). Beginning in 2007, FFA companies were prohibited from selling RALs to Free File users. See “Second Memorandum of Understanding on Service Standards and Disputes between the Internal Revenue Service and Free File Alliance LLC” (Jan. 12, 2007) (2007 MOU).

28 2005 MOU, art. II, at 4. The prohibited “additional cost” associated with RALs was reflected in the fees and interest (typically exorbitant and even usury) charged by FFA companies to Free File users for obtaining the loans, which were typically repaid through the users’ expected federal tax refunds.

29 2005 MOU, art. 4.12.

30 The combination of section 7216 and Rev. Proc. 2013-14, 2013-3 IRB 283, requires explicit taxpayer consent before the taxpayer’s return information can be used for any reason other than the preparation of the taxpayer’s tax return, including for marketing purposes. Violations of section 7216 are punishable by fines up to $1,000 and imprisonment up to one year, as well as the costs of prosecution. See section 7216(a). The 2007 MOU removed the sentence expressly authorizing FFA companies to offer commercial products consistent with section 7216. Compare 2005 MOU, art. 4.12, with 2007 MOU, art. 4.12, at 9. But the current MOU still permits FFA companies to market commercial products to Free File users as long as the companies abide by section 7216. See 2015 MOU, art. 4.12 (“Members shall only use or disclose the tax return data Members collect in provision of Services to taxpayers in accordance with the provisions of Section 7216.”). Moreover, the IRS does not verify in any meaningful way whether FFA companies comply with this requirement (see infra text accompanying notes 43-52 and Section II.B).

31 See 2015 MOU, art. 4.22.

32 See Computer and Communications Industry Association, “IRS and State Free File Programs,” U.S. Conference of Mayors Summer Meeting (June 2017).

33 2015 MOU, art. 1.21, at 4.

34 Id. at art. 1.22, at 4-5. The non-Free File states prominently include California, which offers its taxpayers free and secure e-filing services through CalFile. California also offers taxpayers, tax professionals, and business representatives secure online taxpayer accounts through which users can access various functions and services.

35 While FFA companies must “guarantee the calculations performed by its federal free file offering,” the MOU expressly exempts state returns from this guarantee. 2015 MOU, art. 4.11.

36 See 2015 MOU, art. 4.22. At the same time, the MOU requires FFA companies to list “each State Free File Program that the Member participates in and a hyperlink that will allow taxpayers to access the Members’ Department of Revenue State Free File offering.” Id. at art. 4.22.1.

37 Id. at art. 4.23. See also 2005 MOU, art. 4.23 (reflecting the IRS agreeing to “not provide links to any state free file site” and that any such link on the IRS web page “to competing state tax software programs is grounds for immediate dissolution of the MOU”).

38 Id. at art. 4.33.6 (outlining “Permitted Notice of Other Services on Member Free File Landing Pages”).

39 See id. at art. 4.14 (requiring FFA companies to provide “a hyperlink for users to return to the IRS Free File Website at the time the taxpayer is informed they do not qualify for the Member’s free offer, and a second link back on the Member’s Free File Landing Page”).

40 Id. at art. 4.20.2. Article 4.14 requires FFA companies to provide links both to the IRS Free File website and the company’s Free File landing page, while article 4.20.2 (reflected in this note) only requires companies to link to their own Free File landing page.

41 Id. at art. 4.33.2.

42 For the requirement that FFA companies “disclose their state service offerings on each individual Member’s Free File Landing Page and make clear whether such returns are free or paid,” see 2015 MOU, art. 4.22.1. See also 2015 MOU, art. 4.33.1 (stating that taxpayers “who enter a Member’s Free File Landing Page must be able to see a clearly-stated offer for state tax return preparation and e-filing,” with the free paid state return offers being “clear and located on the top half of the landing page”).

43 See also Goldin, supra note 7, at 543-544.

44 2015 MOU, art. 4.33.4.

45 See supra note 13 and Section II.B for further discussion of section 7216.

46 See Rev. Proc. 2013-14 (modified by Rev. Proc. 2013-19, 2013-11 IRB 648) (regarding “disclosure or use permitted only with the taxpayer’s consent”).

47 Reg. section 301.7216-3(a).

48 2015 MOU, art. 4.12. (See Section II.B for a detailed discussion of the disclosure and use requirements under section 7216 and Rev. Proc. 2013-14.)

49 See, e.g., id. at art. 4.4, at 9 (requiring the low threshold that FFA companies’ Free File websites are “functionally adequate in permitting a taxpayer to complete a taxpayer’s return if the return is consistent with the Member’s free offer”).

50 Id. at art. 4.1 to art. 4.7.2, at 8-12.

51 Id. at art. 4.27.1.

52 Id. at art. 4.27.1(i).

53 Id. at art. 4.27.

54 Reg. section 301.7216-3(a).

55 See infra text accompanying notes 64-68.

56 See section 6713(a).

57 Id. Section 6713 adopts the exceptions contained in section 7216(b) regarding section 7216’s affirmative consent rule, including the one excepting “the use of information in the preparation of, or in connection with the preparation of, state or local tax returns.” Section 7216(b)(2).

58 See id. (describing how neither section 7216 nor section 6713 applies to state and local tax returns).

59 See, e.g., California Business and Professions Code, section 22252.1 (stating, with a handful of exceptions not applicable here, “No confidential information obtained by a tax preparer, in his or her professional capacity, concerning a client or a prospective client shall be disclosed by the tax preparer without the written permission of the client or prospective client”). See also California Business and Professions Code, section 17530.5(a)(1), which is expressly complemented by section 22252.1(c) (specifying the requirements of consent to disclosure or use of a taxpayer’s tax return information, including requiring “a separate document that states to whom the disclosure will be made and how the information will be used”).

60 Intuit “Turbo Terms of Use” (Sept. 27, 2017).

61 Intuit “Terms of Service for TurboTax Online Tax Preparation Services” (July 2016).

62 Intuit Privacy Statement (Sept. 14, 2016).

63 Reg. section 301.7216-3(a)(1). See also Rev. Proc. 2013-14, section 7.01(1) (providing example of invalid consent obtained “by making use of the [tax preparation] program (i.e., the provision of tax return preparation services) contingent on the taxpayer’s consent to P’s disclosure and use of the taxpayer’s tax return information for purposes other than tax preparation”). The Intuit Terms of Service for TurboTax Online Tax Prep Services (reflected as TurboTax Terms of Use on the “Create Your Account” page) is the same Intuit terms of service that fee-based TurboTax users receive. Moreover, the text of the document conditions use of Intuit’s service on the taxpayer, and states explicitly, “If you do not agree to this Agreement, then you may not use the Services.” Terms of Service, supra note 61. Thus, at least for the terms of the agreement regarding disclosure and use of a taxpayer’s tax return information, the agreement is also invalid for paid users of Intuit’s tax prep software.

64 Reg. section 301.7216-3(a)(3)(C).

65 Reg. section 301.7216-3(a)(3)(B).

66 See Rev. Proc. 2013-14 (“If you agree to the disclosure of your tax return information, your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year from the date of the signature.”).

67 Id.

68 Id.

69 Id.

70 Id.

71 See Terms of Service, supra note 61; and Terms of Use, supra note 60.

72 The rationale has also emphasized the benefits of judicial economy, reduced litigation, and forum selection.

73 See Laura Saunders, “Six of 13 IRS-Approved Tax Preparers Fail Cybersecurity Test,” The Wall Street Journal, Feb. 26, 2016.

74 Online Trust Alliance, “Online Trust Alliance Finds 46% of IRS Free E-File Tax Services Fail to Adequately Protect Consumers” (Feb. 26, 2016).

75 OTA, “2016 IRS Free E-File Audit & Honor Roll” (Feb. 24, 2016).

76 2015 MOU, art. 4.6.4.

77 Id. at art. 4.6.6.

78 See IRS Tax Tip 2017-01, supra note 19.

79 See id. (touting Free File and encouraging taxpayers to “join the millions of Americans who safely file their taxes and save money using IRS Free File”).

81 See supra text accompanying note 13 and Section II.A.

82 See 2015 MOU, art. 2, at 5, and 2005 MOU, art. II, at 4.

83 See supra note 82.

84 The Taxpayer First Act, supra note 1, which passed unanimously in the House in April, makes permanent the Free File status quo as reflected in the seven MOUs and five agreements dating back to 2002. Indeed, it states that Treasury “shall continue to operate the IRS Free File Program as established by the Internal Revenue Service and published in the Federal Register on November 4, 2002 (67 Fed. Reg. 67247), including any subsequent agreements and governing rules established pursuant thereto.” See also Joint Committee on Taxation, “Description of H.R. 5444, The ‘Taxpayer First Act,’” JCX-9-18 (Apr. 11, 2018). As of July 9, 2018, the House bill had been referred to the Senate Finance Committee for further consideration.

85 The current Free File MOU expressly permits the IRS to terminate the MOU without cause. See 2015 MOU, art. 10.2.

86 See infra text accompanying note 88.

87 See William J. Baumol and William G. Bowen, Performing Arts: The Economic Dilemma (1966) (reflecting the seminal articulation of this phenomenon, also known as Baumol’s Cost Disease).

88 For an introduction to the IRS future state initiative, including the development of online accounts for taxpayers and tax professionals, see IRS, “Future State Initiative” (overview); “IRS Future State” (overview); “Future State and IRS Activities” (specific projects within each business operating division); and “View Your Account Information” (online account).

89 Generally, section 6103 prohibits release of tax information by the IRS, but it also contains exceptions in order to facilitate tax compliance, tax administration, and interagency and intergovernmental information sharing. Those disclosures are routine and don’t require the same kind of stringent procedures imposed on tax return preparers as reflected in section 7216 and 6713. The IRS reports on these disclosures to the JCT in an “Annual Report to the Joint Committee on Taxation of Disclosures of Tax Information Under Internal Revenue Code section 6103.” In turn, the JCT makes the report public. See JCT, “Disclosure Report for Public Inspection Pursuant to Internal Revenue Code Section 6103(p)(3)(C) for Calendar Year 2017,” JCX-29-18 (Apr. 12, 2018). In 2017 the IRS made nearly 11 billion authorized disclosures of tax returns or tax information. See id. at 3.

90 2015 MOU, art. 10.3.

91 See House Appropriations Committee, “Financial Services and General Government Appropriations Act, 2019,” section 111, 115th Congress, 2d Sess. (June 13, 2018) (“Except to the extent provided in section 6014, 6020, or 6201(d) of the Internal Revenue Code of 1986, no funds in this or any other Act shall be available to the Secretary of the Treasury to provide to any person a proposed final return or statement for use by such person to satisfy a filing or reporting requirement under such Code.”).

92 See House Report of the Committee on Appropriations, “Financial Services and General Government Appropriations Bill, 2019,” 115th Congress, 2d Sess., Comm. Rept. No. 115-792, at 16-17 (June 28, 2018).

93 The Senate Appropriations Committee recently approved a bill that reflected the language of the House provision denying the IRS funds for prepopulated returns. See S. 3107, Financial Services and General Government Appropriations Act, 2019, section 112, 115th Congress, 2d Session (June 21, 2018). See also Senate Report of the Committee on Appropriations, “Financial Services and General Government Appropriations Bill, 2019,” Comm. Rep. 115-281 (June 21, 2018) (stating that the Senate bill “continues a provision which prohibits funds for pre-populated returns”).

94 See, e.g., Building & Construction Trades Department, AFL-CIO v. Martin, 961 F.2d 269 (D.C. Cir. 1992), cert. denied, 506 U.S. 915 (1992) (“While appropriations are ‘Acts of Congress’ which can substantively change existing law, there is a very strong presumption that they do not . . . and that when they do, the change is only intended for one fiscal year.”); GAO, “Principles of Federal Appropriations Law, Chapter 2: The Legal Framework, 2016 Revision,” at 57-60. See also Jessica Tollestrup, “Appropriations Report Language: Overview of Development, Components, and Issues for Congress,” Congressional Research Service (July 28, 2015) (indicating that language from appropriations committee reports is not binding).

95 The American Bar Association Section of Taxation, in a comment letter regarding the Free File provision in the Taxpayer First Act, endorsed the idea of prepopulated returns. The ABA stated that “Congress should authorize the Service to pre-populate draft electronic returns” as a complement to the Free File program. The ABA also referenced California’s ReadyReturn program, which it observed, “is now incorporated into CalFile, a service that offers free, direct e-filing of returns.” ABA tax section letter to Sens. Orrin G. Hatch and Ron Wyden, “Comments Regarding H.R. 5444, ‘Taxpayer First Act’” (June 6, 2018).

96 See H.R. 3641, supra note 11, at sections 4(b)(2) and (7). The Free File provision in H.R. 5444 includes a section on “Innovations” to tax filing that also contemplates the IRS working directly with the private sector “to identify and implement, consistent with applicable law, innovative new program features to improve and simplify the taxpayer’s experience with completing and filing individual income tax returns through voluntary compliance.” H.R. 5444, supra note 1, at section 202(b).

END FOOTNOTES

Copy RID