Policy

Tax Software Companies Push IRS Free-Filing Bill

Consumer advocates have privacy concerns

Rep. Ron Kind wants to make free online tax preparation permanent for lower-income filers. (Photo By Bill Clark/CQ Roll Call)

Just in time for Tax Day, House lawmakers this week will unveil a plan that would make permanent an Internal Revenue Service program that provides free, online tax preparation for low- and middle-income Americans.  

It's the kind of effort that consumer advocates would cheer, in theory. But privacy and other concerns surrounding the 13-year-old Free File program have winnowed the list of supporters and ceded the lobbying push to companies such as TurboTax maker Intuit and H&R Block that provide the software and electronic filing services at no cost.  

The plan by Reps. Peter Roskam , R-Ill., and Ron Kind , D-Wis., calls for new measures to protect tax-filers’ data security, according to draft text provided to CQ. It aims to enshrine a program that supporters portray as a model public-private partnership.  

“By working together with the private sector to offer online tax preparation, the federal government has saved hundreds of millions of dollars since 2003,” said Kind in an emailed statement. “Making this program permanent helps hardworking families and saves taxpayer money.”  

The Free File program gives filers with taxable incomes of $62,000 or less free online tax preparation through the agency’s website, along with free online filing of federal tax returns. Congress first approved the program in 2002 to prod more Americans to file online, instead of rely on paper forms. The current agreement between the companies and the IRS runs to 2020.  

Taxpayers with incomes above the threshold can get access to free online forms — without the prompts, commonly asked questions and other support and provided by the companies — and can file their taxes online at no cost.  

Some critics say the system puts a barrier between taxpayers and the government.  

“As a consumer advocate, the fact that you cannot electronically file your return online directly through the IRS, you have to go through a third party, is absolutely bizarre,” said Chi Chi Wu, a staff attorney at National Consumer Law Center. “It’s completely political. It’s about TurboTax and these other tax preparers that don’t want to lose this market.”  

Involving the outside company in filing tax returns also raises potential privacy and data security issues, Wu said. “You have to make your personal information available to the intermediary,” she said.  

Another gripe of consumer advocates, including the IRS’ Taxpayer Advocate Service, is that some taxpayers with incomes below $62,000 can't chose which software to use. To qualify for TurboTax for free, for example, most taxpayers need a taxable income of less than $31,000.  

Still, supporters say it’s hard to complain about a service that's free. The program “actually saves the IRS money in processing costs,” said Emily Hytha, communications director for Rep. K. Michael Conaway , the Texas Republican who co-chairs the Free File Congressional Caucus.

Political Strength

The legislation from Roskam and Kind is similar to other measures the pair has unsuccessfully tried to enact in previous Congresses. Though the outlook for making the program permanent this year is in doubt, the companies say the bipartisan support, which drew about 150 bill co-sponsors in the past, give the free-filing effort political strength from year-to-year.  

“This kind of public policy unanimity is a testament to the public good done by the Free File Program since it began in 2003,” said an Intuit company spokesperson in a written statement. “Those bills have given eligible taxpayers peace of mind that Congress wants the program to be available to them in the long term.”  

Kind and Roskam were among the top federal recipients of Intuit’s political money in the 2014 election cycle, according to the nonpartisan Center for Responsive Politics. Intuit employees contributed more than $10,000 to Kind and $17,000 to Roskam in the 2014 election cycle.  

Intuit in recent years has spent more than $2 million on federal lobbying annually, including $2.3 million in 2015, when it turned to 10 K Street firms, including a team at Greenberg Traurig with former Sen. Tim Hutchinson, R-Ark; Navigators Global; and the OB-C, among others.  

Intuit reported “Support IRS Free File Program” on its most recent lobbying disclosure with Congress, along with other tax, financial services and business issues.  

H&R Block spends slightly less on K Street, reporting about $2.1 million annually over the past three years. It relied on a handful of outside lobby shops in 2015, including Capitol Tax Partners and Forbes-Tate.  

The 13 companies that participate in the program are part of the Free File Alliance, a Virginia nonprofit that works with the IRS to administer Free File. In addition to Intuit and H&R Block, the members include Jackson Hewitt, OnLine Taxes, the 1040Now Corp. and ezTaxReturn.com.  

The Free File Alliance is not registered to lobby the federal government. The alliance’s executive director is Tim Hugo, who runs the Tim Hugo Group, a lobbying and consulting firm. Hugo, a Republican, also is a member of the Virginia House of Delegates.  

After this tax year, IRS Free File will have provided about 48 million free federal returns, Hugo said.  

“Saying a return is worth $30, that’s about $1.4 billion in free products over the life of the program,” he said. This year, he estimated, that about 3 million taxpayers will use Free File.

Saving Money

When the program began in 2003, 40 percent of taxpayers filed online, while this year it is up to 85 percent, Hugo said. Online filings cost the IRS about 17 cents to process, while paper forms cost the IRS $3.66, he added. “That not only saves taxpayer money because we provide a free service, but it also saves the government money,” he said.  

An IRS spokesman declined to comment.  

If the IRS were to create its own tax-preparation system, Hugo said, that would amount to “the fox guarding the hen house” and could result in higher taxes ultimately.  

The companies that participate in the program have seen an increase in demand for commercial products, but say they’ve also encountered more competition.  

Intuit, in a filing with the Securities and Exchange Commission, for example, reported that “the Free File Alliance has kept the federal government from being a direct competitor to Intuit’s tax offerings.” But it also said the program has fostered additional online competition and may “cause us to lose significant revenue opportunities.”  

If the IRS were to take on administering Free File, the federal government would have to hire additional staff and buy more computer servers, Hugo said.  

“It would be a huge cost to the government,” he said. “We do it now for free.”  

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