Lawmakers are planning to drop a proposal to prohibit the Internal Revenue Service from offering a free online tax-filing option, Politico and Pro Publica report. The provision was included in the Taxpayer First Act, which passed the House in April but has not passed the Senate. It was backed by the makers of private tax preparation software, including Intuit (makers of TurboTax) and H&R Block.
The IRS doesn’t currently offer a free online tax filing option. Instead, since 2003 the agency has had a standing deal with companies like Intuit and H&R Block to offer free versions of their products to customers with modest incomes and simple tax situations. In exchange, the IRS promised not to offer an online filing program of its own. Around 70 percent of all tax filers are eligible for the companies’ free versions.
This legislative proposal would have made this arrangement permanent. Companies would have continued to offer free versions of their software to most taxpayers, while the IRS would officially be prohibited from creating an online tax filing site of its own.
The current arrangement has obvious advantages. Consumers can choose from several different tax-filing programs, all produced at no expense to taxpayers. The problem, critics say, is that hardly anyone is actually using the free private options. Only about 3% of eligible returns have been filed using the services over the last 16 years, according to Pro Publica. That’s partly because many eligible taxpayers don’t know about the program.
The companies have little incentive to publicize the option, and they take every opportunity to upsell customers on paid services that they may not actually need. Recently, Pro Publica even caught Intuit using a robots.txt file to prevent Google from indexing the free version of Turbotax, preventing many eligible users from finding it. (Intuit changed this after the Pro Publica story ran.)
The decision to shelve the provision banning the IRS from making a tax-filing site won’t lead to any immediate changes, as the existing free-file deal between the IRS and private companies will continue until at least 2021. But it means that the IRS could decide to create a “public option” for online tax filing after that point. The threat of doing so will give the IRS more leverage if it chooses to negotiate an extension of the deal beyond 2021—potentially allowing the agency to secure more consumer-friendly terms in the future.
