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Free File gets generally good marks in IRS-commissioned outside analysis

IRS Free File accessed by taxpayer

Millions of taxpayers will be working on their 2018 tax returns this weekend, frantically filling out forms to meet the Oct. 15 filing extension deadline.

Some of them will likely take advantage of Free File, the Internal Revenue Service partnership with the tax software industry that allows eligible filers — this year that's those whose adjusted gross income is $66,000 or less — to prepare and electronically file their returns at no cost.

Free File came under fire earlier this year when Pro Publica reported that some of the tax prep major players that participate it the program also used workarounds on their websites to funnel taxpayers to paid filing options instead of the IRS-touted free one.

In the wake of the findings, Congress dropped a provision from the Taxpayer First Act, which became law on July 1, that would have codified the Free File program. Opponents of the formalized Free File legislative language argued that it would have prohibited the IRS from creating its own in-house no-fee filing system and that could actually cost taxpayers.

The IRS also promised Capitol Hill that it would review and strengthen its working arrangement with the Free File Alliance to ensure that qualifying filers get the information they need on Free File.

As part of that effort, the IRS commissioned an outside analysis of Free File.

Good, but not great news: That study from MITRE Corp. essentially was good news for the IRS and supporters of Free File.

The company, which manages federally funded research and development centers for several U.S. government agencies, found that Free File as is does what it was designed to do and offers taxpayers many benefits.

But MITRE analysts also noted some troubling areas.

Notably, MITRE's analysis confirmed the Pro Publica's investigation. The outside study found that five of the 12 private-sector tax prep firms participating in Free File tried to hide the program during online searches of their commercial websites.

MITRE also noted that while an estimated 104 million or so filers were eligible to use Free File during the 2018 filing season, only about 70 million of them took advantage of the program.

That's actually a bit better than Free File usually sees. While the program was designed to be available to around 70 percent of the tax filing population, in many years it attracts only 3 percent of the eligible taxpayer population. 

Free File eligible taxpayer filing choices breakdown TY2017_MITRE report October 2019
MITRE's breakdown of filing choices of 103.8 million taxpayers eligible for Free File in tax year 2017.

Instead, they used paid private preparers, opted for filing methods that offered URL refund anticipation loans or checks, used paid-for tax prep software on their own or went to Volunteer Income Tax Assistance (VITA) sites for in-person free tax prep and e-filing.

Looking on the bright side: Despite those concerns, the IRS and Free File leadership are looking at the report's positives.

Recent attention and criticisms notwithstanding, the Free File program has operated for 17 years under the governance of an MOU [memorandum of understanding] — an agreement that all members must abide by or be removed from the program," notes the MITRE report. "Overall, based on the various assessment workstreams, all Free File members were compliant with the MOU, in particular with Article 4, Standards of Practice."

Article 4 outlines level of service, software and website functionality, security and disclosure of forms and schedules. It also covers taxpayer service options and other requirements such as innovation.

MITRE also conducted in-person interviews with some Free File users. Not surprisingly, taxpayer ratings of ease and satisfaction with Free File varied by task, vendor and the particular taxpayer needs.

Overall, MITRE concluded that the Free File program is an effective private-public partnership. It provides value to taxpayers as a way to prepare and electronically file their tax returns for free, value to the IRS as a government service and value to the tax preparation software industry by preserving its role of preparing and filing taxes.

Plus, the Free File arrangement is, for now, economical. It provides taxpayers a no-cost service that would be prohibitive if created by and solely offered by the IRS.

"The cost of the IRS providing a free offering itself would be in the hundreds of millions of dollars," according to the report. "By industry providing free access, the IRS is able to minimize costs with three FTE [full-time employee] program office staff."

Tim Hugo, executive director of the Free File Initiative (formerly known as the Free File Alliance), called MITRE's assessment "a diligent, highly detailed endeavor that shows that the partnership is working well."

"The MITRE report is a vote of confidence in a highly successful program," added Hugo. "We are continually working with the IRS to improve the program."

Senate tax writer not convinced: A key Congressional tax panel member, however, is more skeptical.

"The report does not adequately address the problems in the Free File program," said Sen. Ron Wyden (D-Oregon), ranking member on the Senate Finance Committee.

"This was not the rigorous review needed to ensure all eligible taxpayers are able to easily access and use Free File," added Wyden.

The senator also is concerned that MITRE's analysis "does not recommend robust action to prevent companies from engaging in deceptive advertising practices, even though it acknowledges taxpayers were steered to paid sites."

"While I believe we should move toward a public program that allows taxpayers to file directly with the IRS, in the interim, the Free File program simply must better serve taxpayers," added Wyden.

Suggested Free File improvements: While MITRE's analysis basically signed off on the current Free File structure, the company did have some suggestions on how to improve the program.

They include:

  • Define new Free File objectives and create metrics to determine the program's performance against those objectives. This is recommended, MITRE noted, because the program's objectives have not been updated since the program’s inception in 2002.
  • Better understand and define Free File users by conducting data analysis of the demographics of the population who are prime candidates for Free File but not using it. MITRE also recommends the IRS conduct a customer survey of Free File users specific to the Free File experience, not the software they used on the site to file their returns.
  • Standardize how Free File is referenced on IRS platforms and communications.
  • Take steps to increase ease of understanding eligibility requirements. Ensure that taxpayers understand that determining eligibility for a software offer is ultimately their responsibility.
  • Determine how Free File is/should be accessed. IRS communications currently state that taxpayers can only get to Free File through MITRE recommends that if the IRS wants taxpayers to go to Free File sites only through the federal agency's website, it should craft a memorandum of understanding with Free File Initiative partners that specifically reflects that.

The MITRE report is a lot to take in. But regardless of your take on its findings and particular bias (or not), it does raise lots of issues that do need to be addressed if Free File is to continue and, as the IRS and Congress want, grow.

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