Don't Mess With Taxes

It's likely to be a long road getting to free filing offered directly by the IRS. (Photo by Christopher Paquette via Flickr CC)

With the bulk of the annual tax-filing season over, it's time for the regular autopsies of how things went.

Much attention is rightfully focused on the Internal Revenue Service's continuing problems in digging out of the 2020 and 2021 backlogs exacerbated by COVID-19 pandemic protocols.

But this year, the ways we taxpayers get our returns to the overloaded IRS also is getting a lot of attention. The chorus calling for the IRS to cut out the tax software middlemen and directly provide us with free online tax preparation and electronic filing has lots of new, and loud, members.

This free-filing choir got another, federal government voice today. Uncle Sam's watchdog now is calling on the IRS to work on more no-cost ways for taxpayers to file.

Few free filers: The Government Accountability Office (GAO) notes in its 54-page report on the Free File program that the program historically has been available to a large majority of taxpayers.

However, very few potential Free Filers use it. Instead, the GAO found that the vast majority of taxpayers eligible for the joint IRS-tax software industry program used other filing methods, which they may have paid to use.

Of the 100 icons above representing taxpayers filing in 2021, 71 met the 2020 tax year income threshold of $72,000, making them eligible to use Free File. Of those who could have used Free File to submit returns during the 2021 filing season, only 3 did.

While the GAO graphic uses 2020 tax year, 2021 Free File usage, similar weak participation is expected for this year. The main reason is that the largest and most popular tax software companies, H&R Block and Intuit's TurboTax, weren't part of the program this year.

Agreement limits: The partnership of the IRS and Free File, Inc. (FFI), the group representing participating tax software companies, is in effect through October 2023, essentially the end next year's extended tax season.

A key part of this agreement from the get-go has been the proviso that the IRS would not develop its own online filing services that might compete with Free File's participating companies.

Now, however, it might be time to revisit the overall agreement. 

One-sided agreement options: "IRS is not managing the risk of relying on the Free File program as the way it helps taxpayers file for free online," says GAO in its report.

"Under the terms of the agreement, individual companies can leave the Free File program at any time, and FFI can end the program if IRS develops a system of its own," continues the report. "By not managing these risks through the development of additional free online filing options for taxpayers, IRS may be unable to achieve its strategic goal to empower all taxpayers to meet their tax obligations."

I'm sure I'm not alone in thinking that any moves that undermine a "strategic" IRS goal, notably making voluntary tax filing and paying less appealing, are not the way to go.

3 GAO suggestions: Since filing a tax return is one of the most common ways ordinary Americans interact with the federal government, two Democratic members of the Senate Committee on Homeland Security and Governmental Affairs, asked GAO to take a look at Free File.

To assess how the program does (or doesn't) bolster overall tax filing (and paying), the GAO staff reanalyzed IRS data; evaluated the IRS' oversight of agreements with FFI as compared to existing federal digital service guidelines; reviewed IRS documents and studies; and used interviews with selected authors of studies.

This process let to three GAO recommendations for the IRS Commissioner —

1. seek agreement with FFI on incorporating recommended taxpayer experience improvements and relevant practices from guidelines for federal digital services, such as the 21st Century Integrated Digital Experience Act, notably requirements regarding access for users with disabilities.
2. seek agreement with FFI on eliminating the MOU [memorandum of understanding] provision requiring IRS to notify FFI immediately if it commits funding to offer services for free to taxpayers.
3. work with relevant stakeholders before the October 2023 expiration of the current Free File MOU to identify and develop additional options for free online filing of tax returns that would reflect current guidelines for federal digital services.

GAO argues that it's third recommendation — developing additional IRS-based free online filing options by next October 2023 — would help mitigate risks identified with the Free File program. The IRS, however, does not agree. Yet.

The IRS also doesn't like the associated proposal (#2) about removing the heads-up to the FFI if the IRS puts money toward an in-house free filing program.

IRS did agree with the GAO suggestion that the tax agency add relevant practices to improve the taxpayer experience into the next FFI agreement.

Eventual IRS-only free file? The GAO report notes that "when we confirm what actions the agency has taken in response to [these recommendations], we will provide updated information."

As for word on an IRS created and administered free online tax preparation and e-filing program, I'm pretty sure we'll be waiting for a looooong time.

Again, the main reason is the money needed to upgrade the IRS' systems and hire staff who can handle a total government-run Free File. Congress has ravaged IRS budgets. Now, even though lawmakers are slowly moving toward replacing the funds, any and all IRS improvements are going to take quite a while.

But hope, if not universal Free File for all, springs eternal after the end of each spring tax filing season.

You also might find these items of interest:

• Most states also offer free online tax filing options
• Securing taxpayer data is the IRS' biggest challenge
• Problems with plans for the IRS to help taxpayers file returns
• Wanted: Free-for-all tax filing instead of our current chaotic Tax Day free-for-alls

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