In July 2019, the president signed into law the bipartisan Taxpayer First Act (H.R. 1957), beginning a fundamental restructuring of the Internal Revenue Service (IRS) and permanently authorizing a volunteer tax preparation service, thereby addressing some of the challenges highlighted by a recent BPC report on tax administration.
But the final legislation did not include one of the bill’s original provisions: codification of the Free File program, a public-private partnership meant to provide free tax-filing software to low- and middle-income Americans. This provision potentially would have precluded the IRS from offering its own tax-filing software, a feature that many consumer advocates have been calling for. While the Free File codification idea has been put aside for the moment, debate over this provision highlighted ongoing weaknesses in the program—specifically, that it has extremely low take-up rates and therefore is not effectively serving much of its target population.
The Free File program is a partnership dating back to 2002 between the IRS and tax preparation companies. Through it, those companies make free tax software available to taxpayers with less than $66,000 in adjusted gross income, or about 70 percent of taxpayers.
In practice, however, the Free File program has experienced a very low take-up rate—only 2.3 percent of eligible taxpayers used the Free File software in tax year 2016. Although the IRS reports higher take-up for the 2019 filing season, no final numbers have been released.
Driving the Taxpayer First Act controversy, a series of ProPublica investigative reports showed that some major tax preparation companies made efforts to divert customers away from the program and toward paid products. Many of these customers likely would have been able to go through the Free File program at no cost.
It’s important to note that Free File’s low take-up is not only due to this malfeasance. The Taxpayer Advocate’s 2018 Annual Report to Congress notes other factors, chief among them complexity of the program, lack of taxpayer awareness, and a dearth of attention from the IRS—which, in its defense, has been chronically under-resourced by Congress.
Complexity, in particular, raises several barriers to using Free File, making it difficult for potential filers to know that they are using the program correctly or even if they are eligible for it in the first place. There are 12 different Free File providers, and knowing which to use can be a challenge in itself. Because of a restriction on how many taxpayers any one provider can cover, each has its own restrictions and eligibility requirements. Only three of 12 Free File providers offer services to all ages, while five limit usage to people who are under age 60. There are no Free File options for taxpayers who speak English as a second language. More generally, tax filers often only discover that a certain software isn’t right for them when they have already committed a significant amount of time and effort entering their information.
Another barrier to Free File’s success is a lack of effort to understand why the program’s take-up is so low. On the one hand, many potential users are likely unaware of the program. Of course, part of this can be traced back to the potentially illicit activity of the providers, but it is also problematic that the IRS has not allocated funds for advertising or promoting the program. On the other hand, many tax filers who use the program in one year do not return the next year. The IRS has not investigated Free File user demographics or consumer satisfaction—information that might shed light on why taxpayers aren’t using the service or how to improve its taxpayer interface. This is despite a provision in the most recent Free File agreement requiring that the program’s private partners provide support for a customer satisfaction survey.
(Author’s note: I myself used Free File software for the 2019 filing season, but I likely would not have known about the program if I hadn’t spent the previous months researching tax administration policy!)
Lastly, Free File’s program objectives are out of date, unchanged since the program was founded. The stated objectives, for example, still reference goals from the IRS Restructuring and Reform Act of 1998 such as an 80 percent target for e-filing, which was met in 2012 and has since been far surpassed. Improving Free File take-up and the filing experience will require specific, clearly articulated objectives for improvement.
The IRS has made efforts to update some aspects of the Free File program. For the 2019 filing season, the program included additional consumer protection provisions—for example, preventing Free File webpages from linking to paid programs. The recent reports by ProPublica, however, suggest that these updates were not enough to fully prevent such activity. In response, the IRS has launched a review of the partnerships with private tax preparers, and the IRS Inspector General has separately launched an audit of the program—its first since 2007.
Now that the Taxpayer First Act has been signed into law without any provisions regarding Free File, policymakers are in a holding pattern while these investigations take place. But the fact that the controversy has died down for the moment doesn’t reduce the urgency of making tax filing easier for low- and moderate-income Americans. In total, just complying with the tax code (not counting money paid in taxes) costs Americans upwards of $200 billion per year. This burden falls especially hard on lower-income Americans, who rely on tax filing to access crucial programs such as the Earned Income Tax Credit and Child Tax Credit.
Whatever the outcome of the Free File investigations, policymakers should not let the lessons learned from this debate go to waste, as they can be applied to the rest of the tax system: reduce complexity, provide better information and support to tax filers, make clear why programs exist, and then rigorously evaluate whether they serve those purposes.
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