IRS Balks at Public Free-file Suggestion From Government Watchdog

The IRS doesn't think that a public, free-filing option would "significantly improve the taxpayer experience," the tax agency said in a new report from the Government Accountability Office.

That stance goes against a recommendation from the government watchdog, which suggested that the agency identify and create more free options for filing tax returns online. 

The GAO report focuses on the tax agency's 20-year-old Free File program run by the IRS and a consortium of tax preparation companies to give most Americans options to electronically file their tax returns at no cost.

Currently, about 70% of Americans are eligible for the program, which is meant for those who fall under a certain income threshold, but most people eligible for the program use other means to file their taxes, which they might have had to pay for, the GAO says.

The IRS doesn't itself currently have an online filing service like the GAO is suggesting it look into developing, but the question of whether or not the agency could or should offer its own option has been a question from the start of the program. 

"Historically, IRS had agreed that it would not develop its own online filing services in exchange for the participating companies offering free services to eligible taxpayers," the report states.

When the agency signed the first agreement with the servicers in 2002, the IRS agreed that it wouldn't offer its own free online tax preparation and filing services. GAO's report says that companies are participating in the program, "to help ensure the federal government does not create its own tax filing system, which could compete with them."

The deal that the IRS wouldn't make its own service was removed from the agreement between the IRS and the consortium in 2019, according to the GAO report. 

Whether taxpayers would have better experiences if the IRS were to establish its own system is something stakeholders differ on, the report says. 

One concern for an IRS-run service cited by stakeholders referenced in the report, and by the IRS itself, is IRS funding, capacity and outdated tech. 

But others say that the IRS is best situated to use data it has on taxpayers to potentially prepopulate tax returns and to help low-income Americans file their taxes and get the social benefits that come with that. 

GAO itself writes that "given that the law generally requires taxpayers to file a return, and because many federal benefits are only available to those who file, it is reasonable to expect the federal government to help citizens with their filing obligations at the lowest possible cost."

The watchdog recommended in this new report that the IRS eliminate a remaining provision in its memorandum of understanding with the consortium that requires the agency to notify the group if it commits money to provide free services. 

Then, the watchdog recommends that before the current agreement with this consortium ends in October of next year, the IRS commissioner "work with relevant stakeholders to identify and develop additional options for free online filing of tax returns."

The IRS said in reply comments that it "does not believe a public free-filing option would significantly improve the taxpayer experience, nor do we have sufficient funding to develop this solution," wrote IRS Deputy Commissioner for Services and Enforcement Douglas O'Donnell. 

"If new legislation and funding were approved, then the IRS would expect to assess the feasibility and utility of offering additional free tax preparation and filing options," he continued.

The watchdog's report also calls into question the Free File program overall, saying that "IRS is not managing the risk of relying on the Free File program as the way it helps taxpayers file for free online."

GAO points to the fact that companies can leave the consortium freely, and the consortium can also end the program altogether if the IRS were to develop its own system.

Intuit, which runs TurboTax, recently opted out of the program earlier this year. That's along with five other companies that left between 2016 and 2021, which also included H&R Block. With Intuit, it had served about 70% of people in the Free File program in 2019, the report says. 

"The departure of the two largest companies from the program raises questions about its continued viability. While IRS expressed concern about the resources required to develop an alternative, such concern needs to be weighed against the potential of an abrupt end to the program and the customer service challenges it would present," the GAO report states.