House Passes Bill Hampering Free Online Tax Filing

Consumer advocates say they like the bill -- except for one provision they call a giveaway to tax preparers.

WASHINGTON ― Few Americans take advantage of free online tax filing, opting instead to pay for services such as TurboTax, and consumer advocates say Congress is trying to keep it that way. 

The Internal Revenue Service would be disallowed from creating its own system for free online tax filing under a bipartisan bill the House passed Tuesday. 

The IRS currently partners with private companies to provide free online tax filing services to the lowest 70% of taxpayers by income, but only about 3% of taxpayers use it. Others fork over $1 billion annually to tax prep companies like H&R Block, according to an estimate by ProPublica.

The free filing provision is a small part of a broader IRS reform bill authored by Rep. Mike Kelly (R-Pa.) and Rep. John Lewis (D-Ga.). It passed the House Tuesday by voice vote, meaning it was so popular lawmakers didn’t think it was worth having a roll call vote. 

“The bill is a good bill,” Lewis said. “Whatever the problem may be, we will fix it.”

The Taxpayer First Act does things that consumer advocates like. One section prevents the IRS from referring lower-income cases to debt collectors, and another exempts poorer people from certain fees. 

The bill specifies that the IRS should continue to operate its free filing program “cooperatively with the private sector,” which effectively prohibits the IRS from creating its own free program. In its memorandum of understanding with a consortium of tax software companies know as the Free File Alliance, the IRS promises not to provide free online tax filing itself. The language in the bill codifies the arrangement between the companies and the IRS, which had not previously been a matter of law, according to the bill’s critics.

“The provision very clearly prohibits the IRS from ever developing and offering free tax preparation and filing products to taxpayers,” said Mandi Matlock, a tax attorney who works for the National Consumer Law Center on a contract basis.

The bill is a good bill. Whatever the problem may be, we will fix it. Rep. John Lewis (D-Ga.)

The way free filing works now, you can go on the IRS website and find links to free file programs from brands like TurboTax or TaxSlayer ― which might then try to make a sale. The National Taxpayer Advocate, a voice of taxpayers within the IRS, warned last year that the current free filing system “has the potential to mislead taxpayers and ensnare them in for-fee product offerings.”

The bill has passed the House now three times, though in previous years it didn’t pass the Senate. The National Consumer Law Center, Consumer Action and the U.S. Public Interest Research Group said in a letter last year that the free file section “would have the effect of permanently entrenching commercial preparation and commercial software at the expense of American taxpayers.”

The bill’s authors said they didn’t see a problem. 

“The Taxpayer First Act is the first time we’ve done anything in so many years, so, of course, somebody’s going to say it’s not the right thing,” Kelly said. “I don’t know what they’re talking about. I haven’t read what they’re talking about.”

Sens. Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.) introduced a Senate version of the bill. Wyden said in a statement that during the drafting of the bill his staff pushed back on the prohibition on the IRS competing with private tax prep services and that he would continue to push for the IRS to give Americans pre-filled returns that already have their wage information. He also lauded the bill’s debt collection restriction. 

“Again and again in my service in the Senate, I have battled the tax-preparation software industry to simplify filing taxes for the typical American,” Wyden said. 

This article has been updated with comment from tax attorney Mandi Matlock.