Free File providers scam taxpayers; Congress shouldn’t be fooled

In April, the House unanimously passed the Taxpayer First Act, including a provision to codify the IRS Free File Program.

Making Free File a permanent part of the tax law would mean that the IRS and its private-sector Free File partners — organized as the Free File Alliance (FFA) and including Intuit and H&R Block — would no longer periodically renegotiate the terms and conditions of the program. 

For that reason alone — i.e., preventing the IRS from verifying that FFA companies deliver free tax filing services as promised — codifying Free File is a terrible idea. 

{mosads}Even worse, codification would enshrine a program that inflicts substantial harm on taxpayers by facilitating predatory upselling of paid products to Free File users, violating taxpayer privacy laws and stripping taxpayers of legal remedies in the event of disputes with FFA companies. 

The FFA has peddled a far rosier narrative in selling the program to Congress. Thus far, lawmakers have been receptive to industry’s account of Free File, no doubt persuaded by FFA companies’ largesse. H&R Block has spent $3.4 million lobbying the current Congress, while Intuit has paid out $3.1 million. 

According to Tim Hugo, executive director of the FFA, Free File “is a philanthropic endeavor.” It offers free e-filing of federal returns for 70 percent of taxpayers. It saves taxpayers money, at least $1.5 billion since 2003. And it has saved the IRS “hundreds of million of dollars.”

But the FFA’s propaganda obscures a darker reality.

Only 3 percent of taxpayers use Free File in any given year. Of that fraction, less than half use Free File the next year, indicating user dissatisfaction, confusion over inconsistent offerings (eligibility criteria varies based on income, age, and state residence) and the common practice among FFA companies to push Free File users toward paid products. 

The FFA’s claim that Free File saves the IRS money is equally misleading. The alleged savings derive from the erroneous assumption that if Free File users filed their taxes without Free File they would file paper rather than electronic returns.

But it is overwhelmingly more likely that they would file electronically, because more than 90 percent of all federal returns are e-filed.

Alleged cost savings for taxpayers are even more disingenuous. It is well documented that FFA companies view Free File as a bundled “free-to-fee” marketing package with advertised free federal returns serving as the loss leader providing opportunities to sell “value-added” services.

No data exists as to how much upselling actually occurs (FFA companies hide that information). But after accounting for industry’s upselling practices, the purported $1.5 billion in savings is surely closer to zero. Consider just one upselling technique.

Every year, FFA companies send emails to taxpayers who previously used their Free File services. The email informs the taxpayer that the company has the taxpayer’s information on file and offers its services for the current tax year.

But the link contained in the company’s email directs the taxpayer to a non-Free File, fee-based version of the company’s software. Deceptive? You bet. But not as deceitful as how FFA companies are likely violating taxpayer privacy laws.

Federal tax law contains strict requirements pertaining to the disclosure or use of a taxpayer’s return information. The law commands that tax return preparers — including Intuit and H&R Block — solicit and receive “knowing and voluntary” taxpayer consent before disclosing or using a taxpayer’s return information for any reason, including marketing paid services unrelated to the return on which the information appears. State laws contain similar requirements.

FFA companies may be routinely violating these requirements. Intuit’s practices are exemplary. Free File users who choose Intuit’s “TurboTax All Free” from the IRS Free File homepage land on Intuit’s “TurboTax Freedom Edition” website.

After answering as few as one question pertaining to the taxpayer’s income, the user is taken to a “Create your account page” that asks for the user’s email address, phone number, user ID and password. Immediately below those prompts appears a large and colorful “Create Account” button. Time to file your taxes!

Not so fast. Under the conspicuous button, in considerably smaller light-grey lettering, Intuit whispers to the taxpayer: “By clicking Create Account, you agree to the Turbo Terms of Use, Turbo Tax Terms of Use and have read and acknowledged our Privacy Statement.”

These three documents — to which the taxpayer is about to provide her purported “knowing and voluntary” consent — are linked to underlying documents, buried in which lurk an array of blanket clauses limiting and denying the taxpayer’s rights to her privacy and return information.

If the taxpayer fails to consent to the nearly limitless disclosures and uses, she cannot file her taxes using Intuit’s Free File services. These procedures violate the consent requirements under federal tax law.

First, tax preparers are prohibited from conditioning receipt of federal tax services on a taxpayer providing consent to disclosure and use of her tax return information.

Second, Intuit’s sweeping consent waivers violate the requirement that preparers identify with specificity the taxpayer’s return information that it intends to disclose or use as well as the purposes of the disclosures and uses.

Third, taxpayers must consent in separate written documents to each separate disclosure and to each separate use of tax return information.

FFA companies deny Free File users legal remedies in the same way they obtain invalid consent waivers. 

For example, by clicking Intuit’s “Create Account” button, Free File users agree to be bound by Intuit’s two terms of use agreements. These agreements contain mandatory arbitration clauses that strip Free File users of their rights to file a lawsuit, seek a trial by jury or aggregate claims in a class action.

In short, they result in low- and middle-income taxpayers losing their day in court in the event a dispute arises between them and Intuit.

Rather than codify Free File, Congress should restructure it to focus on providing truly free e-filing services.

In so doing, Congress should authorize the IRS to verify that FFA companies (i) disclose all upselling activities and revenues, and further disclose to whom they sell taxpayers’ private information (ii) abide by all taxpayer privacy laws and (iii) preserve the full range of taxpayers’ legal rights in the event of disputes with FFA companies. 

Dennis J. Ventry Jr. is a professor at the University of California, Davis School of Law. He specializes in tax policy and tax practice.