IRS watchdog proposes 2025 deadline to improve or replace Free File program

Congress should direct the IRS to set goals for increasing the use of its Free File program and to replace the program if those goals aren’t met by 2025, the agency’s in-house watchdog said in a report released Wednesday.

“The IRS’s Free File program in its current format has become an ineffective relic of early efforts to increase e-filing,” the National Taxpayer Advocate’s annual report to Congress argued. “Rather than being a beneficial program providing free return preparation services, it provides limited services and is used by only a small percentage of eligible taxpayers.”

The report comes after a year of controversy over the Free File program after a series of ProPublica articles that reported that tax-prep companies had taken steps to hide their free tax-filing options under the partnership.

Under the Free File program, the IRS partners with tax-prep companies to have those companies offer free filing software to low- and middle-income taxpayers. While about 105 million taxpayers are eligible to use the free software, only about 2.5 million returns for tax year 2018 were filed using products from the Free File program, and almost half of the taxpayers who used free software under the program in 2017 didn’t do so again in 2018, according to the taxpayer advocate report.

After several of ProPublica’s articles were published and lawmakers raised concerns, the IRS directed an outside contractor, the MITRE Corporation, to review the Free File program. MITRE’s report argued that the low usage rate of the Free File program is due to the fact that many taxpayers prefer other tax-prep methods.

However, acting National Taxpayer Advocate Bridget Roberts’s report said that she “disagrees with the [MITRE] report’s assessment because it does not consider the reasons why eligible taxpayers chose other preparation methods.” 

“For example, some eligible taxpayers could have used paid return preparers or fee-based commercial software products because they were unaware of the Free File program, while others are unable to use the program due to its eligibility restrictions and language limitations,” the taxpayer advocate report said.

Roberts made several recommendations relating to the Free File program. Notably, she is recommending that Congress direct the IRS to set goals of increasing the Free File usage and retention rates. The IRS should be instructed to set a goal usage rate that’s significantly higher than the current level but still attainable, such as a rate of 10 percent of eligible taxpayers, and the agency should be directed to set a target of a 75 percent retention rate, according to the report.

Congress should tell the IRS that if the agency can’t meet its goals by 2025, it should replace Free File “with an alternative approach to make tax software available to taxpayers at no or low-cost, including through the use of sole-source or multi-source contracts with tax software companies,” the report added.

Late last month, the IRS announced an updated agreement with the tax-prep companies who participate in Free File. The agreement prohibits the tax-prep companies from hiding their landing pages under the Free File program from internet searches, and it also requires the companies to survey taxpayers who participate in the programs and provide summaries of the findings to the IRS.

The updated agreement was announced after the taxpayer advocate report went to press, but the watchdog is continuing to make its recommendations about usage rate goals.

In addition to the report’s section on Free File, the report also discusses other problems at the IRS, including low levels of service on its telephone lines and inadequate funding. Roberts is recommending that Congress provide the IRS with increased funding for taxpayer services and to modernize its information technology, and she’s also recommending that Congress change budget rules to account for the fact that funding for the IRS is likely to generate additional federal revenue.

This is the first report to Congress from Roberts after National Taxpayer Advocate Nina Olson retired last year. Olson had been a longtime critic of the Free File program.

Roberts urged Treasury Secretary Steven Mnuchin to promptly appoint a permanent person for the role she’s holding in an acting capacity.

“Given the current crossroads at which the IRS finds itself, it is critical that a permanent National Taxpayer Advocate be appointed as quickly as possible to help ensure the IRS protects taxpayer rights and meets its obligations to taxpayers,” Roberts wrote.