NY Says Free File Program Exploited

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The New York State Department of Financial Services (NYSDFS) has concluded its investigation into why more taxpayers making $69,000 or less have not been using the Free File Program. On July 16 NY Superintendent of Financial Services Linda A. Lacewell stated: “The Free File Program is broken and was exploited by commercial tax preparer companies to drive their own profits at the expense of low-income taxpayers. This is yet another blow to the public trust.”

The Free Filer Alliance was established in 2002 as an agreement by tax preparation companies to provide free tax filing software to individuals making below a certain income level with the IRS and state tax agencies agreeing not to create their own free filing programs. However, in 2019 only 2.5 million of 100 million eligible taxpayers took advantage of the Alliance’s offerings. The NYSDFS report notes that the IRS has not marketed the program since 2014 nor have there been any strategies for notifying taxpayers they are eligible to use it. In addition: “The NYSDFS investigation found that during last year’s tax season, five leading tax preparation companies that provide software to the Free File program deliberately edited the code of their landing pages to hide those pages from search engine results.” The investigators said Intuit, H&R Block, TaxSlayer, TaxHawk and Drake Enterprises deliberately hid website landing pages for the Free File Program: “Tax preparation companies created and marketed their own products as ‘free’ in order to lure customers away from the Free File Program while upselling those same customers into more costly products.”

H&R Block has announced it will leave the program at the end of this tax season, on October 15, 2020. Nine other companies will continue to partner with the Free File Alliance.

Superintendent Lacewell and Michael Schmidt, Commissioner of the NY State Department of Taxation and Finance, wrote in an op-ed in the New York Daily News: “The H&R action highlights the precariousness of a system that relies on the voluntary participation of private industry to provide free tax filing options to low- and middle-income taxpayers. To address this situation, we urge the IRS to aggressively market the Free File program. We also urge the IRS to consider a broader solution – the public option. The IRS should develop its own free tax-filing program. States could then integrate with this new federal product, allowing taxpayers to file both their state and federal taxes online free… And, last month, IRS Commissioner Charles Rettig testified that he was open to the development of such a program for certain filers.”