Crime

Tax Return Preparation Software Companies Investigated And Sued For Trying To Get People To Pay For Free Tax Returns

Many people who turned to these companies expecting free filing ended up saying another four-letter F word instead.

By  
on

During the months of January to April, you may have seen ads from TurboTax promoting their free tax preparation service. TurboTax as well as other tax preparation software costs between $30 to $160, depending on your needs. So you might wonder why they would offer their services for free. Perhaps it was a way to attract potential customers who would later upgrade to their paid service. That seems like a good business strategy. After all, that is how Westlaw and Lexis got us.

But it turned out that many people turning to these companies expecting free filing ended up saying another four-letter F word instead. A ProPublica investigation found that Intuit, the makers of TurboTax, really didn’t want people using their free-filing program and used various tricks to divert them to their paid versions instead. For example, TurboTax’s Free File program really wasn’t free at all unless all you had was a W-2. Do you have a 1099? Then you have to purchase the $100 self-employed program. You want to deduct student loan interest? You’ll have to purchase the $60 program to do that. TurboTax actually did have a free-filing program called Tax Freedom but it was difficult to find because the website was removed from search engines. This has since been fixed and now the Tax Freedom website is easily accessible.

A leaked internal memo from H&R Block instructed staff to lead customers away from their free products and promote their paid ones instead.

The response to the ProPublica article was swift. The city of Los Angeles filed a lawsuit against Intuit and H&R Block on Monday accusing them of engaging in deceptive and fraudulent business practices. New York Governor Cuomo has called for an investigation against the company. The IRS has announced that it will conduct its own investigation and take action to protect the integrity of the program. Lawmakers have also asked the Federal Trade Commission to investigate.

How did we get to this point?

At one time, the IRS considered setting up its own free-filing system. The IRS would obtain numbers they received from third parties to determine taxable income, deductions, and ultimately, the tax or refund due. The IRS would then prepare a return and if the taxpayer agrees with the numbers, they would either sign them, e-file them, or do nothing, except maybe send payment. This simple system will not work for everyone, particularly those who are self-employed and have to report detailed financial information on their returns.

The tax preparation companies opposed this. And the IRS was understaffed and underfunded which meant that creating their own secure system would be difficult. So in 2002, the IRS made a deal with the tax preparation companies. The companies would provide free preparation and filing services to any taxpayer with an adjusted gross income in the bottom 70 percent. As of 2019, this means anyone with an adjusted gross income of under $66,000. In exchange, the IRS would not develop its own tax filing service.

Sponsored

The problem was that not a lot of people used the free-filing system. According to a 2007 report by the Treasury Inspector General for Tax Administration, only 3 percent of all tax returns were filed through the free-file system. The report advised the IRS to market the service more aggressively to inform more taxpayers about this option. Now that this story has gone viral, and with the IRS likely to step up awareness efforts, it is very likely that more people will look at free-filing services in the future.

So what happens next? If more people are using the free-file services and it affects the tax preparation companies’ bottom line, they will eventually stop offering them once their contract with the IRS expires.

Should the IRS create their own free-filing program as they originally intended? If they do, there is the possibility that it will attract people who have no idea what they are doing and think the IRS will do everything for them. This is particularly the case for self-employed people completing a Schedule C. For example, a taxpayer might want to deduct his yacht purchase. This can increase the likelihood of audits, adjustment letters, and increased calls to call centers, to name a few, all of which will further strain the IRS’s limited resources.

The aftermath of the ProPublica investigation was a call to action and could affect next year’s tax season. The investigations may be an opportunity for all interested parties to talk about which taxpayers would be good candidates for a free-file program and those who will still benefit from outside, expert assistance. In the meantime, I wouldn’t be surprised if I don’t see any Free TurboTax commercials in the near future.

Sponsored

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

Topics

, , ,