Tax Analysts Blog

Why the Free File Alliance Is Bad for Taxpayers

Posted on Apr 14, 2014
It’s almost tax day, and many taxpayers are probably struggling to finish their returns or contemplating filing for an extension. The classic picture of a harried citizen crouched over a paper return frantically erasing numbers is out of date thanks to the advent of e-filing, but the use of online filing methods has brought with it a new problem for tax administration: the Free File Alliance (FFA). Many taxpayers may not be aware of how the FFA is working to make it both more expensive and harder to file.

The FFA is a group of software makers that have contracted with the IRS to provide e-filing options to the public. The IRS was mandated by law to move toward electronic filing and, of course, it outsourced its obligation. The FFA is headlined by Intuit, the makers of TurboTax, but other prominent members include Liberty Tax Service and H&R Block. The alliance is technically organized as a nonprofit, but the various members are operated on a very much for-profit basis. Most taxpayers who visit the IRS’s website to try to file their returns electronically will be referred to a page where they must pick an individual free file member. It is very difficult to even find other options for filing. (It’s even more difficult to locate non-FFA options on various state websites, including Virginia’s and the District of Columbia’s.)

So what’s the problem with the FFA? Let’s start with the name. Filing through an FFA member is not actually free for all taxpayers. As the misleading FAQ on the FFA’s website says:

    Is the Free File program really free?

    Yes. The Free File program is free for qualifying taxpayers to prepare and electronically file their federal income taxes. [Italics added.]

Only some taxpayers can file for free using the FFA. To qualify for free electronic filing, a taxpayer needs an adjusted gross income below $58,000. There are other restrictions that individual FFA members might impose (including limiting what types of schedules and add-ons can be submitted with a return). There are free fillable forms available for taxpayers with incomes over $58,000, but they perform only basic calculations and offer almost no guidance (they are essentially just fillable PDFs that can be directly submitted to the IRS instead of mailed in).

Even if a taxpayer qualifies for free filing, the FFA will still offer many opportunities to spend money. In 2007 the IRS forced the FFA to drop refund anticipation loans and other shady products, which was probably the primary reason most members wanted to participate in the first place. However, the online preparation programs still frequently pressure taxpayers to file their state returns, which usually costs between $10 and $30.

While the misleading name is disturbing, the main problem with the FFA is its insidious lobbying efforts to kill government-sponsored competition. As an example, Virginia used to offer an elegant and efficient electronic filing site that was free and easy to use for all taxpayers. The FFA persuaded the Virginia legislature to scrap it several years ago, replacing it with an FFA portal similar to the IRS’s and causing some taxpayers to have to pay. The FFA has pushed hard to kill California’s experiment with pre-completed tax forms, called ReadyReturn. And it is almost certainly responsible for a provision in House Ways and Means Chair Dave Camp’s tax reform plan that would prohibit the IRS from implementing its own version of ReadyReturn. After the District of Columbia started using the FFA, it eliminated fillable PDFs from its website, making it much harder to file D.C. returns using any means other than the FFA’s members.

Intuit has admitted that the main threat to its business (and profits) is from the public sector. In a 2011 10-K, Intuit said that “our consumer tax business also faces significant competition from the public sector, where we face the risk of federal and state taxing authorities developing software or other systems to facilitate tax return preparation and electronic filing at no charge to taxpayers. . . .Although the Free File Alliance has kept the federal government from being a direct competitor to Intuit’s tax offerings, it has fostered additional online competition and may cause us to lose significant revenue opportunities.”

The IRS should end its agreement with the FFA when it expires in October. The FFA’s campaign to make sure taxpayers must continue to pay to file their federal or state returns (or both) should be stopped. The IRS and state revenue agencies should offer truly free electronic filing options, much like many states had before the FFA intervened. As National Taxpayer Advocate Nina Olson famously said in 2006, you shouldn’t have to pay for the honor of filing your tax returns with the government.

Read Comments (3)

edmund dantesApr 14, 2014

I agree with you and Ms. Olson completely. What's more, it's a disgrace that
one can no longer complete the tax forms by hand, a personal computer is
required because the tax code has become so extraordinarily complicated. We
need radical simplification, coupled with bringing everyone into the tax tent.

Verenda SmithApr 17, 2014

"The IRS was mandated by law to move toward electronic filing and, of course,
it outsourced its obligation." The IRS did not willingly outsource its
obligation. It did so under extreme political pressure in response to lobbying
by the private sector, as you reference later.

"much like many states had before the FFA intervened." Roughly half the states
with individual income taxes do have their own government-owned, completely
free web-filing option, and two more states joined their ranks this year.

" It is very difficult to even find other options for filing. (It’s even more
difficult to locate non-FFA options on various state websites..." That is
because the IRS has signed a contract with FFA agreeing not to offer any of its
own filing options, as have those states (about half) that participate with the
FFA. The FFA strictly enforces this ban.

bob kammanApr 19, 2014

As Ronald Reagan said, "The ten most dangerous words in the English language
are 'Hi, I'm from Intuit software, and I'm here to help.' "

As a user of Intuit's ProSeries software for tax practitioners, I wish they
would fix the program they sell before promoting the one they give away to
prevent competition.

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