Why Isn’t “Free File” Free?
Instructor, Volunteer Income Tax Assistance Program
The recent government shutdown highlighted the loss of yet another public resource: free tax filing help from the IRS.
Before the 1980s you could go to an IRS walk-in site and they would do your taxes for you. Those sites were closed during the Reagan years, and your local IRS office could only assist with basic tax questions or resolving problems. Now, with online “free-file,” which the IRS contracts out to the tax-prep industry, you must do the work yourself and filing is not free for many filers.
I have seen the evolution of this situation not only as a taxpayer, but also as an Instructor and Quality Reviewer for the IRS-supported “VITA/TCE” program (Volunteer Income Tax Assistance/Tax Counseling for the Elderly), which helps low-income people and seniors with tax preparation. By the time I started in VITA in 2008, if a client had a complex tax issue that required IRS help, I told them to go early in the morning and bring water and snacks for waiting in line. Then a few years ago, more budget cuts meant you couldn’t talk to the IRS without an appointment. Now the appointment phone line can leave you on hold for hours.
When IRS agents were furloughed in the most recent government shutdown, there was no one at all to answer the phone or staff the offices, so if you had a tax issue, you had no choice but to write a letter. It may take years for returning IRS agents to plow through the 35 days’ accumulation of letters resulting from the shutdown. So, the budget cuts provide frustrated taxpayers with one more reason for distrust and cynicism towards their government.
IRS budget cuts make no sense. For every dollar spent, the IRS brings in $255. In business terms, that’s a 255 to 1 return on investment. And those proceeds finance almost everything the federal government does. At the same time that Reagan-era tax cuts were ballooning the deficit, IRS audits were cut by a third, and that situation has only gotten worse in the intervening decades. People who do their own tax returns are more likely to make mistakes, a situation that cries for more audits, not fewer, and more filing help. According to a 2013 report by the IRS’ Taxpayer Advocate Service, top quality service to taxpayers is a greater driver of tax compliance than enforcement actions.
The tax prep industry lobbies against free help from the IRS, and reached a compromise that started the “Free File” program in 2003. Now if you can go to irs.gov, you will be connected to software from H&R Block or other industry giants. And while the actual eFiling process has to be free, preparing the return itself is more complicated. Those websites can charge you for a variety of “extras” such as adding a state return, or having more complex kinds of income or deductions. Some even charge you to log back in later and print an extra copy of your return.
IRS officials favor an innovative program where their computers would do your return automatically, based on what’s reported to them by employers, and send it to you to accept or reject. Needless to say, tax-prep industry lobbyists have been, successfully, campaigning against that idea.
The capture of IRS services by the tax-prep industry is yet one more example of the private taking of public goods, in which profit-seekers gain and the public loses. And it’s why something that used to be free—filling out our tax forms—no longer is. What’s needed is to fully fund the IRS so we can actually “free file” once again.