Series: The TurboTax Trap How the Tax Prep Industry Makes You Pay

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For a decade and a half, the IRS program to allow most Americans to file their taxes for free has been floundering.

Now, IRS emails obtained by ProPublica help show why: The agency has allowed the tax preparation industry to write the rules.

The IRS tried to hide the documents from public view, initially withholding more than 100 pages of emails between agency officials and industry representatives in response to ProPublica’s Freedom of Information Act request filed in April. The agency released the emails this month only after ProPublica sued.

This year, as part of our coverage of the IRS and TurboTax maker Intuit, we filed a request for correspondence between the IRS and the Free File Alliance, an industry group. The request sought records surrounding a public-private partnership called Free File.

Under that program, which has long been championed by Intuit, the IRS agrees not to create its own tax filing system that would pose a threat to the industry’s profits. In exchange, Intuit and several other tax prep companies agree to offer free tax filing to most Americans. But the program has been declining for years, with less than 3% of eligible Americans using it this year.

The email correspondence sheds light on a pivotal moment for the future of Free File in the fall of 2018: An expert body called the IRS Advisory Council (IRSAC) had spent months investigating the program. It was preparing to publish a blistering report concluding that the IRS’ “deficient oversight and performance standards for the Free File program put vulnerable taxpayers at risk.”

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A draft of the report had been delivered to the IRS but not publicly released, as ProPublica previously reported. Just weeks before the scheduled release, Tim Hugo, the head of the Free File Alliance, and Stephen Ryan, its lawyer and a lobbyist for Intuit, reached out to the IRS with an “urgent” request to extend the program, even though it wasn’t expiring for another two years.

The newly released correspondence shows what happened next: Hugo emailed IRS officials a slate of potential changes to the memorandum of understanding that governs the program. The reforms — which, Hugo wrote, reflected IRS concerns — included restricting the industry’s ability to market paid services to Free File users.

“In return for these significant and valuable enhancements in the Free File Program, the Free File [Alliance] requests that the current Program be extended for one year to October 31, 2021,” Hugo wrote.

The emails are striking for what they lack: no counterproposals or efforts by IRS officials to push for a better deal. Less than two weeks after the industry proposal, the IRS official who oversees the program, Ken Corbin, signed a new memorandum of understanding.

The new deal reflected all of the industry’s proposals and contained no other significant changes. And it had been extended, just as the industry requested, to Oct. 31, 2021.

Read More Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free Using lobbying, the revolving door and “dark pattern” customer tricks, Intuit fended off the government’s attempts to make tax filing free and easy, and created its multi-billion-dollar franchise.

A spokesman for the Free File Alliance said in a statement that the group had discussed proposed changes with the IRS “for many months” before its push for changes last October.

“The notion that the Free File Alliance ‘dictated’ the terms ... to the IRS is absolutely false,” the spokesman said. “When IRS decides on any issue, the agency gets what it desires. No one dictates to IRS.”

The IRS didn’t respond to questions.

When the IRS withheld the emails in response to ProPublica’s request this year, it cited an exemption to the Freedom of Information Act that protects internal deliberations among government officials. But the withheld emails were written by industry officials. After ProPublica sued in federal court, the agency dropped that objection and released the records.

In racing to sign the new memorandum of understanding, the tax prep industry got out in front of the advisory council’s critical report, which was released just two weeks later.

The industry solutions fell far short of IRSAC’s recommendations.

The council thought, for example, that the IRS wasn’t doing enough to oversee the tax prep companies and recommended that an outside auditor conduct an “objective and transparent” review of each company’s practices.

The industry proposed something far more modest, which became part of the new agreement. Instead of an outside auditor, the IRS and the industry group agreed to work together to perform reviews. There is also no provision for making the results of the reviews public.

One big problem with the Free File program, the IRSAC report said, was that few people know it exists. It’s the IRS’ responsibility, under the Free File agreement, to advertise the program, but the IRS hasn’t had an advertising budget for years. IRSAC recommended that the tax prep companies pony up money to promote the program. Neither the industry’s proposed revisions, nor the ultimate deal the IRS signed, had anything along those lines.

It was far from the first time that the industry had tweaked the program in response to criticism. While the industry has often had an ally in the IRS, consumer advocates have assailed the program. In response, Intuit’s strategy has been to keep “government out of the game,” as a 2007 PowerPoint slide prepared for an Intuit board of directors meeting put it. The company embraces changes that it deems palatable in order to make Free File seem like an adequate alternative to the IRS building a free tax filing system. “Focus on ‘good enough’ to fight off government encroachment,” said the PowerPoint, which was obtained by ProPublica.

Going back to the mid-2000s, the industry has agreed to modify the Free File program several times. Generally, the changes have, bit by bit, restricted the ways that tax prep companies could make money off people eligible for Free File. Back in 2005, the companies could pitch any sort of product, even ones that had nothing to do with taxes, like mortgages. The changes last year finally banned pitching any paid product other than a state tax return. These restrictions have had little effect because Intuit has been successful in steering people to a similarly named program, Free Edition, that its website markets as free, but then customers are often charged.

The newly released records also show the Free File Alliance aggressively attacking a prominent critic of the program, University of California, Davis, law professor Dennis Ventry, who was the chair of the IRS Advisory Council.

In a July 2018 email that was previously redacted by the IRS, Hugo complained to agency officials that Ventry was seeking to “inflame partisan politics in Congress against IRS” by publicly criticizing Free File and trying to meet with members of Congress.

“It is black letter law that it is illegal for U.S. government funds to be used to lobby. I believe IRS may have a duty to prohibit reimbursement of Mr. Ventry’s travel expenses if his trip includes any such lobbying visits,” Hugo wrote. Asked about the email, the Free File Alliance spokesman told ProPublica, “If reimbursed by the government, such trips for lobbying are totally inappropriate.”

Ventry, who said his expenses were reimbursed, told ProPublica the criticism was “patently absurd.” Pursuing multiple matters is standard practice when traveling to Washington as an advisory council member, he said.

Help Us Investigate Have You Worked at Intuit or Another Tax Prep Company? Know Something About TurboTax? We’d Like to Hear From You. We’d like to hear about your experience in the tax prep software industry with companies like Intuit, H&R Block or Jackson Hewitt.