Los Angeles' city attorney is suing tax-preparation software companies H&R Block and TurboTax-maker Intuit, alleging that they "defrauded the lowest earning 70 percent of American taxpayers" by impeding public access to an IRS program. The IRS Free File program is intended to help people who make less than $66,000 a year file their taxes free using commercial services.
But that program — and the consortium of tax-prep software companies that take part in it — are under scrutiny after reporting from ProPublica found that the companies make the free options difficult to find and instead funnel eligible taxpayers toward profit-generating options.
LA City Attorney Mike Feuer filed the civil complaints on Monday against Intuit and H&R Block on behalf of the people of California. In the filings, Feuer writes that for years, the companies have been "actively undermining public access to the IRS's 'Free File' program, while simultaneously employing deceptive and misleading advertising and design schemes intended to induce taxpayers" into buying expensive TurboTax and H&R Block products.
The Free File program went into effect in 2003. A consortium of tax-prep companies formed the Free File Alliance and agreed to offer no-charge tax prep to millions of Americans. In exchange, the IRS promised it wouldn't offer its own free filing software.
Only about 3% of taxpayers eligible for Free File are using it — resulting in Americans paying an estimated $1 billion a year in unnecessary fees to the tax-prep companies, by ProPublica's calculations.
ProPublica found that tax-prep companies used a range of tactics to lead low- and moderate-income people into paying to file taxes. For example, reporters discovered that Intuit used a bit of code to hide the free version of TurboTax from Google and other search engines. The products are also confusingly named: The "Free Edition" of TurboTax actually charges a fee to file state forms, while the truly no-cost version is named "Freedom Edition" and isn't listed on its homepage.
In a statement to the Los Angeles Times, Intuit said that it stands behind its actions and that "[a]ny suggestion that Intuit does not support the IRS Free File Program is flat wrong." H&R Block told the Times it was "proud to have helped millions of Americans file their returns under the Free File program" and has updated its practices to make Free File easier to find.
Feuer, the LA city attorney, compared the behavior of the tax-prep companies to that of Wells Fargo, the bank he sued in 2015 over its deceptive practices. "That was a major corporation taking advantage of the consumer," he told the Times. "There are some parallels. I want to hold the tax-preparation companies accountable and I want to deter this behavior."
The IRS announced on Friday that it had convened a team of senior leaders to review "concerns raised about the Free File program." A week earlier, ProPublica notes, the IRS had called Free File a "successful program and partnership that's benefited millions of taxpayers."
The Treasury Inspector General for Tax Administration, which is the IRS' independent oversight group, says it will also investigate Free File.
And now, both Democrats and Republicans on the Senate Finance Committee want to know whether the program is accomplishing what it's supposed to. Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent a letter on Monday to IRS Commissioner Charles Rettig expressing concerns, The Hill reports.
"We request that you review the IRS' memorandum of understanding with the program's participants ... to ensure industry compliance, and take any necessary actions to ensure the integrity and purpose of the Free File program, including amending the memorandum as necessary to bar whatever deceptive acts and practices the IRS might uncover as a result of its investigation," they wrote.
Sen. Elizabeth Warren, D-Mass., introduced a bill in 2017 that would order the IRS to create its own free online tax prep and filing and would ban the agency from working with the tax-prep companies.
In a tweet Friday, Warren said the Federal Trade Commission should investigate whether "hiding Free File is unfair & deceptive, and if the companies colluded to rip off taxpayers. And IRS should end its agreements with them & get refunds for taxpayers who paid for services because of these abuses."
However, Congress has been considering a bill that would permanently ban the IRS from developing its own online tax filing service. The current Free File arrangement is in place through 2020.