Even after the private, for profit, tax preparation companies got a sweetheart deal from the federal government that the government would not develop its own software for the free filing of taxes, which would be the logical thing for it to do, the greedy companies wanted even more. As part of the deal, the private companies were required to provide free filing options for lower income people but what they did was make the process of finding and using the free process so complicated that only about 2% of the people eligible to use it actually did so. This resulted in the companies getting about a billion dollars in additional revenue.
ProPublica exposed this racket and as a result of the publicity, Congress started asking questions and the IRS carried out an audit.
More than 14 million taxpayers paid for tax prep software last year that they could have gotten for free, according to a scathing audit released Wednesday by the Treasury Inspector General for Tax Administration. That amounts to roughly a billion dollars in revenue for TurboTax maker Intuit, H&R Block and other tax software companies, according to a ProPublica analysis of tax prep fees.
The audit, which was launched following ProPublica’s reporting last year, explores why so few taxpayers use the Free File program, a public-private partnership between the IRS and companies such as Intuit and H&R Block. Among the reasons, the audit found: the confusing design and complexity of the program and persistently lax oversight by the IRS.
The program has been the industry’s tactic to beat back any possibility of the IRS creating its own free tax filing options. It makes free tax prep software available to most Americans, but Intuit and other companies have also found ways to direct people away from Free File and instead to commercial “free” editions, which are not always free.
“The process to participate in the Free File Program is fraught with complexity and confusion. IRS management seems unaware of the complexity and confusion taxpayers face,” the audit states.
Around 104 million taxpayers were eligible for Free File last year, according to the audit. Of those, just 2.4% actually used the free government program.
Of the remaining 101.5 million, 67 million did not use tax software (most going to bricks-and-mortar tax prep services). The remaining 34.5 million used software to do their taxes, and of those, 14 million paid for tax prep they could have received for free. To arrive at that number, the inspector general conducted a survey it deemed statistically valid of 200 taxpayers who’d qualified for Free File but used a commercial online product.
Intuit says in public filings that it makes an average of $62 for each return, but that figure incorporates many people who file for free, so the average revenue for each paying customer is significantly higher. The company’s TurboTax unit generated $1.6 billion in operating income in the most recently reported fiscal year.
More eligible tax filers finding Free File could represent a threat to the company’s profits, according to a December note to clients from J.P. Morgan analyst Sterling Auty, who covers Intuit. “We want to acknowledge the risk that we could see some portion of that population move to free once they realize what is available to them,” he wrote.
The real question is what the government will do now, whether they will give the companies just a slap on the wrist and allow them to continue their finagling or some punishment that has real teeth. Ideally, the government should provide free filing for everyone but at the very least they should provide free filing for the people in the income groups that the private companies were supposed to provide free services for but did not. The companies clearly are not to be trusted.