Democrats accuse tax prep firms of undermining new IRS effort on electronic free file tax returns

Congressional Democrats are accusing big tax preparation firms including Intuit and H&R Block of undermining the federal government's upcoming electronic free file tax return system and are demanding lobbying, hiring and revenue data to determine what's going on.

The lawmakers accuse the companies of lobbying against the new program, hiring former government workers to sway public interest against free file for all, and deliberately sabotaging a government program that offered free tax prep services, according to letters obtained by The Associated Press.

On Thursday, Sen. Elizabeth Warren, D-Mass., and Rep. Katie Porter, D-Calif., sent letters to the executives of Intuit, H&R Block, the American Coalition for Taxpayer Rights and the Free File Alliance, a group of tax preparation companies that provide free online services through the IRS website.

Warren and Porter are seeking specifics on the amount of money firms have made since being members of the Free File Alliance and information on the number of former government workers who’ve joined their firms in the past two years.

“Tax prep companies have engaged in a long and aggressive lobbying campaign to prevent the IRS from offering taxpayers a direct filing option,” the lawmakers' letter to Intuit CEO Sasan K. Goodarzi reads.

Derrick Plummer, an Intuit spokesman, said his firm will respond to the lawmakers' letter, adding that taxpayers already have the ability to file taxes free of charge. “An IRS Direct File system is redundant and will not be free — not free to build, not free to operate, and not free for taxpayers," he said.

Plummer said a free-file system built by the government "is a solution in search of a problem, and that solution will unnecessarily cost taxpayers billions of dollars.”

An H&R Block spokesperson also said that there are free file options for taxpayers and that the “IRS should focus additional funding on improving its existing services for taxpayers.”

The Free File Alliance agreement prevented the IRS from creating its own free tax return filing system in exchange for the companies providing free services to taxpayers making $73,000 or less annually.

A 16-year provision within the agreement ended in 2019. Tax experts and government reports say the program’s existence impeded the IRS from pursuing its own electronic free file system. And the program largely failed to reach its intended audience, with only 3% of eligible taxpayers using it.

The IRS in May announced that it would launch a pilot program for the 2024 filing season to allow taxpayers to file directly to the agency for free. If the effort is successful it could be implemented nationwide in the future, potentially saving taxpayers the added cost of going through a tax prep company.

As it moves forward under the helm of new IRS Commissioner Daniel Werfel, groups on both sides of the issue have mobilized to sway the public and Congress over the usefulness of the program.

An April analysis by the AP found that Intuit, H&R Block and other private companies and advocacy groups for large tax preparation businesses, as well as proponents of electronic free file, have reported spending $39.3 million since 2006 to lobby on free file and other matters. Federal law doesn’t require domestic lobbyists to itemize expenses by issue, so the sums are not limited to free file.

In July, a group of congressional Democrats, including Warren and Porter, released a report that outlined how three large tax preparation firms — H&R Block, TaxAct and TaxSlayer — sent “extraordinarily sensitive” information on tens of millions of taxpayers to Facebook parent company Meta and Google over the course of at least two years. TaxAct and H&R Block said protecting client privacy is a top priority, and TaxSlayer said the report contained false or misleading statements. Meta said it was clear in its policies that advertisers “should not send sensitive information about people through our Business Tools.”

In a letter to the heads of the IRS, the Department of Justice, the Federal Trade Commission and the IRS watchdog, the lawmakers said their findings “reveal a shocking breach of taxpayer privacy by tax prep companies and by Big Tech firms" — and cited the report as an argument for the creation of a government-run free file system.

"Tax prep companies simply cannot be trusted with taxpayers’ sensitive personal and financial information," states the Thursday letter to H&R Block CEO Jeff Jones.

Representatives of the Free File Alliance and the American Coalition for Taxpayer Rights did not immediately respond to AP requests for comment.

The IRS was tasked with looking into how to create a “direct file” system as part of the funding it received from the Inflation Reduction Act, Democrats’ flagship climate and health care measure, which President Joe Biden signed last summer. It gave the IRS nine months and $15 million to report on how such a program would be implemented.

The report’s initial cost analysis shows an option run by the IRS “could cost less than $10 per return to provide, and of course would be free to taxpayers — by comparison, simple electronic filing options currently available to taxpayers are around $40.”

The study estimates that annual costs of direct file may range, depending on the program’s usage and scope, from $64 million for 5 million users to $249 million for 25 million users.