SIOUX FALLS, S.D. (KELO) — The Internal Revenue Service is making it easier for taxpayers to save money in tax prep and delivered a blow to the TurboTax and H&R Blocks of the world this week.
According to the IRS, 70 percent of taxpayers are eligible to do their taxes for free. However, according to data analyzed by KELOLAND News, not many are taking that option.
We looked at the last several years of data from the IRS and found that in the 2018 federal fiscal year (Oct. 2017-Sept. 2018), only 6,778 returns in South Dakota were filed with the Free File program. Applying the IRS estimate that 70 percent of taxpayers are eligible that would mean nearly 287,000 returns were filed that were eligible. Instead, those people paid or filed by paper.
Early data from the 2019 tax season showed an increase in people using Free File.
Who is eligible and how does it work?
Adjusted Gross Income (AGI), according to the IRS, is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account.
TurboTax, H&R Block, Liberty Tax and TaxACT are among the members.
To use IRS Free File, taxpayers need to go to IRS.gov and use a tool to find the company best matched with their tax situation. In addition to the normal documents needed for taxes, people also need an email address and a copy of last year’s tax return.
Once the taxpayers are matched to the service, they can fill out their taxes for free.
Free File hasn’t opened as of Thursday afternoon but is supposed to at some point in January.
It seems pretty simple. Taxpayers work with the tax service matched to them, fill out their tax return forms and file. There should be zero costs. So, why are not many people taking advantage of the program?
Reports in by non-profit investigative news group ProPublica in 2019 found several issues with Intuit-owned TurboTax and its marketing.
First, the site was advertising “free filing” on their homepage and throughout the site. No matter what happened when ProPublica tried to file taxes, there would be a charge. Sometimes more than $200.
It turns out, you actually cannot go directly to TurboTax.com. Hidden in the support section of the site was a note that it’s impossible to find the actual free version on TurboTax’s site. Instead, people were supposed to go to TaxFreedom.com.
ProPublica later discovered code in the site that deliberately hid Turbo Tax’s IRS Free File program from Google searches.
They also found the company made people with disabilities, the unemployed and students pay more for their services after the new tax law was passed and even steered members of the military away from the free version that’s promised by the federal government.
There are several changes in response to these issues announced by the IRS on Monday.
Companies participating in Free File will not be allowed to hide their websites from internet searches. The companies will also need to return taxpayers to the IRS website at the earliest feasible point if they do not qualify for the Free File program that the company offers.
The companies will also be required to survey people who used Free File and report the survey results to the federal government.
In a statement, IRS Commissioner Chuck Rettig didn’t say the changes were specifically because of TurboTax.
“These steps will help further protect taxpayers and make important improvements to the program,” Rettig said. “The IRS is committed to improving the Free File program and providing a great option for taxpayers to consider when preparing their taxes.”
The biggest change, however, will likely disrupt the tax filing industry. Since the Free File alliance was started in 2003, the IRS had promised to not compete with the filing services.
“In recognition of this commitment, the federal government has pledged to not enter the tax return software and e-file services marketplace,” the agreement said.
That sentence was removed this week.
This means the IRS will be able to develop a platform for taxpayers to go through the entire process. Many other countries already do this.
“This updated agreement is part of a larger effort by the IRS to help taxpayers meet their tax obligations,” Rettig said.
TurboTax owned by Intuit said in a statement that they support the changes.
“We believe a strong Free File program benefits taxpayers, empowering eligible individuals and families to manage their own finances through the preparation and filing of their taxes at no cost to them or the government,” the company said. “Be it through IRS Free File, state Free File, Volunteer Income Tax Assistance Program (VITA), Tax Counseling for the Elderly (TCE), military assistance or commercial free tax preparation, Intuit has for decades supported free tax preparation options and has filed more absolutely free tax returns than all other tax prep software companies combined.”
The company also said it was committed to providing free tax preparation and filing for those who need it the most.
“Despite attempts by some recent media coverage to suggest otherwise,” Intuit said.
Intuit said TurboTax was used completely free by approximately 13 million filers last tax season and 55 million taxpayers over the last 5 years.
A further breakdown of that number, according to TurboTax, is 1.2 million returns filed with Free File and 11 million filed with “TurboTax Free Edition.”
ProPublica reports that the “TurboTax Free Edition” is free for people filing very simple returns only.
“It puts many people on track to pay,” the news organization reported.
The company also said it has been linking back to IRS.gov for the past two tax seasons, its search and marketing practices already conform to the rules set out by the IRS and that it supports the surveys.
Company officials say TurboTax will continue to be part of the Free File program, even as the IRS is now expected to build its own platform.
“We are confident in our exceptional product, and we participate in the Free File program to help give eligible taxpayers another option to file their taxes for free,” Intuit said.
The National Taxpayer Advocate, an independent office inside the IRS, listed the Free File program as one of the most serious problems facing taxpayers in 2019.
The IRS has a new form for seniors and retirees. Watch for that story later on KELOLAND.com.