A heavily-hyped program designed to help a wide group of taxpayers get free online tax preparation has turned out to be amazingly unfriendly to use year after year.
This year, maybe, things could be different.
The Internal Revenue Service has added some tweaks to offer more consumer protections to the "Free File" program for the upcoming tax season, which kicks off Jan. 27. Free File is live now but you won't be able take the final step and e-file that return until the IRS begins accepting returns later in January.
If you have never heard of Free File or have no idea how to use it, you're far from alone.
2020 tax filing season opens Jan. 27: Here's what you need to know
In fact, critics charge that some tax software firms even went out of their way so that you couldn't find their Free File offerings "by using a coding device to hide Free File services from internet search results or buying ads that directed taxpayers towards their fee-based software products," according to the 2019 Taxpayer Advocate Service Annual Report to Congress released in early January.
Such deceptive practices had been raised by ProPublica in late October.
What should I know about Free File?
The Free File program remains a solid option, something that could save hundreds of dollars in tax prep services for young workers and those on limited budgets. Using this program you can prepare and file your federal individual income tax return for free using tax software. But you need to pay attention to how it works and how to avoid other products with fees.
Free File brings together different software programs offered by rival, private tax-prep companies. In 2002, the IRS entered into an agreement where some companies would provide free tax return software to a certain percentage of U.S. taxpayers, and in exchange, the IRS would not compete with these companies by providing its own software to taxpayers.
Roughly 70% of taxpayers would qualify for some services offered, as measured by adjusted gross income. Yet only fewer than 2% of taxpayers actually use Free File due to a great deal of frustration and confusion.
How do you qualify for Free File?
To make the process smoother, it can help to first understand what to expect, as well as some of the hurdles:
- If your gross adjusted income is $69,000 or less, you can go to www.irs.gov/free-file to participate in Free File.
- Remember, your adjusted gross income isn't necessarily your salary. It can be lower than your gross income after factoring in pre-tax contributions to a 401(k) or health savings accounts. If you have a good deal of capital gains from investments, your adjusted gross income would be higher than just your income from your job.
- One trick: Tax-prep providers participating in Free File can be specific about what returns they'd handle for free. So you must hunt for a tax provider that is offering services to someone in your age group or income level. This can be somewhat time consuming but it is possible to do via the IRS site.
- Once you find the tax software that you can use, you'd click on "Leave IRS site" to go to that provider's platform to begin processing your return.
- Once completed, the federal return is electronically filed.
The online site at www.irs.gov currently allows you to browse a variety of offers from 10 different tax providers. Boxes list rules for each program that's participating in Free File in an easy to read format.
The Taxpayer Advocate 2019 report noted that only four of the 11 companies last year offering Free File services provided services to taxpayers of all ages, and even those four have restrictions based on the taxpayer's state of residence, income or eligibility for the Earned Income Tax Credit.
What kind of hurdles might I face?
Restrictions for individual Free File programs continue to be somewhat odd.
TaxAct Free File, for example, will offer you a chance to use its Free File services if your adjusted gross income is $59,000 or less and your age is 56 or younger.
The Free File program delivered by H&R Block offers free online preparation of federal tax returns if your adjusted gross income is $69,000 or less and your age was between 17 and 51 as of Dec. 31, 2019.
TaxAct, H&R Block, TaxSlayer, the Free File program offered by TurboTax, and others also offer their Free File programs if you're eligible for the Earned Income Tax Credit or you're active military with an adjusted gross income of $69,000 or less.
Some programs offer free state returns if you qualify for the federal return, such as H&R Block; others do not or may limit their offerings for free state returns to specific states.
And if taxes aren't already confusing enough, a sizable group of tax software providers offer their own free programs in addition to the Free File offerings.
It is interesting to note that software providers taking part in Free File provided free tax software to at least 17.7 million taxpayers outside of the Free File program during the 2019 filing season, according to the National Taxpayer Advocate's report.
"It is likely that most, if not substantially all, of the 2.5 million taxpayers who used Free File software last year would have been able to file free through company websites if Free File did not exist," according to the National Taxpayer Advocate's report.
Already this year, H&R Block has been heavily advertising on TV that its Free Online services – not part of Free File – offer more free forms than TurboTax.
H&R Block said the most common situations where H&R Block is free and TurboTax is not include when forms are needed in some different situations, such as when someone claims the student loan interest deduction or has been unemployed.
TurboTax notes that its TurboTax Free Edition is not subject to income limits and –different from its Free File offering – is "designed for taxpayers with simple tax situations filing only the new 1040 tax form with no additional schedules."
That includes W-2 income, limited interest and dividend reported on a 1099-INT or 1099-DIV, claiming the standard deduction, Earned Income Tax Credit and child tax credits. The TurboTax Free Edition is not an option, for example, if you have mortgage and property tax deductions or student loan interest and education expenses.
"If you have a simple return, import your W-2, answer simple questions about your life, and we'll get you your maximum refund, guaranteed – for free," according to a TurboTax spokesperson.
The challenge with using such offers, though, is that you could be tempted to pay for some services that can give you "on-demand help" from a tax expert. And it may be hard to just Google free tax services and know the difference between Free File and other services.
In the 2019 report, the National Taxpayer Advocate raised concerns that some tax software participants have been steering eligible taxpayers away from the Free File program software products and toward their commercial products. The cross-marketing of fee-based services on Free File program software products can confuse taxpayers, as well.
Now, some of the rules of the game are changing to improve customer satisfaction and use.
Big time tax firms that participate in Free File, including H&R Block and TurboTax, have agreed to some significant changes. They include:
Stopping the bad web search tricks
Tax preparation firms have agreed that they will not exclude "Free File" landing pages from an organic internet search. In the past, consumers had a hard time finding the free services thanks to web-based trickery.
We're talking about using standardized naming for the Free File products being offered. Look for the labeling: "IRS Free File program delivered by (the name of the software provider)."
Making it easier to find a Free File service that works for you
If the taxpayer does not qualify for a specific firm's Free File program, firms must have a link on their site that enables taxpayers to return to the IRS Free File website at the earliest possible point in the process.
That way, the consumer can see if there are other tax services offering Free File programs that he or she could be qualified to use.
Intuit's TurboTax said it has had this practice in place for the past two years.
Monitoring Free File experiences through surveys
Tax preparation firms will regularly survey taxpayers who e-filed a tax return through the Free File program and report results quarterly to the IRS.
Beginning in February, those providing Free File services must use a statistically valid method to uniformly select and survey those who have used Free File to complete their federal tax returns.
The IRS says the changes are designed to make the process more taxpayer-friendly. Whether it will be enough, though, remains to be seen.
One of the hooks involved with the changes: The IRS is no longer promising not to enter the tax return software and e-file services marketplace. The pledge no longer exists for not creating a government-run system.
This article originally appeared on Detroit Free Press: Filing your taxes for free should be easier now with Free File changes