​The New York State Department of Financial Services (DFS) has issued a report that concludes that major tax preparation companies that were meant to be partners in the IRS Free File Program instead deliberately undermined it in order to steer taxpayers toward their own paid products.

The IRS Free File program is a public-private partnership meant to provide free online tax preparation and filing services to disadvantaged taxpayers, specifically the lower 70 percent income bracket among taxpayers. The partnership, which was formalized in 2005, establishes that private-sector tax preparation companies will offer free services to these taxpayers and, in exchange, the IRS will not develop its own free in-house tax preparation and filing service. The report noted that while more than a hundred million people are eligible for the program, only about 3 percent of taxpayers actually participate in it. In New York alone, over 300,000 taxpayers who would otherwise be eligible for free filing instead paid H&R Block and Intuit to get their work done.

That the Free File Program is mired in problems is not a new revelation: The Treasury Inspector General for Tax Administration (TIGTA) noted last year that otherwise eligible taxpayers face numerous barriers to actually participating. A big factor is informational: Taxpayers are not told that they must go through IRS.gov to access the program, and, furthermore, many aren't even aware the program exists at all, given that its marketing budget is $0.00. But even if taxpayers are aware of the program, and go to the proper place, they must still meet the different criteria for each firm's offer, which can encompass age, state, income, whether they're in the active military, whether they have a foreign address, whether they qualify for the earned income tax credit (EITC), or more. Even then, after all that, the taxpayer can still be denied by the firm based on factors such as specific types of income reported, or forms and schedules the taxpayer needs to complete their return.

The New York state report goes over many of these same issues as well, but with the added accusation that the tax preparation companies deliberately created the program's problems in order to dissuade taxpayers from taking the free option. It said that the companies did so in two different ways. One was that they created and marketed products that were called "free" in order to lure people away from the actual Free File Program so they could then upsell those same customers on more costly services. The report noted that firms specifically named this policy as part of their growth strategies over many years and, indeed, for many firms it has borne fruit. For example, the report said that Intuit's own data says that 25 percent of new customers and 35 percent of returning customers who started with Intuit’s commercial “free” federal product upgraded to a paid product—for example by paying for preparation and filing of their state tax returns—resulting in approximately $100 million in revenue.

For instance, those who do manage to make it to the Free File Program website on Turbotax are asked to "tell us about you," so that the company can recommend the right tax filing solution, but the report noted that 9 out of 12 options one can select on this page take the user to a paid product. It added that certain customers accidentally upgrade to a paid product without even being informed they had done so until they're right about to file.

The report also said the firms went out of their way to manipulate search results to conceal references to the Free File Program. It said that, in 2019, five firms—Intuit, H&R Block, TaxHawk, TaxSlayer, and Drake—deindexed their websites so that people would not see the pages that referenced the program (three of those five had already deindexed before then). While the companies, when asked by department agents, denied that their actions were meant to undermine the Free File Program, they apparently also said that even if that were the case, doing so does not undermine the initial agreement with the IRS which set up the program, and further that the pages still technically worked even if people couldn't get to them through a typical Internet search.

Yet the department also cited one interview with an Intuit employee, who said the company was concerned that it didn't want customers who were looking for the commercial product to go to the free option instead because it was worried they wouldn't qualify, despite almost three quarters of all filers meeting the income criteria for the program.

The federal government did not escape critique in the report: The DFS said that the Free File program lacked sufficient government oversight, allowing its problems to proliferate. The report noted that, for 15 years, the IRS declined to take a position on deindexing, that its own advisory council, in 2018, faulted the service for failing to establish performance standards, and that, in 2007, TIGTA faulted the service for lack of oversight documentation. The report added that the program has also been chronically underfunded and underpromoted.

"The Department’s investigation found that the Free File Program does not function as intended," said the report's conclusion. "The Program, at its core, sought to rely on commercial tax preparation companies to provide free services to more than 100 million disadvantaged taxpayers in a transparent manner. Instead of doing so, the tax preparation companies engaged in unfair and abusive practices that undermined the Program by creating and marketing their own 'free' products that directly competed with the Program, with the purpose of upselling customers to pay for their services. In addition, five tax preparation companies worked to remove Free File Program webpages from internet search engine results. In doing so, these practices led millions of consumers to needlessly pay for tax services they should have received at no charge."