Congress scraps provision to restrict IRS from competing with TurboTax
Senate Judiciary Committee Chairman Chuck Grassley (R-IA). Image via screengrab.

Congressional leaders are planning to scrap a provision of an IRS reform bill making permanent the Free File deal between the government and private tax filing companies, torpedoing a long-sought goal by industry giant Intuit, the maker of TurboTax.

The development, first reported by Politico Pro and confirmed to ProPublica by a House Republican staffer, comes two months after an outcry sparked by our storyon the Free File provision in a bill called the Taxpayer First Act.

The bill, which has bipartisan support and contains a range of provisions including restrictions on the private debt collection of unpaid taxes, passed the House in April but stalled in the Senate.

Under the Free File program, the industry promises to offer a no-fee option to most Americans and in return the IRS pledges not to develop its own free, online filing service. Such an IRS program would threaten the industry’s profits. Only a small percentage of eligible Americans use the Free File options, and many are instead steered to paid products by the industry.

The new bill, without the Free File provision, could be introduced today and voted on in the House as soon as next week, according to Politico. The bill’s Republican sponsor in the Senate, Sen. Chuck Grassley, told Bloomberg, “In order to get it through the Senate, we have to” drop the Free File provision. Rep. John Lewis, the bill’s Democratic sponsor in the House, told Tax Notes that the updated legislation is expected soon.

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Congress Is About to Ban the Government From Offering Free Online Tax Filing. Thank TurboTax.

A bill supported by Democrats and Republicans would make permanent a program that bars the IRS from ever developing its own online tax filing service.

The Free File program will continue as before. The development in Congress only means the program will not be codified into law. Free File is governed by a memorandum of understanding signed by an industry group and the IRS. The current deal expires in 2021. The IRS said in May that it was launching an internal review of the program, following our stories on how Intuit, H&R Block and other companies deliberately hid their Free File editions from search engines, making it harder for taxpayers to find them. In addition, New York state launched an investigation and lawsuits were filed on behalf of customers. Intuit has said it is cooperating with the New York probe.

A spokesman for Intuit, which spent $2.6 million last year lobbying on Free File and other issues, declined to comment on the Taxpayer First Act.

On Monday, 75 academics and tax experts, along with dozens of advocacy and community groups, wrote to the sponsors of the bill urging them not to codify Free File. “Recent reports warrant further inquiry from Congress into whether the companies in the Free File Alliance are actually offering a free and accessible service to low- and moderate-income taxpayers as promised,” the authors wrote, citing ProPublica’s reporting.

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