free The IRS Free File Program Overview Timothy Hugo, Executive Director Stephen M. Rya?rngeneral Counsel Ink? This Free File Presentation Chronology and Achievements Millions of free returns inside and outside the Program 0 Extending the value of Free File through State Free File Programs 0 Free File fillable forms Description of select built-in protections for taxpayers Attacks on Free File are deliberate and calculated in an effort to establish a government-populated system I. Chronology and Achievements Free File Chronology and Achievements IRS and private-sector companies establish Free File through Administrative Procedure Act (APA) Rulemaking (Federal Register, Vol. 67, Page 51621, Aug. 8, 2002). Since then, the Program has been renewed through succeeding Memoranda of Understanding three times under both Democratic and Republican administrations. 53 million federal income tax returns filed through Free File Program to date. The value of those 53m returns Approximately $1.6 billion or more. Additional benefits Enabled qualified new entrant companies into the marketplace. Consumers benefit from private-sector innovation and constantly improving software. Free File and VITA Returns Address Poor and Under-Served 2018 Total 2017 Total Change 0 Free File 2.315m 2.171m 5.51% 0 Fillable Forms 286,636 290,098 -2.42% 0 Total 2.602m 2.461m 4.58% By comparison, the Volunteer Income Tax Assistance (VITA) Program files more than 3 million federal income tax returns for under?served and low-income taxpayers and families. The cost of the VITA Program is much higher than Free File, and includes five-year?Eontr?act costs of approximately $30 million, plus costs for grantees. Free File Fillable Forms 0 All taxpayers without regard to income level are eligible to use Free File fillable forms. Extending the Value of Free File: 23 State Free File Programs 0 Arizona North Carolina 0 Arkansas North Dakota District of Columbia Oregon 0 Georgia Rhode Island Idaho South Carolina 0 Indiana Vermont 0 Iowa Virginia 0 Kentucky West Virginia 0 Massachusetts 0 Michigan Minnesota 0 Missouri 0 Mississippi 0 Montana 0 New York (The majority of the 42 states (plus Guam and the District of Columbia) that have state income taxes are participants in the state Free File Program. Our savings estimates do not include the value of these free state returns and electronic filing.) Free File Program?s Benefits: Free Tax Returns Outside of Free File ProfessorJohn N. Friedman of Brown University, and formerly Special Assistant to President Obama at the National Economic Council, found in a 2013 study that companies ?provide substantially more free federal returns than IRS statistics reflect.? John N. Friedman, ?The IRS Free File Program: Tip of the Iceberg for Free Federal Returns,? Bloomberg BNA, Daily Tax Report (Oct. 9, 2013). Free Tax Returns Outside of Free File 0 Professor Friedman, who surveyed 15 companies in 2013, found that they provided nearly five times as many free federal returns (or approximately 14.3 million federal returns) on their own initiative in tax season 2013 as they did through the Free File Program (approximately 3 million federal returns) 0 Professor Friedman thus concluded: ?Free File, lnc., member companies provide substantially more free federal returns than IRS statistics reflect. Over the past five years, members of the Free File Alliance have provided roughly 3 million free federal returns per year as part of the Free File Program. But these companies provide nearly five times as many free federal returns on their own initiative.? Popularity Among Free File Users . In a 2009 survey by the IRS, 95 percent of both traditional Free File users and users of Free File Fillable Forms said they intend to use Free File next year. 98 percent of traditional Free File users said that they would recommend the program to others. 0 87 percent of traditional Free File users said they were very satisfied with Free File. Free File Built-In Protections 1. Structure of Eligibility Requirements ?Each Member and New Market Entrant shall make its Services available to not less than 10 percent and not more than 50 percent of the individual taxpayer population . . . within the Coverage the lowest 70% of taxpayer population calculated using AGI). Paragraph Seventh Memorandum of Understanding Between IRS and FFI 1. Structure of Eligibility Requirements (conunued) The Free File Program is structured in this manner for specific reasons To ensure that a limited number of tax preparation companies do not overtake the Program; 0 To ensure diversity of preparers; 0 To ensure taxpayers can choose from multiple Free File offers; and 0 To ensure competitive marketplace innovation. 2. Adherence to Security and Privacy Standards ?Each Member and New Market Entrant shall possess and provide appropriate documentation to the IRS and the Executive Director [of demonstrating that they have acquired third party security and privacy certifications which are applicable for the period the company is actively listed on the IRS Free File Website.? Paragraph Seventh Memorandum of Understanding Between IRS and FFI 3. Annual Security Testing 0 ?Annually before filing season launch, FFI, or its Members, will conduct penetration and vulnerability assessment of individual Members prior to the start of the filing season. The annqu will be conducted prior to, or concurrent with; the annual Acceptance Testing System (ATS) testing.? Paragraph 4.6.4, Seventh Memorandum of Understanding Between IRS and FFI 4. Additional Requirements on Privacy ?All Members shall adhere to industry best practices to ensure the taxpayer return information entrusted to them is secure and the privacy of such information is maintained.? Paragraph 4.3.4, Seventh Memorandum of Understanding Between IRS and FFI {5 5. Adherence to Section 7216 ?Members shall only use or disclose the tax return data Members collect in provision of Services to taxpayers in accordance with the provisions of Section 7216 of the [Internal Revenue]Code? Paragraph 4.12, Seventh Memorandum of Understanding Between IRS and FFI 6. Links to Paid Sites Prohibited ?Providing an automatic link from the IRS Free File Website to a lVlember?s paid website will result in delisting.? Paragraph 4.20.3, Seventh Memorandum of Understanding Between IRS and FFI 7. Prohibition on ?Up?Selling? ?No Other Sales and Selling Activity. No additional sales or selling activity are permitted to Free File customers except as described above sale of state tax return].? Paragraph 4.33.5, Seventh Memorandum of Understanding Between IRS and FFI 8. Free Services May NOT be Conditioned ?Consortium Participants shall also agree that provisions of Free Services shall not be conditioned on obtaining an eligible taxpayer?s consent to solicitations of additional business.? Advance Notice of Intent to Enter Agreement, Federal Register, Vol. 67, Page 51621, Aug. 8, 2002. 20 9. Functionality of Member?s Website and Software Program ?Members and/or New Market Entrants will provide the Executive Director and the IRS with a link to the Member?s and/or New Market Entrant?s proposed Member?s Free File Website . . . before the Website is expected to go live. . . . Prior to launch, the IRS and the Executive Director will review each Member?s Free File Website usability. If the IRS and/or the Executive Director determine that a Member?s and/or New Market Entrant?s Software Program is difficult to use, and has or will result in a significant and measurable reduction in the ability of taxpayers to complete their return, the Member will not be listed on the IRS Free File Website or may be delisted until both the IRS and the Executive Director are satisfied that the issue(s) which led to the concern . . . have been addressed.? Paragraph 4.4, Seventh Memorandum of Understanding Between IRS and FFI 0 For the past five years, a former Treasury Inspector General for Tax Administration (TIGTA) auditor, who also is an expert on cybersecurity, has conducted this annual testing. 10. All Free File Companies Participate in the IRS Security Summit All current Free File companies are participants in the IRS Security Summit that began in 2015 to combat identity theft tax refund fraud, and is an endorsing organization. The Security Summit has been a success. In 2017, the number of tax returns with confirmed identity theft was 597,000, compared to 883,000 in 2016 a 32-percent decline. The amount of refunds protected from those fraudulent returns was $6 billion in 2017, compared to $6.4 billion in 2016. In 2015, there were 1.4 million confirmed identity theft returns totaling $8.7 billion in refunds protected. Overall during the 2015- 2017 period, the number of confirmed identity theft tax returns fell by 57 percent with more than $20 billion in taxpayer refunds being protected. This illustrates the value of public-private partnerships and that success comes from marketplace innovation. Ill. Attacks on Free File Are Ideologically Based Attacks to Discredit Free File Are Often Ideologically Based 0 The proponents of a government-sponsored tax- filing system where government pre-populates taxpayers? return with data/information that is available to government have attacked the Free File Program because their goal is imposition of a government?sponsored tax filing system. 0 These attacks are deliberate and calculated, because Free to the establishment of a government-populated return. Key Problems with Government- Sponsored Returns A government-sponsored tax?filing system overturns the current American tax administration system based on Voluntary Compliance. It is not right -- from a fairness standpoint that the taxpayer would be liable for lRS?s work. IRS has a huge conflict of interest, as they would be preparing, reviewing and auditing returns. Whose side would they be on in a dispute? A government-sponsored tax filing system where taxpayers? most personal financial information is sent through the US. Mail is fraught with security and identity theft concerns. Key Problems with Government- Sponsored Returns (continued) 0 A government-sponsored tax?filing system is a backdoor method of increasing taxes. Why? Many poor and under-served taxpayers would choose to not challenge the government?s calculation of their taxes, and forgo important social benefits for which they are qualified and critical to their livelihood. 0 The proponents of government-sponsored returns claim that their proposal will cost little. In fact, studies have shown that such federal and state systems will cost tens of millions of dollars to build, operate and maintain. IRS already struggles to meet both its customer service demands and overall mission. Study of ?Return Free Filing? ?Based on our analysis, we conclude that there is no plausible set of assumptions under which one could conclude that the benefits of implementing RFF [Return-Free Filing] would exceed the costs.? Jeffrey A. Eisenbach, Robert E. Litan, Kevin W. Caves, ?The Benefits and Costs of Implementing ?Return Free? Tax Filing in the March 2010. Failure of Ready Return in California In 1999, the Franchise Tax Board in California conducted an illegal procurement on Ready Return. A California Superior Court ordered that the procurement be ended because it violated the California Constitution and laws. Subsequent variations of Ready Return were attempted, but the program failed and was turned off because of a low take-up rate and higher per return costs. The cost per return was never made public. In 2012, about 80,000 used the California program out of millions of taxpayers there. Recent Assertions About Free File Are Factually Inaccurate Assertion that Free File companies engage in "predatory up?selling of paid products? taxpayers is factually inaccurate. Assertion that Free File companies engage in criminal activity by violating Section 7216 is factually inaccurate. Assertion that Free File companies ?deceptively strip? taxpayers of legal remedies is factually inaccurate. Assertion that Free File companies negligently expose taxpayers to malicious cybersecurity threats is factually inaccurate. Recent Assertions About Free File Are Factually Inaccurate 0 Assertion that Free File companies ?deceptively strip? taxpayers of legal remedies is factually inaccurate. In reality, taxpayers are given the opportunity to take advantage of extremely favorable arbitration provisions, or maintain the status quo by opting out a substantial improvement for the taxpayer. 0 Assertion that Free File companies negligently expose taxpayers to malicious cybersecurity threats is factually inaccurate. The basis for this assertion is a ?study? by Online Trust Alliance, which actually was a poorly camouflaged effort to try and sell members software with which it has a commercial relationship. How can we make the Free File Program more successful for taxpayers?