Bait and switch scam anyone? Read On.
Here is a story about how tax preparation software companies lobby the IRS to take advantage of tax-payers.
What is the Free File Alliance (Official IRS page, Free File Alliance FAQs)?
In 2001 the IRS Free File initiative was created by the the Office of Management and Budget Quicksilver Task Force (President’s Management Agenda) and it instructed the IRS to provide free and secure online tax preparation services to the majority of taxpayers. In 2002 the IRS negotiated a contract with the largest commercial tax software companies to provide accessible free tax preparation services to at least 60% of tax-payers.
The Free File Alliance is a “non-profit” lobbying organization created by a group of private sector tax software companies to “help” the IRS provide accessible free tax preparation services to at least 60% of tax-payers.
Why did the government engage in this partnership?
The government believes private industry, given its established expertise and experience in the field of electronic tax preparation, has a proven track record in providing the best technology and services available. Additionally, the U.S. Treasury has indicated it does not want the IRS to enter into the tax software business. The government believes a partnership with private industry will provide taxpayers with higher quality services by using the existing expertise of the private sector; maximize consumer choice; promote competition within the marketplace; and meet objectives in the least costly manner to taxpayers.
Except there are some major conflicts of interest. Now the taxpayer ends up paying twice, why?
Here is my story
While filing my taxes last weekend I went to the IRS website and was pleasantly surprised to find the IRS free-file program, it states that if you earned less than $62,000 in 2015 you are eligible to use free tax-preparation software from eligible vendors (i.e. the Free File Alliance).
That sounded great, the HR Block software offer seemed perfect so I followed the link, created an account and started completing all of the forms for the joint tax return (both for me and for my wife, we were both eligible).
The overall process of gathering all of the documentation (W-2, 1099-div, 1099-int), completing all of the forms, deductions, credits …etc was pretty standard and took me about 2 hours (including the state taxes).
and the Switch
Then things went sour. Prior to submitting the return electronically we were being charged $40 for the federal return preparation and $40 for the state return preparation. I thought well there must be an error since:
- We are eligible.
- They are clearly endorsed by the IRS and,
- They are a large (and respected?) corporation…
So thinking I did something wrong I went over the application process again. I tried with an individual return both for me and my wife (for this we were charged charged less though not free, and the return was not favorable).
Before giving up, I thought well let’s go ahead and save our data and import it to another free-file software vendor, but of course the only options was: pay what we say or start over.
Would you like to keep the return we prepared for you?
- Yes, I’ll keep my completed return (It’s ready to file!)
- No thanks, delete it. I’ll start over and prepare my return on my own.
Vendor lock-in in action 🙂
Generate blind dependence, trap them inside and then make them pay.
Frustrated I gave up, I paid. By this time I had spent most of my day on this. Also I thought maybe the IRS free-file contract did not cover joint returns, oh well.
But wait … it gets better.
So just out of curiosity I decided to call their customer service support and after a couple of transfers and a nice mix of classical music and advertisements I got a hold of their product support rep (or something along those lines), here is the conversation:
Me: We were overcharged $80, when as per your advertisements we should have received this service for free? We were recommended by the IRS free-file page. The IRS (i.e. through the Free File Alliance) has a contract with tax software vendors to provide free tax services to individuals with AGIs of less than 62K ; Our individual AGI was below 62k.
We filed jointly, perhaps that could be the reason?
Also we were only told the price after we spent about 2 hours to complete the application and then there was no way to export our data.
Joan/Karen/rep: Let me check on this for you.
Joan/Karen/rep: It seems you didn’t use the IRS page but you accessed our site directly, therefore the offer is not valid.
Me: Excuse me but that is not true, the only reason I went to your website was because I was redirected from the IRS site.
Joan/Karen/rep: Well, you see you have to check the small banner at the top of the page (I am guessing she meant the address bar as there is no banner) to make sure that you are still using the IRS sponsored service and not our site directly. What must have happened is that when you were redirected from the IRS you clicked a link from the sponsored page and then it redirected you to continue through our site.
Me: Wait, What? but the tab on the left said it was free, how can you tell the difference?
Joan/Karen/rep: There is no difference, The only way you can tell is by looking at the small banner at the top of the page. It is free to start, then you have to pay.
Me: So you provide a link in the IRS sponsored site to direct users to your paid service? and you use the same advertisements and interface to trick customers into thinking they are still using the free service? and furthermore you wait until the last page to charge them with no option to export their data?
I am sorry but deceiving customers in such a way is not right, in fact it is quite dishonest.
Joan/Karen/rep: So how do you think we can make money?
Me: What? So this is actually a bait and switch scam and somehow this is perfectly OK? I can’t believe this. Hang up.
Where do we draw the line?
- At what point can we start calling advertisements for what they are, nicely packaged lies? or should we call them enhanced truths?
- Why do we allow marketing professionals to continue to gray the line between plain lies and actual information.
- Why is it OK for companies to blatantly lie to consumers yet anywhere else in society it is considered rude and dishonest.
- How have we allowed this practice to become socially acceptable yet we punish people that lie in courts?
- At what point does a misleading product actually become a scam?
A great initiative: a flawed solution
While the IRS initiative to make taxes accessible to the common person is a great step (i.e. the tax code is complex), the implementation lobbied by the Free File Alliance is economically flawed (largely to the advantage of tax software vendors).
The IRS free-file page (with the credibility of the agency) incentivizes consumers to use one of the software services negotiated with the free file alliance partners. However as consumers leave the IRS site, software vendors guide them through a different more lucrative path.
What ends up happening is that consumers end up paying twice: First as tax payers through the IRS and second as individuals to the software vendors. All this while using the IRS free-file page as a source or free advertisements for vendors and their services.
Moving forward: an alternative solution
Here is one idea: what would happen if instead of negotiating a contract with tax software vendors (i.e. pre-paying them to provide free tax services), the IRS invests a fraction of the funds on a publicly funded open tax platform developed by a FOSS foundation/organization?
This would mean that (these are open for change):
- The intellectual property for the software developed with public funds would be in the public domain (as it should be).
- The enforcement of regulations and the prevention of abuses will largely be reduced given the transparency and openness of the source code (e.g. a bait and switch scheme would not be possible, and dishonest advertising/marketing will not exist).
- People will have complete access over their information and are free to export their data to any proprietary vendor if they wish to do so (no more manipulative vendor lock-in).
- The government does not need to devote money to start a business and enter the commercial tax preparation business nor does it need to negotiate with tax software vendors for providing this service.
- The amount of funds devoted to launch the open tax project would be significantly smaller than e.g. contracting a proprietary design firm to do the job (due to the logistics and collaborative nature of FOSS development).
- Knowledge of tax code would become widely accessible not only to the developers of the software but also to anyone interested in the freely available source code.
- Tax software vendors will cease to hold an oligopoly over tax preparation services, this will incentivize competition and lower the prices for commercial tax services.
- Freely available and accessible tax information will incentivize tax software vendors to provide honest information about their services instead of using dishonest advertisements to trick uninformed consumers.
- Even in the future case that the IRS stops funding the organization maintaining the open tax platform, the IRS can negotiate with other organizations to pick up (fork) the source code and continue the development (due to the open intellectual property).
- Even in the future case that the tax software lobbying groups help pass laws to prohibit the IRS (or Dept. of Treasury) from funding the open tax platform, the source code is open and people can continue using it while collaborating to maintain it updated with tax code changes.
- IRS funds devoted to the project will decrease over time. After a mature codebase is developed, technical efforts will decrease and mainly involve keeping track of annual changes in the tax code. This is in contrast to the fixed fees charged by private companies for their services.
But these are only the advantages for the IRS agency specifically. We users also benefit from using FOSS software (you can read more here).
For these reasons, I truly believe an open tax platform could be a better alternative than the current half-functional approach. Another alternative would be using pre-filled forms but that alternative was lobbied against by tax software companies and turned down by congress.
Please voice your concerns in the comments section below. I will gladly update this post If I missed anything. My hope is to polish this draft and at some point in the future post a short summary in change.org
References (with some interesting reads at the bottom)