A high-stakes battle over free tax preparation

Be wary of offers for free tax preparation as April 18 approaches. They can carry costs that aren’t measured in dollars and cents.

Financial services company Credit Karma, known for providing free credit scores and credit monitoring, has been touting its latest giveaway: It’s offering free federal and state tax preparation and electronic filing for the first time.

Read the forms carefully, however. Credit Karma will ask permission to use the personal information gleaned from the tax filing to directly market financial products to those signing up for the free service.

“We get to understand our members better,” said Bethy Hardeman, chief consumer advocate at Credit Karma. “We can offer loans, credit cards, balance transfer that are tailored to a situation with the better information.”

Customers who decline to have their financial dossier mined for marketing purposes will still receive free tax preparation services, Hardeman said.

Credit Karma’s business model depends on customers’ willingness to share their details. Financial services companies pay a fee to Credit Karma if its marketing brings them customers. Credit Karma must believe that free tax preparation will lure a significant amount of new clients: It purchased tax preparation company AFJC Corp. last year for an undisclosed sum to start the service.

Hardeman said the company has established trust with its customers through offering free credit scores and monitoring, so it’s confident the tax product will prove popular. Still, she declined to say how many people had used the service or how many had agreed to share their information.

Other companies and organizations also offer free tax prep, though people can still wind up spending money on hidden fees or by purchasing services missing from the gratis package. Some programs are reserved for low- and middle-income people, including one run by the Free File Alliance, a nonprofit funded by major tax-prep firms including H&R Block (HRB) and Intuit (INTU), the maker of TurboTax. The alliance offers free federal preparation services to people who had an adjusted gross income of $64,000 a year or less in 2016 – which it says covers around 100 million Americans.

Sounds like a great deal. But critics charge the tax preparers only agreed to set up the alliance in 2003 to block the IRS from launching a service to calculate citizens’ taxes for them, a move that could save consumers billions of dollars. In some European countries, the government sends citizens a prefilled form telling them how much they owe. People can choose to pay it or opt to prepare their own taxes.

Tax preparers’ latest effort to prevent the government from adopting a prefilled form was lobbying for the Free File Act of 2016, which would have barred the IRS from starting such a system. Intuit spent $2.4 million lobbying in the last election, with a chunk spent on this legislation, according to Open Secrets. H&R Block spent part of its $3.2 million lobbying effort on passing the Act.

Neither that bill nor one sponsored by Sen. Elizabeth Warren, D-Massachusetts, which would have paved the way for prefilled tax returns ever made it out of committee.

“Do you want the IRS to be the tax collector and the tax preparer?” asked Tim Hugo, executive director of the Free File Alliance. “The IRS’ inherent interest is to get as much tax possible. Are they going to find every deduction?“

Hugo said the IRS would require a major investment to begin preparing prefilled returns -- money that would come out individual’s taxes. He believes the alliance is sparing the country from a major expense, adding that it has already saved Americans $1.5 billion in tax-prep fees.

The savings could have been far greater. Only 2.6 million people -- a mere 2 percent of those eligible—used the Alliance’s services last year. Hugo said the IRS no longer provides the alliance with a marketing budget, so there are no funds to promote the service.

“We are the protectors of the consumers’ bottom line,” said Hugo. He declined to answer questions about whether companies like H&R Block were protecting their bottom lines by fighting against prefilled forms.

In a statement, H & R Block echoed Hugo’s concerns about putting the IRS in charge of calculating taxes:

“We have confidence that our tax pros or our best-in-class DIY software will dig for all deductions and credits our clients are due,” the statement said.” If the government makes a mistake, who will go to bat for the taxpayer against the IRS?”

An Intuit spokeswoman said in a statement that it “supports taxpayer independence and empowerment and we have long advocated for real, common sense tax simplification reform.” It added that a prefilled form that “minimizes the taxpayers’ engagement in the process of their own compliance, is not a reform. “

Elizabeth Maresca, a tax law professor at Fordham University Law School, said instituting a prefilled form would have mixed results for Americans. She noted that people with simple tax returns who don’t bother to itemize could benefit from such a system as would those who never file taxes but are due refunds.

Yet, she acknowledges that the IRS could make mistakes. Another major concern is what would happen to people who make a living filing taxes, especially accountants who are self-employed or work at small firms.

“We don’t want to put 50,000 people out of work,” said Maresca. “There are a lot of mom-and-pop shops out there that support their families doing taxes.”