Daily Tax Report ®

Fractures Over Free-File Provision Harm IRS Bill’s Odds in Senate

April 29, 2019, 8:46 AM

An effort to reform the IRS—years in the making—is now at risk of tanking in the Senate, as a growing number of Democrats grow wary of a free-filing provision in the bill.

Lawmakers in both chambers were optimistic about the House-passed tax administration bill (H.R. 1957) in the lead-up to the two-week April recess. The legislation was rolled out simultaneously in both chambers, sped through the House tax-writing committee, unanimously passed on the floor, and Senate Finance Committee Chairman Chuck Grassley (R-Iowa) had talked about fast-tracking it.

But a provision codifying the Internal Revenue Service Free File program has received more scrutiny since then—including from Senate Finance ranking member Ron Wyden (D-Ore.) and 2020 presidential hopeful Sen. Elizabeth Warren (D-Mass.). Some Democrats are concerned the bill could make it harder—if not impossible—for the agency to ever offering its own free-file product .

That debate will likely stall, or possibly kill, the bill’s chances in the Senate, according to sources close to the negotiations. Both chambers return from recess April 29.

The bill (S. 928) would need seven Democratic votes to pass the Senate, if it isn’t fast-tracked. Prolonged debate would also bruise what leaders in both chambers had heralded as an example of bipartisanship.

Andrew Grossman, the top tax counsel for Ways and Means Democrats, said April 25 that he was becoming worried about the bill’s prospects in the Senate, calling the situation “a little unfortunate” given the existing support for the bill.

ProPublica, a nonprofit journalism organization, has published a series of articles raising questions about the existing Free File program, which is backed by the tax prep industry. In an April 26 article, Wyden said he would ask the IRS about Intuit Inc.'s efforts to shield its free filing service from Google searches. Intuit makes TurboTax. The company didn’t return a request for comment.

IRS Restriction?

The provision at issue would codify the partnership the agency has with tax prep companies to make free tax return software available to people who earn less than $66,000 per year. But the agency’s agreement with the private partners that offer the software also prohibits it from developing and offering a potential competing service.

Warren on April 11 introduced a bill (S. 1194), currently with 11 co-sponsors, that would bar the IRS from making agreements that “restrict its ability to provide free online tax preparation or filing services.” Her 2020 rival Sen. Bernie Sanders (I-Vt.) is among the co-sponsors.

The debate could be a sign that lawmakers are either still struggling to agree on the bill, or that it will become a vehicle for other provisions in the future, a lobbyist said.

Mounting Concerns

Wyden is continuing to work with his colleagues on a path forward. That effort could clarify that the bill doesn’t ban the IRS from ever instituting a direct-file program, a spokeswoman in his office said. It isn’t clear what that clarification would look like, or how long it may take to ease the concerns.

“If Sen. Wyden can convince his recalcitrant fellow Democrats that, by the time the IRS is ready to offer direct online filing services, the legislation will permit that to happen, then the Senate may be able to pass the House bill without amendment,” said Russell W. Sullivan, a former Democratic staff director for Senate Finance.

“If Sens. Grassley and Wyden have to modify the statutory language to make that clear, then there is a chance the bill unravels and won’t pass as a standalone bill,” said Sullivan, now a shareholder with Brownstein Hyatt Farber Schreck LLP in Washington.

A spokesman for Grassley referred questions about the bill’s prospects to Senate Democrats.

The smart money now seems to be on a shelf-ready IRS bill that has the approval of the Senate and could get rolled into a bigger spending bill at the end of September, according to two former congressional aides.

Senate Majority Leader Mitch McConnell (R-Ky.) has historically resisted wasting precious floor time on bills that aren’t a finished product, the former aides said. He instead is focused on approving the administration’s nominations.

‘Good-Faith Effort’

A compromise situation, in which the Senate strips the free-file provision but passes the larger bill, could still bring problems.

House Democrats are wary of the Republican-controlled Senate tacking on their own tax priorities to a package, said Alexander Reid, a former legislative counsel for the Joint Committee on Taxation. It is a “fairly good-faith effort” from House Democrats to have passed the bill in the first place, he said.

“One strategy for the House is to give nothing, pass no tax legislation at all and give the Senate no vehicles to do anything,” said Reid, now a partner at Morgan Lewis & Bockius LLP. “The fact that they’re willing to try suggests there is some willingness to do a deal.”

It isn’t the first time a bill to rework the IRS moved through the House and got snagged in the Senate. A version (H.R. 7227) cleared the House last year, but died in the Senate.

The bill also puts income limits on the agency’s private debt collection program and requires the IRS to come up with a new customer service strategy.

It Was Always There

Intuit has spent more than $3.9 million lobbying on versions of the tax administration bill, among other tax topics. H&R Block Inc. has spent at least $5.3 million over that same time frame, according to lobbying disclosures.

A spokeswoman for H&R Block said the bill would improve and modernize IRS service. “We regularly engage with policymakers on matters that would benefit taxpayers,” she said in an April 26 statement.

A Republican aide who spoke on the condition of anonymity said it would be worth clarifying that the free-file provision doesn’t make it illegal for the IRS to offer its own online system.

The Free File program is now in its 17th year. According to the IRS, nothing in the bill would prohibit the agency from offering its own return preparation platform in the future.

Given that the program has been effectively enacted for over a decade, the provision’s inclusion in an otherwise noncontroversial tax administration bill isn’t logical, said Jeff Trinca, who previously led a commission to restructure the IRS.

“It appears to be creating political problems with the bill—now we might have a debate going into the presidential election around the IRS building a free filing system,” said Trinca, now a vice president with Van Scoyoc Associates in Washington.

To contact the reporters on this story: Kaustuv Basu in Washington at kbasu@bloombergtax.com; Robert Lee in Washington at rlee@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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