Budget cuts spell end of Montana’s free tax-filing service

In a cost-cutting move, the state Department of Revenue has discontinued an online service that allowed Montanans to file individual income taxes for free.

Instead, the state is now directing taxpayers to the Free File Alliance, a nonprofit coalition of  tax software companies that partner with the IRS to enable many taxpayers — many, but not all — to e-file their tax returns for free.

The change was noted by a regular reader of Last Best News, who wrote in to ask why the Department of Revenue “shut down its own successful, free system and now wants taxpayers to pay these for-profit companies instead.”

We thought it was a good question, which we posed to Mary Ann Dunwell, the department’s public information officer and also a Democratic member of the Montana House from Helena.

Dunwell answered by saying there are two reasons for the change: the state budget crisis has put the pinch on all departments, and the free tax-filing service was being used by fewer and fewer people.

Mary Ann Dunwell

Because of budget cutbacks, Dunwell said, the Department of Revenue has 70 vacancies it cannot fill, and on top of that it recently let go of 23 employees. It cost money to maintain the free tax-filing service, she said, including the expense of programming new tax forms into the system every year.

And it was becoming more difficult every year to justify the expense. In 2016, Dunwell said, only 15,255 individual filers — or 1.5 percent of all those who filed state taxes — used the free service. Last year, that number dropped to 12,953, or 1.3 percent.

“We had to weigh the cost-benefit, because frankly the rest of Montana taxpayers were subsidizing the very limited use of the service,” she said.

Using the Free File Alliance (click on the link and scroll down to see the various vendors) is still free for most taxpayers, she said. For example, Online Taxes offers free online filing of federal and state taxes for those with a federal gross adjusted income between $14,000 and $66,000.

Another vendor offers free filing for those making under $60,000, or $64,000 for active military personnel.

Dunwell wondered if the Last Best News reader who mentioned the change had run into a familiar problem — that unless you used the Free File Alliance to file your federal and state income taxes at the same time, you would be charged for filing your state taxes.

That reader, though, said no, that he was in that small class of people who prepare their own taxes but make slightly too much to qualify for free filing from any of the alliance vendors.

Dunwell said that in Montana, a relatively low-wage state, a higher percentage of taxpayers would qualify for free filing than in most other states. She said about 350,000 Montana state income taxpayers earn less than $64,000, while about 90,000 earn more than that (though not all is earned income; there is also some investment income).

That means about a fifth of Montana taxpayers who could have filed their taxes for free under the old system now make too much to qualify for free services from members of the Free File Alliance.

The bigger problem, right now, Dunwell said, is that a lot of people found out too late that they had to file federal and state taxes at the same time to be able to file state taxes for free. There are statements to that effect through the documents that need to be filled out, she said, but the state needs to post a prominent notice to that effect on the Department of Revenue’s online portal to the Free File Alliance.

She promised that would be added as soon as possible.

This story originally appeared on Last Best News, of which Ed Kemmick is the founding editor.