Pressures for improved, broader free e-file buffet IRS

Congress and auditors have criticized the IRS for insufficient oversight of industry that provides free electronic tax filing for a segment of the population. Some members of Congress and tax experts say the IRS should develop its own portal to provide free electronic filing and make it available for all individuals. Yet others question whether the federal government should prepare and collect taxes.

The IRS has relied upon the tax preparation software industry to provide that service under the Free File Alliance for those who fit industry's income or other criteria. IRS and industry renegotiated that contract for use through 2009 with more eligibility restrictions than previously.

'If the tax preparation industry cannot provide free basic filing services without hidden costs and traps, perhaps it is time to consider having the IRS provide a direct filing portal to enable all taxpayers to file electronically without cost,' said Senate Finance chairman Charles Grassley (R-Iowa) and Senate Finance Ranking Member Max Baucus (D-Mont.) in a letter last week to IRS commissioner Mark Everson.

The Senate Finance Committee, which oversees the IRS, reprimanded Everson for accepting tighter program income limitations, which eliminated 39 million taxpayers from program eligibility. At the same time, the agency eliminated the TeleFile program, which provided free electronic filing directly with the IRS by phone for certain eligible taxpayers.

'It seems the tax preparation industry was holding all the cards in the renegotiation of this program,' said Grassley, adding that industry participants used the Free File program to market an array of other products to boost revenue at taxpayer expense.

The senators cited a report from the Treasury Inspector General for Tax Administration that examined the eligibility restrictions, which caused a 23 percent drop between 2005 and 2006 in taxpayer usage and other shortcomings. The IRS told TIGTA that the Free File Alliance never guaranteed universal coverage, only up to 60 percent, although some industry participants have made their services available to all.

The Free File Web page also can be difficult and confusing for some taxpayers to use, TIGTA said. In a survey of Free File users, however, the agency found a high level of satisfaction in its ease of use and navigation, it said.

TIGTA noted that Free File industry participants added consumer protections, security and performance standards, such as limiting offers on refund anticipation loans, but that the commercial nature of the Free File program made those enhancements necessary.

The IRS needs to better scrutinize the program to make sure the program works effectively for taxpayers, Baucus said. The IRS is to respond to the committee about how it will improve free filing in the next filing season by Nov. 17.

'In the 21st Century, there should be an easy, convenient and free way for taxpayers to file their returns directly to the IRS online,' he said.

In addition to the Senate Finance Committee, the Government Accountability Office also will examine the costs, capabilities and obstacles for the agency to develop its own online return preparation capability, TIGTA said in its report.

Many taxpayers who are not eligible for the Free File program prepare their own returns electronically with commercial tax preparation software but print and submit the returns through the mail, TIGTA said. In 2005, IRS found that 72.5 percent of those individuals who filed paper returns prepared their returns using a computer. If those taxpayers filed their returns electronically, the IRS would save about $106.7 million in processing and be a lot closer to the goal of 80 percent of taxpayers filing electronically, TIGTA said.

After individuals pay for the tax processing software, they don't want to pay another fee to a certified electronic transmitter to file it for them, said Nina Olson, IRS National Taxpayer Advocate.

'We have to develop something to have free Internet filing. It is in the government's interest to remove the impediment of a fee,' she said at a tax and software industry event last week sponsored by the Council for Electronic Revenue Communication Advancement in Arlington, Va.

Some members of Congress and industry question whether it is appropriate for the IRS to assist in preparing tax returns, make adjustments or additional assessments as part of processing returns and collect the proper taxes, TIGTA said.

The fiscal 2007 House Treasury appropriations bill, however, prohibits the use of funds to develop or provide free individual electronic tax preparation and filing products or services, other than the Free File program and the IRS' Taxpayer Assistance Centers, Tax Counseling for the Elderly, and volunteer income tax assistance programs. The provision also prohibits the use of funds to develop or implement direct interactive electronic individual income tax preparation or filing services or products, or a return-free system.