IRS Wants Free Access To Tax E-Filing

by Mike Godfrey, Tax-News.com, New York

12 March 2002

US Government plans to make it possible for all taxpayers to file tax returns electronically - and what's more, free - have alarmed the rapidly growing and highly profitable tax software industry.

The Bush administration says it's unfair to expect taxpayers to pay for access to e-filing, and the Treasury Department announced earlier this year that it would authorize the IRS to create a system through which taxpayers could file returns directly with the agency, without using third-party software or services.

"I believe that the current tax code is an abomination that cries out for vast simplification and reform," Treasury Secretary Paul O'Neill said in a statement. "Until that vision can be accomplished, we need to reduce the burden on taxpayers in the short term by rapidly expanding opportunities such as e-filing and making it free to those who choose it. No one should be forced to pay extra just to file his or her tax return."

Currently, E-filing is available only to those who pay for tax-preparation software or services compatible with IRS standards or who use a tax preparer with access to such software. Software companies and online service providers charge fees ranging from $10 for online preparation of simple returns to $50 for advanced software packages, although a number of companies offer free services for low-income taxpayers.

Currently about 30% of taxpayers file electronically, although Congress aims to have at least 80% of federal returns submitted electronically by 2007.

It's not clear how the IRS could achieve universal, free electronic access without damaging commercial software firms unless it pays them directly for their work. O'Neill has said, however, that the department will work with, rather than compete against, private tax-preparation companies. "I don't intend for the IRS to get into the software business," O'Neill said in the statement.

The software companies worry that an e-filing service offered by the IRS might include some form of tax-preparation assistance. "Our tax system is based on voluntary compliance," said Robert Weinberger, vice president of government relations for tax-preparation leader H&R Block. "There's a danger that if the IRS gets into the tax-preparation business, there's a real conflict of interest in acting as both the adviser and the enforcer or auditor. I think the industry generally takes the view that any online vehicle that is interactive and computational and results in a determination of tax liability gets into tax preparation."

The private sector firms believe that the IRS should achieve its goals by working through their services. For example, tax software and online services leader Intuit already offers free preparation and electronic filing for taxpayers with adjusted gross income of $25,000 or less, a level that covers more than half of US taxpayers.

"I think the IRS wants to see the private sector help, and we are," said Intuit spokesman Scott Gulbransen. "We're doing everything we can to open the e-filing revolution to everyone."

Block's Weinberger however thinks that any threat is far off. "I don't believe the IRS really wants to get into this business," he said. "I think they've changed the tone of the relationship with the industry. They now regard us as stakeholders and very much want to work the path of cooperation."

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