IRS makes free 2006 tax preparation software available

The Internal Revenue Service on Wednesday made free federal tax preparation software available to most taxpayers through its Web site.

This marks the fourth year that an alliance of tax software vendors have collaborated with the IRS to offer free online versions of their products in anticipation of the April 15 filing deadline. Taxpayers can reach the software vendors through the IRS Free File Web site.

Last year, members of the Free File Alliance made their IRS-linked products available to all individual taxpayers. This year, they are available only to people with a maximum adjusted gross income limit of $50,000. Some of the 19 participating software vendors have incorporated additional requirements such as state residency or age, and more stringent income limits.

"Candidly, Bill Gates does not need [free tax preparation software] provided to him," said Tim Hugo, Free File Alliance president. The IRS estimates that 70 percent of the nation's taxpayers have adjusted gross incomes worth $50,000 or less.

Adjusted gross income is total income minus business expenses and some deductions, such as individual retirement account contributions or alimony payments. Standard or itemized deductions do not lower adjusted gross income.

Private sector tax software vendors moved to create the alliance after the IRS planned to develop its own free online tax preparation software. "It was to make sure that . . . a government-subsidized entity did not compete with private industry," Hugo said.

Vendors can still make money from Free File participants if individuals choose to use ancillary services, such as state or city tax preparation. Some of the vendors also offer tax refund anticipation loans, but the IRS requires vendors to state their fees and interest rates and make clear that the loans are not actual tax refunds.

The IRS allows tax refunds to be deposited electronically directly into individuals' bank accounts. Those who owe money can pay by credit card.

The IRS is turning more often to the Web as a customer service tool. Last year, more than 5.14 million taxpayers used Free File, approximately 7.5 percent of taxpayers who used the Internet to file federal taxes. The agency is under a legislative mandate to have 80 percent of all tax returns filed electronically by 2007.

Electronically filed federal returns made up more than half of total returns for the first time during the 2005 filing season, but IRS Commissioner Mark Everson has said the agency will likely miss the 2007 benchmark.

The agency's drift toward Web-based customer service has critics, including those in Congress who worked to reverse a 2005 IRS decision to close 68 of its 400 walk-in service centers. At the time, IRS officials said statistics showed less demand for walk-in centers and more need for Web services.

Several watchdogs, including the IRS Oversight Board and Nina Olson, the National Taxpayer Advocate, disputed the agency's conclusions.

In her 2005 annual report to Congress, Olson said the agency increasingly relies on Internet customer service without adequate research on the possible downsides. "In the absence of adequate research and a comprehensive strategy, ... the IRS should not continue with a radical restructuring of taxpayer service," she wrote.

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