Use of free tax filing software drops significantly

Use of the Internal Revenue Service's free electronic tax filing offering dropped substantially following the introduction of new eligibility restrictions, according to an audit report released Friday.

The decrease in use could keep the agency from meeting its congressionally-mandated goal of having 80 percent of all federal tax returns filed electronically by the end of 2007, the 45-page Treasury Inspector General for Tax Administration report said. In 2006 about 66 percent of taxpayers filed electronically.

"It is imperative that the IRS carefully examine the reasons this free service is not being used by more taxpayers," Treasury Inspector General J. Russell George said. "The IRS must review its marketing strategy to better target taxpayers who file paper returns even though they are eligible for this program."

The service, dubbed the Free File Program, allows people to prepare and file their income tax returns electronically and free of charge. The software is available on the IRS Web site and is provided by a consortium of tax software companies known as the Free File Alliance.

When the program started in 2003, the alliance agreed to offer free services to at least 60 percent of individual taxpayers. In 2005, some vendors offered the free software to all interested individual filers. But in October of that year, the alliance amended its agreement so that no more than 70 percent of individual taxpayers would qualify, based on adjusted gross income. For returns filed in 2006, for instance, taxpayers had to have adjusted gross incomes of $50,000 or less to qualify.

In 2005, a record 5.12 million taxpayers used the free program. But participation fell to 3.9 million, or 3 percent of all individual tax returns, in 2006. The drop coincided with the introduction of the new income restrictions.

The report did find that 24 percent of the users of the free file program in 2006, or 819,000 taxpayers, were first-time filers.

Despite the fact that no further adjustments were made in 2007, auditors found that as of April 14, only 3.3 million taxpayers filed returns using the free service.

The audit also found that the IRS failed to fully document oversight reviews of companies participating in the Free File Alliance. Alliance members incorrectly included the Free File indicator on approximately 37,000 returns from taxpayers who actually paid tax companies to prepare and file their returns, the IG found. The program software also did not always accurately compute taxes due.

In response to the report, Richard Morgante, commissioner of the IRS' wage and investment division, said the agency would develop a plan to evaluate and promote the Free File program. He also said the agency would expand marketing efforts by directing promotional materials to taxpayers who are eligible to use the software, but have filed their returns on paper. He agreed to establish a process to assess the accuracy of the Free File indicator early in the filing season.

Morgante did not agree with the auditor's recommendation to establish a process to test the accuracy of the software used in the program before the filing season. He said doing so would present a monumental challenge, due to the complexity of tax law.

Representatives of the Free File Alliance did not respond to requests for comment on the report.

Stay up-to-date with federal news alerts and analysis — Sign up for GovExec's email newsletters.
FROM OUR SPONSORS
JOIN THE DISCUSSION
Close [ x ] More from GovExec
 
 

Thank you for subscribing to newsletters from GovExec.com.
We think these reports might interest you:

  • Sponsored by G Suite

    Cross-Agency Teamwork, Anytime and Anywhere

    Dan McCrae, director of IT service delivery division, National Oceanic and Atmospheric Administration (NOAA)

    Download
  • Data-Centric Security vs. Database-Level Security

    Database-level encryption had its origins in the 1990s and early 2000s in response to very basic risks which largely revolved around the theft of servers, backup tapes and other physical-layer assets. As noted in Verizon’s 2014, Data Breach Investigations Report (DBIR)1, threats today are far more advanced and dangerous.

    Download
  • Sponsored by One Identity

    One Nation Under Guard: Securing User Identities Across State and Local Government

    In 2016, the government can expect even more sophisticated threats on the horizon, making it all the more imperative that agencies enforce proper identity and access management (IAM) practices. In order to better measure the current state of IAM at the state and local level, Government Business Council (GBC) conducted an in-depth research study of state and local employees.

    Download
  • Sponsored by Aquilent

    The Next Federal Evolution of Cloud

    This GBC report explains the evolution of cloud computing in federal government, and provides an outlook for the future of the cloud in government IT.

    Download
  • Sponsored by LTC Partners, administrators of the Federal Long Term Care Insurance Program

    Approaching the Brink of Federal Retirement

    Approximately 10,000 baby boomers are reaching retirement age per day, and a growing number of federal employees are preparing themselves for the next chapter of their lives. Learn how to tackle the challenges that today's workforce faces in laying the groundwork for a smooth and secure retirement.

    Download
  • Sponsored by Hewlett Packard Enterprise

    Cyber Defense 101: Arming the Next Generation of Government Employees

    Read this issue brief to learn about the sector's most potent challenges in the new cyber landscape and how government organizations are building a robust, threat-aware infrastructure

    Download
  • Sponsored by Aquilent

    GBC Issue Brief: Cultivating Digital Services in the Federal Landscape

    Read this GBC issue brief to learn more about the current state of digital services in the government, and how key players are pushing enhancements towards a user-centric approach.

    Download

When you download a report, your information may be shared with the underwriters of that document.