IRS chief warns tax industry of growing debate over online filing services

The commissioner of the Internal Revenue Service warned the electronic tax preparation industry Friday that failure to act in taxpayers' best interest could result in Congress directing the government to offer its own preparation services.

Mark Everson said a debate is brewing over whether the IRS should be required to provide a portal for taxpayers to file their federal income tax returns online without the help of a third party. Issues fueling the discussions include "predatory" refund anticipation loans and the quality of return preparation offered by private sector companies.

"A lot of members just don't accept the fact that you can't just get online with the IRS and fill in your tax return," Everson said at the annual Council for Electronic Revenue Communication Advancement conference in Arlington, Va.

But the private sector is very efficient in providing tax filing services, leaving the IRS free to do other work, Everson said. It is important to recognize the amount of work and money that would be involved in the agency establishing its own portal, he said.

Use of the IRS' free electronic tax filing program declined nearly 23 percent after income restrictions were applied last tax season, according to a recent report from the Treasury Inspector General for Tax Administration. The service is provided by a tax software consortium known as the Free File Alliance, and a 2005 agreement between the IRS and the consortium limited access to taxpayers with adjusted gross incomes of $50,000 or less, which is about 70 percent of all filers.

Members of Congress and TIGTA have said the income limits and questionable advertising and fees on individual coalition members' Free File Web sites have held back the overall growth of electronic filing, which increased by 6.3 percent from 2005 to 2006.

Everson said it is clear that the IRS will not reach the Congress' goal of having 80 percent of all tax returns filed electronically by 2007.

"Obviously, there is a lot of controversy associated with the Free File Alliance … everyone knows the numbers went down," Everson said. "There is a vigorous debate right now that is accelerating … what type of access should taxpayers have directly to an IRS portal?"

A Nov. 2 letter to Everson from Sens. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, and Max Baucus, D-Mont., the committee's ranking member, stated that the IRS needs to improve oversight of the Free File program and encourage alliance members to provide services to taxpayers that are truly free.

"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," the senators stated.

Grassley argued that it appears the tax preparation industry is using the Free File program to bolster its revenues and that the IRS "is losing the game and doesn't even seem to realize it."

While the IRS is in a better position technologically to offer a tax preparation service than it was a few years ago, Everson said he has some concerns about introducing a program so significant.

A Senate Republican aide for the finance committee who requested anonymity said the renegotiated deal with the IRS and the alliance appears to give all the benefits to the tax preparers. The committee will monitor Free File use and will consider introducing legislation in the next session of Congress that would require the IRS to develop a direct filing portal, the aide said.

"The IRS is of the opinion that this would be enormously expensive, but we are going into an electronic age and people expect electronic services," the aide said. "Other branches of the government allow for electronic filing and the IRS has failed to provide taxpayers with the level of service that they need."