IRS, private firms try to avoid competing with each other

The Internal Revenue Service and private tax firms are working up a plan to offer free electronic tax filing to low-income Americans-and to avoid a battle between the government and the multi-billion dollar tax preparation industry.

IRS officials and industry representatives have been working on a plan for the past several months after an Office of Management and Budget-sponsored e-government committee called Quicksilver last year resurrected an idea that had caused the agency trouble in the past and, not surprisingly, has caused it trouble again.

The idea was for the government to create a free online tax filing application for the millions of low-income Americans who can use the 1040EZ tax form each year. Software companies and tax preparers, who have invested millions of dollars developing electronic tax filing programs at the behest of the IRS since the mid-1980s, were outraged when the idea came up in the Clinton administration. Their reaction was just as angry last year when the Quicksilver group proposed it again, particularly since IRS officials, including Commissioner Charles Rossotti, have repeatedly promised not to go head-to-head with electronic tax preparers and software makers, such as Intuit and H&R Block.

IRS officials started to walk a fine line, trying not to contradict the OMB-sponsored group while also making clear that it had no intention of developing its own tax filing application after all the work private firms had done over the years to promote electronic tax filing. "We were not part of that [Quicksilver] effort," says Terry Lutes, director of electronic tax administration for the IRS.

The Quicksilver committee's EZ Tax Filing plan has transformed into a discussion between the IRS and private sector firms on ways the firms could develop free e-filing options for 1040EZ users. Free e-filing options were offered for the 2001 filing season. In fact, one vendor offered free e-filing for anyone whose adjusted gross income was under $25,000, which is about 47 percent of the tax filing public. The IRS also offers free e-filing at its walk-in voluntary tax assistance sites, which are open to low-income taxpayers only. The agency and private firms hope to issue a plan to better publicize and coordinate free e-filing options by early summer.

"All we've done up to this point is offer links to companies that offer electronic filing services, with lots of caveats around the links. We really distance ourselves from the companies," Lutes said. "We are not going to endorse any individual company's product. But we are going to work with industry to establish some standards for free products--a range of products from a range of companies. What we will promote is a consortium approach."

Three trade associations, the Computer and Communications Industry Association, the Council for Electronic Revenue Communication Advancement and the National Association of Computerized Tax Processors, are working with the IRS on a plan for EZ Tax Filing. Lutes said the cost to the government should be minimal, since the work will primarily be done by private firms.

But OMB must approve the plan that the IRS and tax preparers come up with. OMB officials haven't agreed to approve a joint government-industry plan that would avoid having the IRS create its own e-filing program. "We are hopeful that our point of view will win the day," said Jason Mahler, vice president and general counsel for the Computer and Communications Industry Association.

But Mahler said his organization is ready for a fight if OMB decides to push a government-run e-filing system. "We would take that as a very antagonistic move," he said.

Advocates for poor taxpayers say something must be done to keep the poor from being ripped off at tax time. Many poor taxpayers pay high fees for so-called refund anticipation loans, through which companies take a cut of taxpayers' refunds in return for an immediate loan while the IRS processes their requests for refunds.

IRS Taxpayer Advocate Nina Olson cited the cost of electronic filing for low-income workers as one of the top 20 problems facing taxpayers in her fiscal 2001 report to Congress. Olson said IRS officials need to better publicize free e-filing options for low-income workers. "We are mindful of Congress' direction that IRS not interfere with the free operation of the market for income tax preparation," Olson said. "Although we do not believe the IRS should enter the tax return preparation business, we do feel oversight is needed to ensure affordable electronic filing for low-income taxpayers."

About 46 million Americans filed their tax forms electronically this year, up from 40 million last year.