Reported drop in free tax e-filings revives criticisms

The popularity of the Free File program for electronically filing federal income-tax returns continues to decline, according to a new report by government auditors.

"Taxpayers' use of the Free File program -- an alliance of companies that offer free return preparation and electronic filing on their Web sites to eligible taxpayers -- is 5.5 percent below last year at this time," the Government Accountability Office said in a report released Wednesday. The report addressed interim results of the 2007 tax-filing season and the Bush administration's fiscal 2008 budget request for the program.

Free File, now five years old, is available to taxpayers with an adjusted gross income of up to $52,000. About 70 percent of U.S. individuals are eligible this tax season.

This year, the participating companies, which include H&R Block and the TurboTax manufacturer Intuit, cannot advertise tax-refund anticipation loans and other commercial products on the Free File Web site. In previous years, pitches for refund anticipation loans and pop-up advertisements stirred controversy over the "free-ness" of the program.

While participation in the program is decreasing, the Internal Revenue Service reports that complaints are down to one per every 2,193 returns, compared with one in 654 returns last year.

"There have been some extraordinarily negative criticisms of Free File -- which have been partly based on fact" with regard to cross-marketing and pop-ups, said Bernie McKay, the vice president of corporate affairs for Intuit. But the IRS "took the bull by the horns" and eliminated the corporate plugs.

McKay attributed any reported decline "to the undermining of the program by severe critics who didn't come out and say anything when the reforms were instituted."

McKay said the IRS should increase Free File's media exposure via public service announcements to counteract the negative publicity.

With other e-filing options and Free File, all taxpayer data goes through a third-party software company before reaching IRS computers. The IRS' dependency on commercial preparers has prompted privacy advocates to question the ability of tax preparers to use that data for cross-marketing financial products.

Before the April 17 deadline for filing income-tax returns, Sen. Daniel Akaka, D-Hawaii, plans to reintroduce legislation that would require the IRS to offer all individual taxpayers free and direct e-filing through its Web site.

"The declining use of the Free File program cited in the report is just another indication that the program is not working," he said in a statement on Monday.

According to the report, the IRS responded to a draft of the document by stating that the agency "will soon release its strategic plan for taxpayer service delivery, which will serve as the foundation for future decisions for service improvements and efficiencies."