Senators push for IRS to expand free online tax filing

A measure introduced last week in the Senate would require the Internal Revenue Service to let taxpayers file income tax returns for free directly through the agency's Web site.

The Free Internet Filing Act, sponsored by Sens. Daniel Akaka, D-Hawaii, and Jeff Bingaman, D-N.M., would allow anyone who files taxes without the help of a third-party tax preparation company to file electronically at no cost. Currently about 70 percent of taxpayers are eligible to file their returns through software on the IRS Web site provided by a consortium of companies known as the Free File Alliance.

Akaka said the agreement with the alliance is a failure because it leaves out too many taxpayers with its eligibility limits. To use the software, filers must have adjusted gross incomes of less than $52,000. 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 decrease adjusted gross income.

"If taxpayers take the time necessary to prepare their returns by themselves, they must be given the option of electronically filing directly with the IRS," Akaka said. "[W]e have an obligation to make free electronic filing available to all individual taxpayers. Electronic filing benefits both taxpayers and the IRS."

Tax software companies created the alliance so that the IRS would not develop its own free online offerings. "It was to make sure that . . . a government-subsidized entity did not compete with private industry," the group's president said last year.

Representatives of the Free File Alliance did not respond to requests for comment on the bill. An IRS spokesman said the agency does not comment on proposed legislation.

About 45 million returns prepared using software are mailed in rather than electronically filed, Akaka said in a statement on the Senate floor. It costs 55 to 75 cents to process an electronic return, while it costs about $2 to process a paper one, he said. The error rate for electronic returns is also lower, at 1 percent compared to 20 percent for paper returns.

Akaka also cited the recent rash of electronic data breaches and argued "taxpayers should not be forced to hand over their private information" to tax preparation companies if they want to electronically file their returns.

Yet a recent Government Accountability Office report (GAO-07-364) found that further efforts are needed at the IRS to address significant information security issues. Only limited progress has been made in correcting previously reported weaknesses, with 66 percent of them remaining, the report stated.

"Until IRS fully implements an agencywide information security program that includes risk assessments, enhanced policies and procedures, security plans, training, adequate tests and evaluations and a continuity of operations process for all major systems, the financial and sensitive taxpayer information on its systems will remain vulnerable," the report said.

The legislative push comes as the IRS announced that taxpayers are filing electronically at a record pace. According to the agency's statistics for the week ending March 23, self-prepared electronically filed returns grew more than 8 percent from the previous year. Electronically filed returns from tax professionals climbed almost 5 percent.

Nearly 72 percent of all returns have been e-filed this tax filing season, compared to 68 percent for the same period last year. And as of March 23, 29 percent of e-filed returns were submitted by people using their home computers, up from 28 percent for the same period last year.

But according to recent congressional testimony from Colleen Kelley, president of the National Treasury Employees Union, which represents many IRS employees, the agency is likely to fall short of its 80 percent online filing goal.

"While overall use of e-filing may be on the rise, the number of taxpayers opting to use this type of return is not increasing as rapidly as the IRS had originally projected," Kelley said.