IRS e-filing plans worry tax industry

Would you rather pay extra to file your tax return electronically or do it for free and let the Internal Revenue Service look over your shoulder as you enter your deductions?

That's the choice tax reformers and software industry representatives see facing U.S. taxpayers as the government moves ahead with as yet undefined plans to expand electronic filing to all taxpayers.

E-filing is available only to those who pay for tax-preparation software or services compatible with IRS standards or who use a tax preparer with access to such software. Software companies and online service providers charge fees ranging from $10 for online preparation of simple returns to $50 for advanced software packages, although a number of companies offer free services for low-income taxpayers.

The IRS has touted e-filing as a money-saving move for the agency and a way for taxpayers to save time and get refund checks faster. Goals set by Congress call for at least 80 percent of federal returns to be submitted electronically by 2007. The current rate is about 30 percent, according to the IRS, with 40 million taxpayers filing electronically last year while 90 million were stuck with paper.

But the Bush administration is saying it's unfair to expect taxpayers to pay for access to e-filing. The Treasury Department announced earlier this year that it would prepare budget proposals that would authorize the IRS to create a system through which taxpayers could file returns directly with the agency, without using third-party software or services.

"I believe that the current tax code is an abomination that cries out for vast simplification and reform," Treasury Secretary Paul O'Neill said in a statement. "Until that vision can be accomplished, we need to reduce the burden on taxpayers in the short term by rapidly expanding opportunities such as e-filing and making it free to those who choose it. No one should be forced to pay extra just to file his or her tax return."

"No one should be forced to pay extra just to file his or her tax return." --U.S. Treasury Secretary Paul O'Neill

The Treasury Department has offered no details on how a direct-filing program would work. An IRS representative referred all questions to the Treasury Department. Treasury Department representatives did not respond to requests for comment.

O'Neill has said, however, that the department will work with, rather than compete against, private tax-preparation companies. "I don't intend for the IRS to get into the software business," O'Neill said in the statement.

Current electronic services available from the IRS are limited mainly to Telefile, which allows taxpayers with the simplest type of return to file by telephone, and printable forms, which can be downloaded from the IRS Web site.

Let IRS do your math?
But software makers and tax groups say that even well-meaning e-filing changes could hurt taxpayers and the multibillion-dollar tax-preparation industry, which is increasingly focused on software and online services.

The biggest worry is that any e-filing service offered by the IRS would include some form of tax-preparation assistance. Even something as seemingly innocuous as checking the taxpayer's math could lead down a slippery slope ending in the IRS advising taxpayers on what they report.

"Our tax system is based on voluntary compliance," said Robert Weinberger, vice president of government relations for tax-preparation leader H&R Block. "There's a danger that if the IRS gets into the tax-preparation business, there's a real conflict of interest in acting as both the adviser and the enforcer or auditor. I think the industry generally takes the view that any online vehicle that is interactive and computational and results in a determination of tax liability gets into tax preparation."

Jason Mahler, vice president and general counsel for technology trade group the Computer & Communications Industry Association (CCIA), said there's inherent danger in letting the IRS do the taxpayer's math.

"Once you start doing calculations, where do you draw the line?" he asked. "There are many things that go into the calculation of taxes that provide some discretion to the taxpayer. What is reportable income? What is a proper deduction? The IRS has different views on that than many in the tax bar and many in the court system."

Pete Sepp, vice president of communications for the National Taxpayers Union, said any IRS-provided e-filing service should be limited to offering electronic versions of current paper forms that can be sent directly to the IRS.

"It should be easier to file your return and you should be able to do it without paying, but not if it means having the IRS advise you on deductions and tell you how to calculate everything," Sepp said. "Our position is that the IRS should serve as nothing more than a mailbox online for the deposit of e-filed returns if they are to offer this service for free."

The push to make access to e-filing free is somewhat misguided, industry figures add. Tax software and online services leader Intuit, along with a number of other smaller online tax services, already offer free preparation and electronic filing for taxpayers with adjusted gross income of $25,000 or less, a level that covers more than half of U.S. taxpayers.

"I think the IRS wants to see the private sector help, and we are," said Intuit spokesman Scott Gulbransen. "We're doing everything we can to open the e-filing revolution to everyone."

"It should be easier to file your return and you should be able to do it without paying, but not if it means having the IRS advise you on deductions and tell you how to calculate everything." --Pete Sepp, vice president of communications, National Taxpayers Union

Instead of cost, the Treasury Department should be looking at other, more significant barriers to e-filing, Mahler said.

"We believe there is an underutilization of this, but we don't think it's a matter of cost," he said. "Some people don't trust putting their information on the Internet; some people just don't like computers. We'd like to address those reasons."

It would also help if e-filing worked for more taxpayers, said Charles Petz, vice president of software development for Petz Enterprises, a Tracy, Calif., company that sells professional tax software and runs the TaxBrain.com online service.

The IRS has adopted increasingly stringent standards for verifying data on e-filed returns, Petz said, resulting in more than 10 percent of e-filed returns being rejected because of birth dates, Social Security numbers or other information that doesn't match numbers stored in often outdated IRS databases.

"This is an absurd group of hoops you're shoving a taxpayer through to file electronically...compared with filling it out on paper, mailing it in and letting them deal with it," he said.

For now, few in the tax industry are worried about immediate threats of an IRS-run e-filing service. The agency already has its hands full with other initiatives and has committed to consulting with industry leaders as it formulates new plans, Weinberger said.

"I don't believe the IRS really wants to get into this business," he said. "I think they've changed the tone of the relationship with the industry. They now regard us as stakeholders and very much want to work the path of cooperation."

Besides, there's some question about whether IRS technology is up to the challenge of maintaining interactive online forms. The Taxpayers Union's Sepp said current IRS data systems are woefully out-of-date.

"It should be easy enough theoretically for people to just e-mail a return to the IRS, but we're talking about a data system so backward that six years ago the IRS had magnetic tapes they were flying around the country because their computers couldn't talk to each other," Sepp said. "Six years later, they're still looking at how to get that information off the tapes."

Petz agreed. "As far as the IRS going out and establishing a Web site to collect data and process it--that's a nice idea, but I don't know if the IRS could pull it off," he said. "The IRS doesn't do a very good job of running software. There's a lot of cool technologies they could use, but it'd be like handing a kid a loaded gun."