Taxpayer advocate proposes free e-filing for everyone

National Taxpayer Advocate's FY 2005 Objectives Report to Congress

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A controversy that software industry officials thought had been put to rest two years ago is likely to be reopened after the Internal Revenue Service's chief taxpayer advocate told lawmakers this month that all citizens should have access to free software online for filing their tax returns.

Nina Olson, who is head of the IRS' Office of the Taxpayer Advocate, opposes extending an agreement between the IRS and the tax preparation software industry. Under that arrangement, known as Free File, 60 percent of taxpayers qualify for free filing, but others must pay for software to file their returns online.

The arrangement lets software companies offer free tax preparation and filing online for moderate- and low-income taxpayers. It began in 2003 and will end in 2005, if it is not renewed. In her July 6 report to Congress, Olson said she favors having the IRS provide free software on its Web site for all individual taxpayers. But it would be barebones software, she said, unlike the tax preparation packages offered by the software industry.

A senior adviser to Olson described the proposed software as "the electronic analog of filing a paper return." The free IRS software would let taxpayers enter and tabulate data and link to various instructions and IRS publications. But unlike more sophisticated commercial tax preparation software, it would not give tax advice or alert taxpayers to possible deductions for which they might be eligible.

Tax software officials involved in the Free File program oppose Olson's proposal, which they say would give taxpayers an inferior product and would hurt the software industry. "We're disappointed with her comments," said Michael Cavanagh, executive director of the Free File Alliance LLC, a group of companies that offer their commercial software free to taxpayers who qualify for the Free File program.

This year, 3.4 million taxpayers used Free File to file their tax returns online. "The Free File Alliance has worked, so there's absolutely no public policy reason to go in this direction at all," Cavanagh said of Olson's proposal.

He added that he is certain that IRS officials will not act on Olson's suggestion. "Her proposal is that the IRS should get into the electronic tax prep business, and the IRS does not agree with that," he said. "We think clearly that would take away from the American taxpayer the innovation and level of [software] quality they now enjoy."

IRS spokesman Tim Harms said IRS officials do not comment on the report to Congress that the Office of the Taxpayer Advocate is required to submit twice a year.

Olson said her proposal would help the tax agency meet its goal of having 80 percent of all tax and information returns filed electronically by 2007. Congress set that goal for the agency in the IRS Restructuring and Reform Act of 1998.

IRS officials and lawmakers agree that reaching or exceeding that goal would allow for greater internal efficiency and taxpayer convenience. The agency, for example, would need fewer data transcribers. And most taxpayers would get their refunds faster because online-filing software looks for common errors before it accepts tax returns.

But Olson, in her report, said her proposal is more than practical; it is a matter of principle. No one, she said, should be forced to pay extra to file a tax return online.

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