Another View: Free e-filing is not a simple matter for IRS

All the brouhaha over homeland security overshadowed the fact that IRS recently got through another tax season, one in which 46 million taxpayers filed returns online. They got their refunds in half the time of paper filers. Indeed, IRS’ premier e-government offering, called E-file, earns ratings on the University of Michigan’s customer satisfaction index.

Still, the question persists: Why doesn’t the IRS make e-filing free? Why should filers pay nearly $15 to the private-sector folks who transmit e-file returns to the IRS? I got some strongly worded versions of this complaint when I worked at IRS.

Here’s why filing isn’t free:

  • Policy. The private sector cites OMB Circular A-76, which many believe forbids the government from competing with its citizens. This is debatable. The essence of A-76 is to foster competition around commercial services without prejudging the outcome.

  • Channel management. The e-file program’s success results in large part from the IRS’ long-standing partnership with commercial tax preparers, tax preparation software providers and transmitters. Much like a private-sector organization, IRS has to respect the investment its distributors have made in selling, marketing and servicing e-file to the public. Any time a product organization wants to go straight to the customer, it must work through a variety of issues with the existing distributor base.

  • Legality. The IRS Reform and Restructuring Act authorized IRS to offer e-filing directly to taxpayers over the Internet as one means to meet a target of 80 percent of tax returns filed online by 2008. The IRS would need to work through the Electronic Tax Administration Advisory Committee, also enabled by the Reform Act.

  • Management. The IRS, even if given more customer service resources, ought not to create the in-house capability of answering routine customer service calls. It should outsource answers to questions about whether a modem is important to the e-file process or why the directions for installing the software tell the user to put the CD in what looks like a cup holder.

Nonetheless, the Bush administration has included a proposal in the 2003 budget that supports direct e-filing over the Internet, apparently thinking e-file is a pretty good program, and taxpayers ought be able to file directly to IRS for free. Given industry’s historic resistance to even talking about such an idea, this is bold leadership!

So how do the IRS and the industry strike a deal to make this happen? Here are few ideas.
  • Product differentiation. The IRS might only offer basic e-file services and let industry offer value-added features such as “audit buster” advice, which IRS arguably will not and should not offer.

  • Market segmentation. Both industry and the IRS have some decent insight into characteristics of the customer base that might allow each of the players to focus on select segments of filers.

  • Outsourcing. The IRS could hold a competition to see who could provide direct e-filing on its behalf.

Ultimately, this debate needs to center on taxpayers’ benefits—and they are not at the bargaining table. Let’s hope whatever arrangement IRS works out with industry to enable direct filing via the Web provides citizens with a demonstrably broader set of options than they have now.

Stephen H. Holden, a former federal employee, is assistant professor in the Information Systems Department of the University of Maryland, Baltimore County. E-mail him at Holden@umbc.edu.

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