The agreement also should increase the number of people who file taxes online, which benefits the IRS
Initial reaction has been positive to the Internal Revenue Service's agreement to stay out of the online tax preparation business in return for tax preparation companies providing free electronic tax services to more than half the nation's taxpayers.
Under the agreement, a consortium of companies have agreed to offer free tax preparation and electronic tax filing to 60 percent of U.S. taxpayers — the same services they provide to paying customers.
As many as 78 million Americans could receive free online tax assistance as a result of the agreement, Treasury Department officials said July 31.
"I think this is a good deal," said Keith Ashdown, spokesman for Taxpayers for Common Sense, an IRS watchdog organization.
The agreement should increase the number of people who file taxes online, which benefits the IRS because electronic tax returns are much cheaper and faster to process than are paper returns. But the agreement keeps the IRS from serving as both tax collector and tax return preparer, roles that could create a conflict of interest, Ashdown said.
National Taxpayers Union spokesman Jerry Terry agreed that electronic tax preparation should lead to fewer mistakes, more efficiency and less expense for the government. "That's great," but he said the agreement also raises questions about why taxpayers can't file returns directly to the IRS.
"Our big concern is why taxpayers have to go to a third party to file." Is it for security purposes or to protect business for tax preparation companies? An IRS employee said any security problems created by letting individuals file directly to the agency could be easily overcome.
A tax preparation company collects an average of $12.50 from taxpayers each time it transmits a completed tax return to the IRS, according to Treasury.
But the agreement's chief benefit to tax preparation companies is that it keeps the IRS from becoming a competitor, said Ed Black, president of the Computer and Communications Industry Association.
The CCIA has waged a years-long struggle to stop government agencies from "sliding into e-commerce" and competing with private companies.
At least nine companies already offer free services to people who make $25,000 a year or less, which is 47 percent of all taxpayers, said Julie Miller, a spokeswoman for Intuit Inc., which makes TurboTax software. Intuit's Quicken Tax Freedom Project is one of the free services.
Tax preparation companies did not balk at increasing the taxpayer population eligible for free preparation and filing services from 47 percent to 60 percent. "We don't expect it to have impact on the bottom line," Miller said.
Larry Levitan, chairman of the IRS Oversight Board, described how the free services would work:
By logging on to IRS Web site, www.irs.gov, or the federal portal, www.FirstGov.gov, taxpayers can go to a page that displays "a menu of all the providers" that have signed the agreement.
"You pick who you want to use, click on your choice and you are transferred to their Web site. You will then have access to their tax preparation software and you will get tax preparation and e-filing for free."
Levitan said tax preparation companies were spurred to reach an agreement after the Bush announced in January a goal to have 80 percent of tax returns filed electronically by 2007. The administration did not rule out letting the IRS provide free e-filing.
It was "a significant concern for all [tax preparation service] providers that the feds should not go into competition with them," Levitan said. "I personally was not that optimistic that we would be able to work things out — certainly not this quickly."
Levitan called the agreement "a win for everybody. The industry didn't want government competition, the IRS did not want to get into the business because of the expense and the public wanted free service." To a great degree, all are satisfied, he said.
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