IRS struggles to take next step in E-filing

With Congress weighing in, agency looks to expand services, increase usage

E-filing up; free filing down

Number of individuals electronically filing their taxes:

2005: 62.1 million, up 10 percent from 2004

2006: 70 million, up 6.2 percent from 2005

Number of individuals participating in the IRS' Free File program:

2005: more than 5 million

2006: 3.9 million

We hit an all-time high on a system that hasn't improved much in the past two years. We need to upgrade it.'

'Bert DuMars, Electronic Tax Administration

Zaid Hamid

The height of tax season may be past, but the IRS is still feeling the pinch, as the agency tries to expand its electronic filing and free tax services.

With Congress hot on the case, IRS officials are acutely aware that the pressure is on to make tax services more accessible.

'People are watching us,' Bert DuMars, director of the IRS' Electronic Tax Administration office, said at a recent conference sponsored by the Council for Electronic Revenue Communication Advancement in Arlington, Va.

Congress is sharpening its focus on the agency as it looks for ways to improve E-filing. But with a tight IT budget, agency officials realize they are limited in how much they can expand the program in the near future.

'We're experiencing big cuts in the budget, and we're really feeling it this year,' said Sandra Clifton, chief of the IRS' e-Submission Processing division.

The IRS overall received a slight decrease to $11 billion (adjusted for inflation) in the fiscal 2007 budget request the White House sent to Congress earlier this year. On the IT side, the IRS' Business Systems Modernization program requested $167.3 million, a $29.7 million decrease from last year.

New users, services

E-filing, though, remains a top priority as the agency works to bring in more users by adding new services, DuMars said.

'We hit an all-time high on a system that hasn't improved much in the past two years,' he said. 'We need to upgrade it.'

Though the number of E-file users grew again this year (see chart), the growth rate has certainly slowed.

The Government Accountability Office, in testimony before the Senate Appropriations subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development, and related agencies, said E-filing grew 2.1 percent this year. Although data released by the IRS more recently reported that the number of e-filers actually increased by 6.2 percent, and topped 70 million, it still shows a decrease on the rate of growth (see chart).

This decline has caught the attention of other members of Congress.

'The IRS needs to have an aggressive game plan to increase electronic filing in the near future,' said Senate Finance Committee chairman Chuck Grassley (R-Iowa) after an early April hearing on tax preparation.

One factor keeping more people from filing electronically, the IRS has said, is a change made to the Free File program this year. Free File, which debuted in 2003, is a means to provide free tax services to moderate and low-income taxpayers.

In 2004, the program let all filers regardless of income participate in the Free File program. But last year, in agreement with the Free File Alliance, a collection of tax preparation companies, the IRS lowered the income threshold to an adjusted gross income of $50,000 or less because of business and competitive concerns. The companies were worried that if they offered free filing services to all citizens, they'd be run out of business.

'Not surprisingly, IRS statistics show that use of the program has decreased more than 21 percent from the same time last year,' Grassley said.

Not to mention, many tax preparers place further limitations on the types of income and deductions customers can claim while using their Free File services, Finance Committee staff found.

'[T]axpayers are being inundated with additional charges that may accrue and the sale of ancillary services,' Grassley said, including fees for preparation and filing of state tax returns, resetting passwords, printing and mailing services, professional tax return reviews and, among others, live chat help.

After the hearing, Grassley said Congress should consider analyzing the IRS' role
in the Free File program and urged the private sector to improve their services.

'The Tax Code is complex enough without making it harder for working families,' Grassley said. 'We should continue to look at how we can partner with the private sector and the IRS to make this happen'there should be plenty of room for the software industry to continue to provide value-added services.'

Jill Gerber, spokeswoman for the Finance Committee, said Grassley and committee staff are meeting with IRS and industry officials but at this point do not see a need for legislative changes.

'We continue to request documents from the IRS and have follow-up meetings [with them] to see how we can improve the Free File and E-filing programs,' Gerber said.

DuMars admitted that Free File has its warts and said that the agency needs 'to work on continuing to improve the quality of the program.'

So far, the IRS has let the private sector run the Free File system on its own and has no plans for taking a broader role.

'The IRS believes that private industry, given its established expertise and experience in the field of electronic tax preparation, has a proven track record in providing the best technology and services available,' IRS commissioner Mark Everson told the Senate Appropriations subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development, and related agencies last week.

And the private sector, not surprisingly, agrees.

Mission focus

'The IRS is likely only handling a small portion of [electronic] tax returns,' said Mike Lister, chairman, president and CEO of tax preparer Jackson Hewitt Tax Service of Parsippany, N.J., at the CERCA event. 'Let's let them focus on their mission.'

Preparing tax returns 'is not an inherently governmental function,' added Bob Weinberger, vice president of government relations at H&R Block of Kansas City, Mo.
DuMars, meanwhile, offered one suggestion to industry that will bring in more electronic filers for the next tax season'change how they price their products.

Most customers who file their taxes electronically, once they purchase the software to do so, are also charged an extra fee for submitting their returns to the IRS, DuMars said. These fees can range from $9 to $14 dollars, leading some customers to print out their returns and send them in the mail, he added.

'There is a big group of people who use a computer [to complete their return] and print it and mail it in,' DuMars said last month an industry conference sponsored by the Council for Electronic Revenue Communication Advancement in Arlington, Va.
'That's the group we have to convert' to electronic filing.

DuMars suggested that the tax software developers bundle the processing fee into the cost of their product, arguing that customers will still buy the software even if it costs a few extra dollars.

'The value is in the software and helping them get their taxes done,' DuMars said.

He also said that the agency is working on ways to add features to the E-filing system, such as letting users attach documents to their tax returns online.

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