Another View: IRS, tax software companies make peace

Stephen M. Ryan

Negotiated rule-making. Public-private partnership. Model for A-76 problem-solving. Award-winning e-government application. These qualities can all be attributed to the astounding success of the IRS Free File Alliance, a program that processed millions of tax returns for free this past season. Seventeen companies, linked to an IRS Web site, provided the returns.

How did this success come about? Now, barely two weeks after the close of the filing season, it's a good time to review.

Early last year the tax software industry entered a negotiated rule-making with the IRS and Treasury Department. Years of skirmishing had preceded these discussions. The industry didn't want the IRS competing with tax software publishers by creating software of its own. Several states had tried similar programs with limited success.

Such programs prompted several industry concerns. For example, government sponsorship of the software would blur the roles of tax auditor and preparer. A failed application could discredit not only the IRS but also other e-government applications. Finally, industry believed the IRS offering preparation software violated OMB Circular A-76's prohibition of government competing with the private sector.

But industry also had its reasons to make an accommodation because the IRS made the case that low-income taxpayers needed assistance with filing so they could obtain benefits such as the earned income tax credit.

In the end, former IRS commissioner Charles Rossotti and acting commissioner Robert Wenzel reached an agreement with two industry groups. For the record, I represented the 17-company alliance of tax software companies and negotiated the deal with the IRS and Treasury.

Industry agreed to provide 60 percent of all taxpayers with free returns, and the IRS promised not to become a tax software supplier. Comments on the rule-making ran 6-to-1 in favor. The result is a public-private partnership, linked at www.irs.government and other government sites.
The practical results are impressive. What had been a running dogfight between the policy shops of the agency and industry consortia morphed into a productive relationship.

In fact, the services provided for free exceeded those required by IRS statutes and rules. The 17 companies were required to provide proof of security and privacy reviews by trusted third parties selected by the IRS. The companies had to provide their commercial products unchanged to those who qualified for free filing.

Now six states'Arizona, Georgia, Massachusetts, Michigan, Mississippi and New York'are copying the infant IRS program. Other states are reconsidering their online tax activities, too.

What are the lessons of this program? That there is a way for government and industry to achieve more with dialogue and cooperation than by being adversaries. It took government leaders willing to break the status quo. It took an industry willing to make a contribution to create a stable policy environment. The Bush administration deserves significant credit for this successful program.

Another lesson is that some critics are never satisfied. Some people simply believe government should be the provider of software. If so, the IRS would need several hundred million dollars to duplicate what the private sector has provided for free.

Stephen M. Ryan is a partner at Manatt, Phelps & Phillips LLC of Washington. E-mail him at [email protected].

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