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Senators Push for Electronic Tax Filing

IRS "Free File" Program Soaks Taxpayers With Unexpected Fees

By Truman Lewis
ConsumerAffairs.com

April 12, 2006

• IRS Considers License For Tax Preparers • Tax Refunds Likely to Boost Consumer Spending • Last-Minute Tax Tips • Tax Tips & News for Procrastinators • Need More Time to File Your Taxes? Just Ask • Don't Overlook These Itemized Deductions • 10 Ways Uncle Sam Helps You Save Money • 10 Common Tax-Filing Mistakes to Avoid • Penalties for Late Tax Returns • Tempting the Tax Auditor • 10 Often Overlooked Tax Breaks • Big Break for Lower-Income Taxpayers • Should You Always File a Joint Return? • Your Taxes From A to Z • Some Cars Save More than Gas • 5 Stupid Tax Mistakes • Taxpayer Rights Just One Click Away • Foreclosure Tax Double-Whammy Eased • Tax Consequences of Defaulting on Your Mortgage • Help for Low-Income Taxpayers • Video: Tax Tips – New Tax Breaks For Your 2008 Return • Tax Scam Deal Really Is Too Good To Be True • IRS Offers Help to Financially Stressed Taxpayers • Don't Let Just Anyone Do Your Taxes • Tax Preparers Tighten Up on 'Instant Refund' Loans • New Tax Rules Could Cost Second-Home Owners • New York Stops H&R Block's Deceptive Sweepstakes Ads • J. K. Harris Settles Deceptive Ad Charges --- • More about tax preparation ...

Does it seem absurd that the Internal Revenue Service has the capacity to scam and electronically process millions of tax returns it receives via postal mail but claims it doesn't have the capacity to receive the same returns electronically, via the Internet?

Sen. Charles Grassley (R-Iowa), who heads the Senate Finance Committee, thinks so. And so does Sen. Max Baucus (D-Mont.), the ranking Democrat on the committee. They want the agency to give some thought to accepting electronic returns directly from taxpayers.

Currently, the IRS requires taxpayers to use a paid preparer or commercial tax preparation software, which adds cost and complexity to the task and also exposes taxpayers to frauds, scams and rip-offs.

Republicans in the House, on the other hand, have put the heat on the IRS to curtail its service to taxpayers, lest it offer for free a service that commercial interests can charge for.

Treasury Secretary John Snow last week assured a House Appropriations subcommittee that the IRS would not try to compete with the private sector in tax preparation.

"We're not software development people," Snow told Rep. Todd Tiahrt, R-Kan, ignoring the fact that IRS runs a huge data processing operation.

That was music to the ears of pro-business House members. But Grassley and Baucus found it a little flat. Grassley said there is "plenty of room" for the software industry to develop value-added products but no reason the IRS can't make it possible for taxpayers to file simple returns on-line.

The IRS several years ago set up an alliance of private companies who supposedly offer free electronic filing. The program, called Free File, used to operate under a contract that required companies to offer the free services to 60 percent of taxpayers.

This year, a new contract put a cap on the number of taxpayers who can get free software. That means 70 percent of taxpayers, or those making $50,000 or less, qualify and can use the software to file their tax returns or, in some cases, file for extensions.

But participation in the program is down about 22 percent this year, possibly because of the income cap.

Another, perhaps likelier, factor is the difficulties and unexpected expenses taxpayers have encountered in trying to use the "Free File" service. Many have wound up being charged for services they were led by their own government to think would be free.

Take Bonnie of Flatwoods, Ken. She was led to Express Tax Refund by the Free File program last year.

"I filed my tax return online at this site which implied the service was free only to find out that they are going to charge me over $137.00. I called the bank that they go through which is Santa Barbara Bank ... I am disabled on a fixed income and can not afford what these people are doing to me."

H&R Block, which has more than a few friends in Congress, also slapped taxpayers with unexpected bank fees.

"I used their 'free' file service this year linked to from the IRS website," Chris of New London, Conn., told ConsumerAffairs.com. "At the beginning of the session, they asked if I wanted my refund to go to a special debit card. I read far enough into the terms & conditions to see that fees applied and went back and said no."

But Chris found that, despite his rejecting the "offer," his refund was coming his way via an HSBC debit card.

"I did call the IRS and there is nothing they can do to stop my return from being processed or my refund from being hijacked by HSBC," Chris said. "The person I talked to did say that this year he has received more calls complaining about H&R block doing this to people than people calling about tax questions."

It's not only taxpayers who are complaining about problems with Free File. IRS Taxpayer Advocate Nina Olson tested the 20 private sites participating in the IRS Free File program and found them hard to navigate. She compared it to "living in the wild, wild West."

Olson said the government should put a basic tax form online and let taxpayers fill it in and file it directly to the IRS without charge.

Or, as ConsumerAffairs.com's James R. Hood put it in a recent article on tax problems: "Pardon our French, but what the hell is the tax collector doing if it's too busy to collect taxes?"

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