Calling the Free File Alliance "a failure," Sen. Daniel Akaka (D-Hawaii) reintroduced a bill (S. 1074) March 29 that would allow all individual taxpayers to file their taxes directly with the Internal Revenue Service.
Akaka said taxpayers should be allowed to file their taxes at no cost and without having to use a commercial tax preparer.
His proposed legislation, the Free Internet Filing Act, would reduce dependence on intermediaries and commercial preparers, pare worries about the sharing of taxpayer information with third parties, and increase the number of electronically filed returns, Akaka said in introductory remarks.
The current Free File Alliance agreement, which provides free tax preparation services to those with annual incomes of $52,000 or less, "leaves out too many taxpayers," Akaka said, and subjects them to worries that their personal information is being sold to others.
"Taxpayers should not lose out on the benefits of electronic filing simply because they are worried about sending their data to third parties," he said.
Consumer Groups Applaud.
The bill has strong support from consumer groups and groups that work on behalf of low-income communities including the National Consumer Law Center, The Consumer Federation of America, U.S. Public Interest Research Group, California Reinvestment Coalition, Center for Economic Progress, and the Neighborhood Economic Development Advocacy Project.
A March 28 letter from the groups said: "Unlike the current Free File program established by the IRS, the Free Internet Filing Act will provide taxpayers with free electronic filing without the potential of being subject to cross-marketing pitches for financial products which may not be in their best interests."
The Free File Alliance was established by the IRS several years ago, to allow individuals to file their returns with no charge. Taxpayers can access the services of private tax preparation companies through links on the IRS Web site, IRS.gov. However use of Free File still involves the use of an intermediary, which is one of Akaka's main concerns.
"In an era when there have been so many electronic breaches of financial information, taxpayers should not be forced to hand over their private information if they want to electronically file their return with the IRS," he said.
Concerns about taxpayer security have largely driven the discussion of rules now pending at the IRS on disclosure of taxpayer information. The IRS, in December 2005, proposed to allow tax preparers, such as H&R Block, to share return information with their third-party affiliates, such as banks.
The proposed rules created a furor with consumer advocates who said, if approved, the rules would deny taxpayers control over how companies ultimately use their personal information. (235 DTR G-1, 12/8/05).
Fastest, Safest.
There are other reasons the IRS needs a direct portal, Akaka said. IRS Commissioner Mark Everson has put forth e-filing as the fastest, safest, and most accurate way to file a tax return, with fewer errors.
With 45 million returns using software still being mailed rather than electronically filed, direct filing could spur use of the Internet, Akaka said. People will get their returns faster with fewer errors.
A similar proposal, requiring direct tax return filing access through the IRS, was reported out of the Senate Finance Committee during the 109th Congress in a bill (S.1321) repealing the telephone excise tax. But the Senate never voted on the bill.
Akaka's measure would allow the IRS to contract with a private vendor, such as a Free File Alliance member to provide a filing portal at the IRS. However the Free File Alliance-the consortium of 20 companies that provide free tax preparation-would be eliminated by the IRS establishing its own portal, those familiar with the current contract said.
IRS Commissioner Everson has said the IRS does not have the infrastructure to create its own tax filing portal and has expressed concern about the cost to the government.
