Don't Mess With Taxes

Most of us are decompressing from the filing season that just wrapped up on April 15, but already there's talk on Capitol Hill about changing the system.

Charging that the IRS is imposing an additional tax on filers by outsourcing e-filing operations, U.S. Sen. Charles Schumer (D-N.Y.; pictured at left) introduced legislation on April 15 to eliminate e-filing fees.

S. 2861 would amend the Internal Revenue Code to "prohibit the imposition of a separate fee for electronic filing of returns and statements for individuals." Violators would face a $50 penalty for each illegal e-filing fee.

Currently, the only official way to get no-charge return filing is via Free File, which is restricted to taxpayers under an income ceiling. For this filing season, you could use of the Free File programs only if your adjusted gross income was $54,000 or less in 2007. Free File will remain available for folks who got an extension until the Oct. 15deadline.

But for filers with higher incomes, it costs between $15 and $20 to send in a return electronically.   

Some tax preparation software companies during the filing season do make special free e-file offers to those who can't use Free File. And it's not unusual for the companies to also make deals with financial institutions, brokerages and investment companies to offer the service at no charge to their customers.

But for Schumer, and I share his opinion, it's the principal of the process.

"The current system forces millions of Americans to pay a fee for the 'privilege' of filing their taxes, even though e-filing is cheaper for the IRS to process," Schumer said.

Free File, e-file issues: The IRS was instructed by Congress 10 years ago to get 80 percent of returns electronically filed by 2007. That didn't happen. This year, the IRS estimates that 62 percent of all tax returns will be e-filed.

The public-private partnership of Free File was supposed to help the IRS get most of our returns electronically. But it's essentially hit a wall when it comes to new users.

The one year that Free File was open to all regardless of income, back in 2005, participation in the program was the highest ever. In 2006 when a $50,000 income cap was imposed, around 39 million taxpayers were cut out of the program. Use of the program also dropped, some speculated, because of negative publicity surrounding the eligibility change.

Details on the effect of the eligibility change from 2005 to 2006 filing seasons are in this Treasury Inceptor General for Tax Administration report from September 2006.

To be fair, the Free File was originally designed to help folks for whom purchase of a tax software program and any associated filing fee would be a definite major cost consideration when it comes to filing. So with that approach in mind, making folks with triple-digit incomes pay to e-file is understandable.

But, as I said before, it's the principal of the process. As long as I can mail in my return for around $5 certified, why pay three times that? That's definitely what I do in those all too frequent years when the hubby and I owe the IRS. I'm not paying anything extra to get my money to the IRS sooner!

'Doomed' free file effort: I doubt Schumer's effort will go anywhere. There's a big lobby out there that likes things just as they are.

In fact, eWeek.com reported that "Schumer's proposal touched off a minor border skirmish in the thin line between e-gov and e-commerce" when, last Monday, the Computer & Communications Industry Association (CCIA) held a teleconference dismissing the notion of free e-filing as a "nice idea doomed to fail."

"You might think, 'Why in God's name can't the IRS just put up a Web site?'" said Jeffrey Eisenach, chairman of Criterion Economics and a co-founder of the free market think tank, the Progress and Freedom Foundation. "The IRS' experience with large IT systems suggests the costs of trying to implement I-File would be large and the results uncertain."

CCIA has published its own report on direct-to-IRS filing, aka I-File. It's no surprise that CCIA finds "I-File proposals do not represent a viable approach to increasing electronic filing, improving the efficiency of the IRS, or reducing the costs to taxpayers of filing tax returns."

Point taken. Many government agencies have spotty track records in trying to recreate services provided by private industry. So maybe the answer is another combination of private and public sectors.

Instead of outlawing e-filing charges, offer us taxpayers a tax credit to cover the cost of sending in our returns electronically. That way the software companies and e-filing processors can continue to rake in the estimated $1 billion in such fees and those of us who use the programs can immediately get the money back on our tax returns.