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Free File lawsuit dismissed

Limiting Free File participation on the basis of income is fine.

So says a U.S. District Court judge, who last week dismissed a class action lawsuit that was filed in 2007 against the Free File Alliance. That's the group of tax software vendors who provide free software and electronic filing to low-income taxpayers via a special IRS Web page.

Also named in the lawsuit were Intuit (TurboTax's manufacturer), H&R Block Digital Tax Solutions (maker of TaxCut) and the Internal Revenue Service.

Free_file_logo Stacie Byers and Deborah Seltzer initiated the class action suit on the grounds that Free File was artificially restricted to a segment of the population, that is, taxpayers with income below a certain amount, when the program was introduced in 2002. When the suit was filed, the income cap was $54,000. This filing season it is $56,000.

The plaintiffs acknowledged that IRS computations show that even with the income limit, about 70 percent of taxpayers are eligible to use the Free File service. But, argued Byers and Seltzer (or actually, their attorneys), that income level specifically leaves 30 percent of taxpayers without access to free tax software via the IRS site.

They also pointed to a report by the Treasury Inspector General for Tax Administration on the Free File program, claiming the report indicated that software vendors pressured the IRS into restricting the service and threatened to drop out of the Free File program unless their demands were met.

Not so fast: Federal Judge Thomas N. O'Neill, Jr., however, did not find the suit's arguments persuasive.

"The IRS stated that it believed that the program had 'successfully fulfilled the intent of the initiative,'" wrote O'Neill. "This language strongly suggests that the restriction did not 'hinder' IRS policy."

In fact, the materials that the plaintiffs presented to support their lawsuit seemed to hurt them.

"When allegations in a complaint are contradicted by the materials appended to or referenced in the complaint, 'the document controls and the court need not accept as true the allegations of the complaint,'" wrote O'Neill.

In short, O'Neill ruled, the plaintiffs did not allege sufficient facts to support their case. "Therefore, I will grant corporate defendants' motions to dismiss plaintiffs' second amended complaint," ordered the judge.

Same song, second losing verse: Did you notice O'Neill's reference to "second amended complaint"?

Yep, the suit had been thrown out of the Pennsylvania federal court before, back in May 2008.

And this year, filing season circumstances offered absolutely no additional help for Byers and Seltzer in their revised legal effort to force the Free File program open to everyone.

Some changes in 2009 to both the Free File program, as well as in some private sector e-filing offerings, have made at least free filing, if not free tax preparation, available to more taxpayers.

The IRS is now offering taxpayers some common tax forms that they can fill out on their computers and then e-file for free. There is no tax software connected to the fillable forms; you must know the data that goes on the lines and enter it yourself. However, this option has widened access to free filing at the IRS site.

Also this year, TurboTax and TaxCut are providing free e-filing to taxpayers who buy their packaged tax software programs from store shelves.

Yes, in many cases there still is a cost associated with the software for folks who do not qualify for Free File or those who choose to use other online filing options. But at least a few more folks are free of the e-filing charge this tax season.

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