Bob Carlson

April 17, 2012

Why You Have to Pay Again to File Your Taxes

Filed under: finances — Bob @ 12:30 pm

Most of you completed your income tax returns recently, and a high percentage of you filed those returns electronically. The IRS has wanted almost everyone to file electronically for a long time. E-filing, as they call it, reduces errors, saves the cost of processing paper returns, and saves storage and other costs.

It would be in the IRS’s interest, and taxpayers’ interests, for the IRS to build its own web-based or even non-web-based income tax return filing program. You go to a web site, log into your personal account, and do the return at your leisure. If the web site were linked with the IRS’s database, things would be even more efficient. The information returns the IRS receives about you (W-2s, 1099s, 1098s, and more) would automatically be loaded into your account. Your returns would be almost completed before you start it.

Lots of other government agencies do this. Virginia’s Board of Elections, for example, recently rolled out an online system for candidates and political committees to file their financial reports. Financial firms regulated by the SEC and state securities agencies do all their filing online through the web-based system administered by FINRA. Other examples abound, but not the one requirement almost every adult American faces.

The IRS has spent tens of billions of dollars on technology the last few decades, yet it hasn’t established its own online filing system. In fact, it has archaic and inefficient technology. If you’ve been audited recently, even what is called a paper or mail audit, one of the first things you’re asked is to provide a full paper copy of the return in question because the IRS has only an electronic transcript if you filed electronically.

Why is there such a mess?

Because software companies hire high-priced lobbyists who in turn “influence” Congress and state legislators to do the wrong thing.

The biggest culprit is the misnamed Free File Alliance. This sounds like a group of people who would want to encourage electronic filing. In fact, it’s the opposite. It was organized and funded by software companies specifically to prevent the IRS from writing its own tax preparation software that taxpayers could use free. It especially doesn’t want taxpayers to be able to go to an IRS-written program and file directly from the IRS web site.

The “free file” name is because the IRS wants the software makers to allow taxpayers to e-file for free from the software. The software makers want to charge extra for that step. They reached a “compromise” under which the software makers allow people with incomes up to a certain level to file free. (In others words, it’s built into the price of the software.) Others have to pay again to file electronically.

It’s an ugly story, and it shows the American political system at its worst. Americans are spending millions of dollars on private-provided software and paying again to have the IRS integrate the data into its system.

Read more about it here. Then, contact your Congressman and Senators.

What is the Free File Alliance?  It’s a coalition of 14 software makers that have signed an agreement with the IRS to provide tax preparation software to the public.  You see, the IRS was mandated to provide free online tax prep services to the public, so it outsourced this to existing commercial tax preparers.  This agreement was first signed with the Bush administration IRS in 2002, renewed in 2005, and then renewed again under the Obama administration in November, 2009.  Even today, despite the Obama campaign promise and demonstrated success around the world, the Free File Alliance indicates on its web page that “Treasury has indicated it does not want the IRS to enter into the tax software business.And Intuit said on its investor report that this alliance “has kept the federal government from being a direct competitor to Intuit’s tax offerings.”

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