E-Filing Fees Under Attack

Ten years ago, Congress enacted laws instructing the Internal Revenue Service to allow the electronic filing of federal income taxes, setting a goal of 80 percent of returns filed electronically by 2007.

The IRS responded by outsourcing the task to software companies and other electronic originators who collect more than $1 billion in fees to provide the service.

"The bottom line is that the IRS is imposing an additional 'tax' on people paying their taxes," Sen. Charles Schumer, D-NY, said April 14 as the Congressional Joint Economic Committee released a study supporting the elimination of e-filing fees.

Under current e-filing rules, the IRS does not accept electronic returns directly from individuals making more than $52,000. For Americans making less than that, the IRS provides for free e-filing through an alliance of most tax software companies. However, in either case, the filing is through a third party. The IRS estimates that 62 percent of all tax returns this year will be filed electronically.

"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.

The New York Democrat is expected to introduce legislation April 15 calling for direct e-filing—now being called I-File—with the IRS.

“I'm going to introduce a bill that will eliminate the tax on taxes that millions of Americans are now paying, and impose a $50 penalty per offense on any company that charges a tax-filing fee to consumers," he said. 

Schumer's proposal touched off a minor border skirmish in the thin line between e-gov and e-commerce. Earlier in the day, the CCIA (Computer & Communications Industry Association), whose members include Intuit, 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 stalwart 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."

Eisenach is the co-author of a new report paid for by the CCIA that says e-filing should remain in private-sector hands.

"Even using very generous assumptions, our analysis shows that I-File fails a benefit-cost test; it would cost at least $132 million more than it would save over the next 10 years and probably a lot more," he said.

Report co-author Robert Litan, vice president for research and policy at the Kauffman Foundation and a Brooking Institute fellow, predicted an IRS I-File portal is unlikely to gain traction against existing services.

"Competition in the industry obligates software companies to keep their products user-friendly and reasonably priced, and the IRS Free File program already makes tax preparation software available to seven out of 10 taxpayers for free," Litan said. "By comparison, an IRS I-File program would cost more than its benefits, and come with a significant risk of failure."

The Joint Economic Committee's analysis released April 14 notes the cost of processing paper returns is $2.50 per return; e-filed returns cost only 30 cents. A committee press release states that "the IRS made agreements with paid tax preparers and software companies to not offer free filing because the companies were concerned it would hurt their business."

"As long as the private sector continues to offer outstanding online tax preparation software—at a competitive price to those who buy it—and for free for the majority of Americans through Free File, there truly doesn't seem to be any sense or benefit in implementing an I-File system," said CCIA President and CEO Ed Black.