Ten years after the Internal Revenue Service first flipped the switch on electronic tax filing, key lawmakers said Monday the time has come to make e-filing free for all taxpayers — a move that could cost software makers millions in annual revenues.
Sen. Charles Schumer, a New York Democrat, and Sen. Daniel Akaka, a Democrat from Hawaii, plan to introduce a bill that would eliminate fees that taxpayers currently pay to third-party software firms and others who handle the e-filing transactions.
Currently, taxpayers who earn US$52,000 or less can e-file for free. The senators announced their intentions to file the legislation to make e-filing free to all as the Congressional Joint Economic Committee released a report showing that if e-filing fees were eliminated for all taxpayers, it would save Americans $1.2 billion per year.
“The bottom line is that the IRS is imposing an additional ‘tax’ on people paying their taxes,” Schumer said. “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.”
The committee’s report said the IRS spends $2.50 to process each paper return and just 30 cents to process one filed electronically.
Electronic tax return filing has grown rapidly in recent years, surpassing the 50 percent mark in 2005. This year, the IRS projects that 62 percent of the 138 million U.S. taxpayers will file electronically. Tax returns are also expected to be up sharply since only those who file 2007 tax returns are eligible for rebate checks soon to be issued under President Bush’s fiscal stimulus package.
The proposal came as millions of U.S. taxpayers scrambled to meet the midnight deadline to file tax returns, with most of them using tax-preparation software or a third-party provider with access to the software, to make their filings.
Under the current system, the money taxpayers dole out to file electronically goes to third parties, primarily software makers such as Quicken and Turbo Tax maker Intuit. Those companies then handle the electronic returns by formatting them in a way that existing IRS systems can handle them.
When it instituted e-filing in 1998, the IRS gave those companies the exclusive right to handle electronic returns. Because taxpayers must use third parties to e-file, they are often sold additional services at the same time, further boosting their tax filing costs, Schumer said.
The fees associated with e-filing are what’s holding back the IRS from reaching its long-stated goal of having 80 percent of all tax returns filed digitally, he added.
The Joint Economic Committee report also said e-filing reduces errors, with one mistake in every 100 returns compared with one in every five paper returns, on average.
The Computer & Communications Industry Association (CCIA) also released its own report Monday, saying that an earlier proposal to enable more direct filing of returns, known as “I-File,” would offer few benefits over the existing system.
“There is little reason to believe that an IRS-operated system would represent an improvement over the products already available in the market — and many reasons to believe it would not,” the report said. “There are no plausibleassumptions under which an I-File system could produce sufficient savings to pay back its development, implementation and operating costs.”
While the I-File approach — which presumably would involve the IRS setting up its own Web interface to receive applications directly — “seems to make sense, on the surface,” the reality is that it’s not worth the investment, CCIA President Ed Black told the E-Commerce Times.
The private sector “continues to offer outstanding online tax preparation software at a competitive price,” Black added, with millions of taxpayers able to file free under current rules. Given that, he said, “there doesn’t seem to be any sense or benefit in implementing an I-File system.”
Taking a Hit?
Last Spring, Intuit reported that its sales of desktop software that includes federal e-filing privileges had fallen 2 percent, even though the number of tax returns filed electronically rose.
That was a sign that Web-based alternatives were seeing growth. Intuit also offers tax preparation tools sold as an online service.
In 2005, the Free File Alliance, of which Intuit is a member, signed a five-year deal with the IRS to provide free e-filing access to qualified taxpayers. That deal enabled the IRS to postpone developing its own technology for fielding returns electronically and ensured software makers that the IRS would not enter their market space in the near term.
Meanwhile, Intuit has been aggressively pursuing ways to decrease its reliance on revenue from tax-filing software. Last December, it bought e-payment processing solutions firm Electronic Clearing House as part of a larger strategy to give businesses access to a full suite of invoicing and payment-tracking tools. Earlier, it bought online banking service provider Digital Insight in a $1 billion deal.
Intuit has been seeing slowing growth rates as a result of the maturing of its core market as well as the rise of Web services alternatives to its big-name packaged software titles, said Gartner analyst Martin Reynolds. For those reasons — and because of the relative fragility of the agreements that keep the IRS out of the e-filing business, diversification makes sense.
“Its core business slowed, so it looked for other growth avenues,” Reynolds told the E-Commerce Times. “That’s a sound strategy regardless of how long it is able to offer exclusive access to online tax filing.”