Testimony of ETAAC 'Concerned Group' at House Hearing on Electronic Commerce

September 27, 2000

[2] The Conference Report for the RRA contains the following. "The intent of the conferees with respect to this provision is for the IRS and Treasury to press for robust private sector competition. When disputes arise between the IRS and the private sector on the question of whether services offered by the IRS inhibit competition or are appropriate services not reasonably available to taxpayers or tax preparers, the Electronic Commerce Advisory Group [ETAAC] shall recommend to the IRS Commissioner an appropriate course of action. Those recommendations shall also be made available to the Congress."

[3] On May 1, 2000, the ETAAC sent the IRS a letter, addressed to Robert Barr, Assistant Commissioner of Electronic Tax Administration, regarding the subject of the IRS offering "one or more options to the public for preparing and filing individual income tax returns over the Internet at no cost to the taxpayer." The ETAAC took this action because of the increasing controversy between the private sector and the IRS on this matter and the ETAAC's view that this was not good public policy.

[4] In its May 1st letter ETAAC recommended ". . . that the most appropriate actions the IRS can take to provide taxpayers with a wide choice of no cost tax preparation and filing options over the Internet are to: 1) let the competitive market continue to progress, and 2) continue stimulating electronic filing through its creative advertising campaign and making electronic filing convenient to use through such improvements as the acceptance of additional forms and the elimination of paper." The letter further stated that "The ETAAC strongly recommends against the IRS developing its own tax preparation software program, either internally or through acquisition. The ETAAC also believes that the IRS should not follow an approach where the IRS issues an RFP or RFA to select a limited number of "Authorized IRS e-file providers" to IRS specifications." This recommendation and opposition to IRS entering tax preparation through an Internet-based service was communicated to Congress in the ETAAC's June 2000 Annual Report.

[5] Voluntary compliance has been a keystone of our income tax system from its outset. With voluntary compliance came both the responsibility and the right for an individual to independently and privately prepare and file a statement of their income and tax liability. Put another way, under the American income tax system, it is the citizen who takes the first step in the tax transaction, telling the government what they earned and what they owe. The burden is then on the government to challenge the citizen's independent tax return, and only about 1% of the American people are so challenged through the audit process. For 99% of the American taxpaying public, when they submit their tax return, and either make a payment or receive a refund, that is the end of the transaction. However, the present strategy of the Electronic Tax Administration threatens to reverse the presumption of the American tax system -- ultimately imposing on all of our citizens the necessity of having to challenge the government's determination of their earnings and tax liability. Introducing such a fundamental change to the system, by bringing the preparation of individual and business income tax returns under the auspices of the government, should be the subject of full public debate, and happen only as the result of Congressional decision with the concurrence of the President.

[6] Today some 55% of individual taxpayers choose the assistance of a paid tax professional in preparation of their return. The remaining self-preparers either use paper and pencil or have chosen, in increasing numbers, to use personal computer software. As a matter of public policy, we believe that tax preparation should remain the independent right and responsibility of the taxpayer. Consequently, we strongly oppose any action by the IRS to further enter into income tax preparation, including the IRS offering the public an Internet-based preparation service, either developed internally or obtained through contract, or through regulation of private sector companies providing computerized and Internet tax preparation software and services. We believe that the IRS plans to insert itself into this arena are ill conceived and represent fundamentally flawed public policy.

[7] The private sector invented electronic tax preparation services, and annually invests many tens of millions of dollars in ongoing technology and service innovations. The marketplace is robustly competitive, and has demonstrated civic responsibility by already making many Internet-based tax preparation and filing services available to lower and middle income citizens at no charge. The strategy of IRS' ETA group to insert itself into this market risks both continuing investment and innovation as it seeks to make this a government service sector of the economy.

[8] In its letter to Mr. Barr, the ETAAC commented: "The IRS Restructuring and Reform Act of 1998 states that 'The IRS should cooperate with and encourage the private sector by encouraging competition to increase electronic filing of such returns.' This approach is working well. Existing marketplace competition has already led to a wide number of options that individual or business taxpayers can choose, including very low or no cost tax services on the Web for individual taxpayers from a wide variety of providers -- the very trend you indicated in your letter. The number of providers, now over 20, is dramatically increasing every year, forcing strong product development and causing prices to fall dramatically."

[9] Further emphasizing this point, the ETAAC included this statement in its June 2000 Report to Congress. "The ETAAC believes that the clear choice of public policy should be to let the private sector provide the capability, with the federal government stepping in if the private sector does not meet the need. The ETAAC believes it is inappropriate at this time to pursue a public policy that would require the IRS to offer no-cost electronic filing over the Internet. The marketplace has made noticeable progress towards achieving no- cost electronic filing over the internet for individual taxpayers in the past two years, and additional progress towards this goal is expected next year based on publicly announced plans. The ETAAC believes that any effort by the IRS at this time to enter the marketplace itself, either by developing its own software or aligning itself with a limited number of "authorized e-file providers" that offer no-cost e-filing for individual or business taxpayers, would have the effect of limiting competition and would ultimately limit taxpayer choices."

[10] "In support of the goal of no-cost e-filing and tax preparation over the Internet, the ETAAC believes that the most appropriate actions the IRS can take to provide taxpayers with a wide choice of low-cost and no-cost tax preparation and filing options over the Internet are to continue to: 1) encourage competition, 2) seek industry views on which barriers inhibit lower-cost to no-cost private sector supplied options, and 3) stimulate electronic filing through its creative advertising campaign and making electronic filing convenient to use through such improvements as the acceptance of additional forms and the elimination of paper. The ETAAC's recommendations on the use of the Internet for electronic filing are grounded in the belief that competition is the most effective way to provide taxpayers with the widest range of performance and price options for tax preparation and electronic filing. Promoting the most intense competition among private sector companies and pursuing policies that allow these companies to reduce unnecessary costs is the best action the IRS can take in pursuit of the goal of no-cost electronic filing for taxpayers."

[11] On July 20, 2000, the IRS' Electronic Tax Administration proceeded with its plans and initiated a procurement action by releasing a Request for Information (RFI) seeking comments on an Internet-based preparation service by which taxpayers could prepare and file their tax returns directly with the IRS, at no cost to the taxpayer. As a justification, the President's FY2001 Budget Request is cited: "No later than tax year 2002, the IRS would be required to offer one or more options to the public for preparing and filing individual income tax returns over the Internet at no cost to the taxpayer . . ." We were surprised and shocked that the IRS is continuing with this effort after all of the discussions and recommendations on the part of the ETAAC and the industry. We are deeply concerned that the CHECK AND BALANCE that Congress sought to create when the ETAAC was created through the RRA is not working. It appears that the ETA group is pursuing an independent course of direction without regard to any other consideration.

[12] The content of the RFI raises a related concern. Why is the IRS entering the e-commerce market by attempting to set market prices for private sector products and services, and dictating e- commerce business models? The IRS has no corollary authority to the FCC's Communications Act under which it can play such a role in the marketplace. Indeed, we know of no statutory basis by which the IRS should be attempting to establish policies for or regulate software, Internet, financial services, accounting, and tax preparation services whatsoever. We believe this latest initiative is far outside of the mission of the IRS.

[13] Accordingly, we strongly recommend the IRS rescind their current procurement action, the electronic tax RFI, and discontinue all other efforts to further expand their mission and role into tax preparation on the Internet and elsewhere. We request that Congress address the cited budget provision with an explicit denial, and conduct necessary Oversight on ETA's ongoing plans, activities and role in the IRS organization.

[14] We appreciate your consideration of our comments and are prepared to answer any questions you may have.

Sincerely,