Free File Alliance Opposes IRS Web Portal

It is our understanding that legislation concerning the creation of an IRS "web portal" for the preparing and/or eFiling of tax returns may be considered by the Finance Committee in the coming weeks. As Members of the Free File Alliance (the Alliance), a group of private sector tax software companies in compact with the federal government, we write to express our strong opposition regarding such web portal proposals.

The Alliance was created through a unique public-private partnership with the primary intent to provide tax preparation and eFiling services to those who need it most, at no cost, while still allowing a marketplace for professional, independent tax preparation. And that's exactly what is happening. These industry members who are competitors in this free market place are the same companies who -- through the Free File Alliance -- contributed free preparation and eFiling services to 20 million American taxpayers, the majority whom are low-to-moderate income. At a very conservative cost estimate of $40 per return, the Alliance has provided 800 million Dollars in free services to the American taxpayers who needed these services the most. This amount is likelier to have market value of over 1 Billion Dollars.

Currently, the Free File program is working well. Unfortunately, the IRS web portal proposal would put all of this at risk by making the federal government a direct, government-subsidized competitor with the private sector & free market. If Congress enacts the web portal proposal, it would abrogate the current agreement between the Free File Alliance and the IRS. Per the terms of that Agreement, the Alliance would dissolve and cease to be an entity providing free Income Tax Returns and electronic filing to millions of Americans.

Additionally, a decision to create a government sponsored competitor would have other, very serious implications.

First, all the costs, technical infrastructure, and customer service burden for the taxpayers currently undertaken by the Alliance would immediately shift to the government. The government would need to create a dependable system sufficient to handle peak capacities and peak filing times -- systems the industry has worked long and hard to perfect and make secure. A similar e-filing system set up by the Canadian government broke down for 10 days this year, with very serious political and economic consequences. The costs of such a system have been estimated at tens and even hundreds of millions of dollars. GAO recently concluded states' "portal systems" were generally not successful, either in the rate of taxpayer use or financially. GAO stated "for the systems profiled, both reported benefits and costs were relatively modest and it is unclear whether benefits were greater than costs." GAO further indicated its skepticism that the state experience was even applicable to the IRS "which would require additional security and other features . . . and finally developing an I-File system would further stretch IRS's capability to manage systems development, an area we have designated high risk since 1995."

And other serious questions would arise: Would the government create and maintain a duplicate software system in Spanish and other popular secondary languages? Would all forms be covered by this government system or only some as is the case with most of the states sited in the GAO report? Would all income groups be served by the government, including the wealthiest? And how many new federal employees would be required to manage the phone lines, and be trained to answer questions, for the tens of millions of taxpayers currently handled by the Alliance? What is the over all financial impact of such a program that will also reduce much needed employment opportunities in the private sector?

Since the IRS will be thrust into the tax preparation business, how will the walk-in taxpayers be handled? Will they be turned away because the GAO report indicates that while the telephone service costs over $19 per call, the walk in process costs nearly $30 per each visit?

However these questions are answered, though, what is clear is that the cost and burden of handling of these issues, calls and questions would, with the creation of an IRS web portal and the end of the Alliance, fall squarely on the government -- and the taxpaying public.

Further, there are technical, economic, security, privacy and political risks inherent in attempting to supplant the private sector in these functions. For instance, it would give hackers one central location where they could attempt to deny service, or worse, seek to steal the data on tens of millions of taxpayers at once.

There are also very serious public policy concerns with the government taking on the role of tax preparer. It would effectively place the IRS on both sides of the tax equation: acting as both tax preparer and tax collector -- raising serious potential or actual conflict of interest issues for the IRS -- and additionally supplanting the function of independent tax advice. What if a customer entered one set of numbers into the government portal system and then changed them? Would that be recorded? Would that be an appropriate basis for an audit? Could that be used against the taxpayer in an audit? If such cases were to reach the courts, what will be effect on the credibility of the system and voluntary compliance? This is merely the start of the kinds of serious questions that would arise should the IRS take on this function and compete directly in the tax software marketplace.

Instead of the trying to supplant the private sector; take on a massive new set of costs and systems that will be borne ultimately by the taxpayers to implement, maintain, and service; and effectively throw out one of the most successful public-private partnerships in existence, why not simply invest more in advertising the existing Free File program? This year, 93 million American taxpayers were eligible to benefit from this public-private partnership -- yet, a small fraction of these 93 million Americans were aware that they could have a free federal tax return. Over the last few years, the IRS budget for advertising all eFiling programs has been slashed. Each year, the IRS has made fewer taxpayers aware of this free, public private partnership. The IRS advertising budget for ALL eFiling programs has sharply dropped from $16 million spent on marketing its own eFile logo and programs several years ago to only $1 million spent last year to promote all eFiling -- Free File promotion was but a very small part of this budget even though the original free File agreement anticipated more aggressive action on the part of the IRS.

The Free File Alliance is an extremely successful public-private partnership model that provides valuable services at no cost to those American taxpayers who need it the most, while still allowing the free market to continue to innovate and thrive.

The web portal concept threatens this successful public private partnership, our tax system based on voluntary compliance, and the trust that the American taxpayers have in their system.

We respectfully urge you to consider these matters when the issue comes before you.