Tax News

CCH (cch.taxgroup.com) reports:

Despite learning that Free File Alliance software does not always compute taxes correctly, the IRS has declined to test the commercial tax preparation software provided through the program to determine its accuracy in applying federal tax law. Testing to determine accuracy in applying the tax law would be a "monumental challenge," the IRS told the Treasury Inspector General for Tax Administration (TIGTA). The Service's response is part of a TIGTA report, entitled "Additional Action is Needed to Expand the Use and Improve the Administration of the Free File Program," issued on June 28. TIGTA's report sparked immediate criticism from lawmakers questioning why the IRS has not provided taxpayers with a direct filing portal on the IRS website.
Free File offers no-cost electronic tax preparation and filing. It is accessed through, but is not part of, the IRS's website. Individuals generally must have adjusted gross incomes below $52,000 to qualify. The Free File Alliance is a partnership between the IRS and a group of tax software providers, including CCH.
CCH Comment. CCH contacted the Free File Alliance for reaction to TIGTA's report but did not receive a response by press time.
Tax Law Accuracy
TIGTA tested the software of participating providers and discovered that some software did not always calculate tax amounts accurately. TIGTA also reported problems with the earned income tax credit (EITC) and the dependency exemption, among other issues.
The IRS told TIGTA that it reviews the accuracy of members' software "to ensure it operates within the parameters of the Free File agreement." According to TIGTA, this is not a review for technical accuracy but ensures that electronic returns are compatible with IRS system requirements and that the software correctly calculates the entries on the return. These tests do not assess the accuracy of the software in applying the tax law, TIGTA discovered.
Rejecting TIGTA's recommendation for tax law accuracy testing, the IRS stated that: "Testing of commercial tax preparation software to determine its accuracy in applying the tax law would be a monumental challenge."
Lagging Participation
Only a small percentage of eligible taxpayers participate in Free File, TIGTA found. The program accounted for roughly 3 percent of all individual returns filed in calendar year 2006. TIGTA recommended that the IRS focus its marketing efforts on eligible nonusers who file paper returns. The IRS plans to develop a comprehensive marketing initiative and target paper filers.
CCH Comment. An IRS spokesperson told CCH that the most recent Free File statistics are from March. Through March 13, 2007, almost 2.6 million taxpayers filed their returns using Free File.
Criticism from Congress
The leaders of the powerful Senate Finance Committee urged the IRS to do more to ensure the accuracy of tax preparation offered through Free File. "At a minimum, the IRS needs to provide better assurance that Free File tax preparation software can handle the most basic tax scenarios," Committee Chairman Max Baucus, D-Mont., said in a statement. "Taxpayers have every reason to question whether they would be better off with a pencil and an abacus than using the current Free File program," added ranking member Charles E. Grassley, R-Iowa.
Baucus is a champion of universal free online filing. "This report underscores the need for a direct filing portal on the IRS website, where the agency makes certain that the tools supplied to taxpayers comply with the Tax Code," he said. TIGTA noted that, while the IRS is exploring other e-filing options, a direct filing portal is not one.
By George L. Yaksick, Jr., CCH News Staff
SFC Release: IRS Says It Cannot Verify Accuracy of Free File Tax Programs Offered Online
TIGTA Report: Additional Action Is Needed to Expand the Use and Improve the Administration of the Free File Program