Free File Alliance fights back

Did you use the Free File Alliance this year to send in your 1040? Me neither.

In fact, not too many of us took advantage of the public-private consortium that enabled taxpayers with adjusted gross income of $52,000 or less to electronically prepare and e-file their taxes for free. A recent Government Accountability Office examination of the 2007 tax-filing season found that the program continues to lose users.

According to the GAO data collected through March 17, there were 5.2 percent fewer Free File users this year compared to that time frame in the prior filing season. That number might increase, possibly even make it up to the 2006 tally, once the millions who waited until April 17 to file and those who got extensions are taken into account after that mid-October deadline passes.

But even if that does happen, the news still isn’t good for the highly-touted program. The 2006 numbers were down almost 23 percent from 2005, primarily because Free File two years ago was open to all taxpayers, regardless of income.

That open-to-all approach has been cited by some on Capitol Hill as a reason to go to an IRS-operated Web filing portal, rather than continuing to use Alliance partners, which currently number 18 tax software companies.

Preemptive strike: Lawmakers reportedly are crafting legislation to create and, more importantly, fund such an IRS Web site. In the wake of such talk, the Free File Alliance, seeing its survival at stake, has taken a "best defense is a good offense" approach.

The Alliance’s executive director Timothy Hugo last week sent the Senate Finance Committee a letter denouncing the move. "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," Hugo wrote.

And it’s not just the Alliance that’s endangered, according to Hugo. Using an IRS portal, he continued, also would threaten "our tax system based on voluntary compliance, and the trust that the American taxpayers have in their system" and would necessitate "a massive new set of costs and systems that will be borne ultimately by the taxpayers to implement, maintain and service … ."

Hugo pointed to a Canadian governmental e-filing system that broke down for 10 days this year "with very serious political and economic consequences." And he raised the always politically sensitive issues of security and privacy risks, arguing that "computer hackers would have one central location to attempt to deny service or seek to steal the personal data of tens of millions of taxpayers at once."

As for the Alliance itself, Hugo said that an IRS filing portal would abrogate the current agreement, forcing the consortium to dissolve.

While it’s a smart business move for the Free File Alliance to make these anti-IRS-site arguments early and often, the chances for a government-run portal are slim at best. While the idea has the support of many in Congress, as well as Taxpayer Advocate Nina Olson, the IRS itself is not too keen on the idea.

Plus, don’t be surprised to see the Bush Administration come out against such a move. Dubya and crew have consistently worked to shift government services away from Uncle Sam to the private sector. Even with a Democratic House and Senate now in D.C., the folks at 1600 Pennsylvania Avenue are going to keep fighting to maintain that "business does it better" operational approach.

Still time: If you filed for an extension, you have until Oct. 15 to get your 2006 return to the IRS. And the IRS is asking all procrastinators to e-file. If you meet the Free File Alliance’s income requirements, it will be available to you through the extension deadline.