Protesting the E-Filing Penalty

Tech-savvy taxpayers question why they must pay for the privilege of filing electronically.

Mike Hogan, special to PCWorld.com

Scott Cohn is plenty steamed that it took him 2 hours to fill out his 1040EZ--the simplest of federal tax forms. But what really rankles the 45-year-old electrical engineer is that he couldn't then electronically file his return free of charge through the Internal Revenue Service's Web site.

"They've been pushing IRS e-file heavily," says the Newton, Massachusetts resident. "So you go to their Web site, and it turns out there's no IRS e-file. That's a lie and a misrepresentation."

Clicking the "e-file" link on the IRS Web site takes the visitor to a list of what the IRS calls Electronic Return Originators (EROs) with the disclaimer: "NOTE: IRS cannot compete with private enterprise and does not offer free e-file software or direct filing."

Some EROs offer certain classes of taxpayers--typically, low-income or 1040EZ filers--free e-filing. But tax software vendors and providers of Web services usually charge fees of $5 to $15 for providing the tools that enable you to e-file your state or federal taxes. Some accountants and tax lawyers charge $75 or more for e-filing, on top of charges for tax preparation services.

"Give me a break!" says Cohn of the IRS disclaimer. "That's one of those really fake excuses to cover up the fact that they can't admit they're protecting the interests of tax preparers and software companies rather than the taxpayer--as usual."

Treasury Wants Change

Taxpayer Cohn's assessment may not be wrong. A spokesperson for the U.S. Treasury Department, which oversees the IRS, says e-filing isn't provided on the IRS Web site because of "opposition from the industry." But now the Treasury Department is seeking funding to add that function to the site.

"No one should be forced to pay extra just to file his or her tax return," U.S. Treasury Secretary Paul O'Neill writes in his budget proposal. His agency's oft-quoted goal is to have 80 percent of all federal tax returns filed electronically by 2007, up from about one-third of all returns this year.

Calling the current tax code "an abomination that cries out for vast simplification and reform," O'Neill proposes extending the April 15 tax deadline to April 30 for e-filers. He proposes having the IRS work with the private sector to simplify e-filing.

Extending a tax filing deadline would literally take an act of Congress, however, and a Treasury Department spokesperson couldn't say exactly what simplification entails. Free e-filing could come to the IRS Web site as early as next tax season, she says. But the improvement is unlikely to extend to providing tax preparation on the site.

"We are building a partnership with the industry to expand e-filing without having the IRS get into the software business," she adds.

Taxpayers might still have to buy third-party tax preparation solutions to e-file, even though the IRS site provides downloadable forms free of charge. Currently, frugal taxpayers who have Web access but want to avoid third-party services can only download the PDF versions of federal tax forms, fill them out, and file them by mail. They can't fill out the forms on the IRS site and then e-mail them to the agency.

Some States Can

Are electronic transactions too complicated for a government agency? Not if you live in Cohn's home state. The Massachusetts Department of Revenue lets residents complete and e-file the most complex state returns for free. "The screens look just like the paper forms they mail out," Cohn says. "You can do the EZ version in about three screens."

Massachusetts is one of a half-dozen states with Web sites that support varying degrees of tax preparation and e-filing for at least some of their constituents. Most start by offering full online services to low-income and EZ filers. The Indiana Department of Revenue site, however, accepts the whole gamut of personal tax forms at no charge, and is developing support for corporate filings. Idaho, meanwhile, gives e-filers a $2 rebate on their taxes and accepts tax payments by credit card without a surcharge.

Chris Neff, director of communications for National Information Consortium, says free e-filing is one of the highest priorities of the state leaders with whom his company does business. NIC designs and maintains the Web portals for Idaho, Indiana, and several other states.

"This is something where business and citizen demand are rising rapidly," Neff says. "I don't know of any of our state partners who don't have this on the radar. It's just a question of when they'll be launching."

Save Money Online

E-filed returns cost the IRS less to process than paper returns, in part because they're 20 times less likely to contain errors than manually prepared returns, according to the IRS. In its effort to encourage e-filing, the agency advertises that refunds are delivered to e-filers within ten days, instead of the usual four to six weeks by snail mail. Treasury Secretary O'Neill acknowledges another often-overlooked consumer concern (one that is echoed by Cohn): privacy.

Having once had his credit card hacked from an e-commerce site, Cohn is anxious about his personal finances sitting on a commercial tax preparer's server.

"I don't think I'll do my taxes online again with anyone but the IRS, because I'm worried about security," Cohn says. He knows that IRS servers are not perfectly secure; Cohn says he came away from his last IRS Web site visit with the W32.HLLW.Hai virus. But since none of us can hide our personal financial data from the IRS anyway, Cohn is willing to enter his information at the agency's site. He figures the fewer servers that contain his Social Security number, the better. But at the very least, he wants the option not to have to buy third-party tax services in order to e-file.