The IRS wants taxpayers to file electronically. But sending returns over the Internet requires many people to use a paid preparer or tax-preparation software, adding an extra fee to their tax bill.
The two senators who sit atop the Finance Committee, Chairman Charles Grassley, R-Iowa, and ranking Democrat Max Baucus of Montana, are pushing the tax agency to consider accepting returns filed directly by individuals.
"All the forms and instructions are free, so why do we force taxpayers to pay a preparer or buy software to file electronically?" Baucus asked. "Taxpayers don't have to go to a bookstore and buy forms to file a paper return."
Grassley said there would still be "plenty of room for the software industry to continue to provide value-added services."
Congress set a goal of having 80 percent of individual tax returns filed electronically by 2007. The IRS does not have the technological capability to accept electronically filed tax returns from individual taxpayers. They must be sent in batches by professional tax preparers, software manufacturers or online preparation providers.
Responding to concern that making it easier for taxpayers to file through a free site could put the IRS in competition with private tax preparation software developers, Treasury Secretary John Snow last week assured a House Appropriations subcommittee that the government would not try to compete with the private sector in tax preparation.
"We aren't tax preparation people. We're not software development people," Snow told Rep. Todd Tiahrt, R-Kan. "There's a private market out there that does that and does it well."
Taxpayer Advocate Nina Olson, whose office helps taxpayers navigate problems with the IRS, has said fees charged by tax preparers deter many people from filing electronically, pointing to IRS data that show 45 million returns are prepared online, then printed and mailed rather than sent electronically.
Bert DuMars, IRS director of electronic tax administration, told lawmakers he believed Congress had made it clear "that IRS should stay out of the tax software preparation business."
To encourage taxpayers to put away their pencils and type at their keyboards, the IRS entered into an alliance several years ago with private companies to offer some taxpayers free electronic preparation services through the agency's Web site.
The program, called Free File, used to operate under a contract that required companies to offer the free services to 60 percent of taxpayers. This year, a new contract put a cap on the number of taxpayers who can get free software. That means 70 percent of taxpayers, or those making $50,000 or less, qualify and can use the software to file their tax returns or, in some cases, file for extensions.
Participation in the program this year dropped about 22 percent compared with last year. DuMars said the income cap may have deterred some people from participating, but the program also did not get the same media attention as it did last year, when several companies opened their free offerings to everyone.
IRS Commissioner Mark Everson told the House Ways and Means subcommittee that oversees his agency that government negotiators lost some of their leverage during contract negotiations with the private companies when the Senate last fall said the IRS could provide free individual electronic preparation and filing services only through Free File, the IRS's own walk-in centers or volunteer preparation programs, such as those for low-income and elderly taxpayers.
Olson has pointed out significant shortcomings with the Free File program. She said the government should put a basic tax form online and let taxpayers fill it in and file it directly to the IRS without charge.
Her office tested the 20 preparation sites available through Free File and found some sites had problems applying special rules for Hurricane Katrina victims, posed problems for some taxpayers reporting business income or omitted calculation of the alternative minimum tax.
"On the whole, we found that trying to navigate the Free File sites was a bit like living in the wild, wild West," she said.