updated 6/28/2006 5:18:41 PM ET 2006-06-28T21:18:41

Senate tax-writers voted Wednesday to make it possible for individuals to file tax returns by computer without buying commercial software or paying a professional preparer.1

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The Internal Revenue Service would have three years to make electronic filing available through its Web site, under a bill approved by the Senate Finance Committee.

"Taxpayers can file a paper return for free, and they should be able to file an electronic return for free as well," said Sen. Max Baucus, D-Mont.

Opposition in the other House
That's the opposite direction that House lawmakers headed earlier this year when they voted to prohibit the IRS from developing or providing free electronic tax preparation or filing services for individuals outside a program called Free File.

Some House lawmakers have concerns that making it easier for taxpayers to file electronically could put the IRS in competition with private tax preparation software developers.

Taxpayer Advocate Nina Olson, whose office helps taxpayers work out problems with the IRS, has said the fees associated with electronic filing discourage taxpayers and that IRS data show 45 million returns are prepared online, then printed and mailed.

To encourage electronic filing, the IRS entered a contract with commercial preparation companies to offer the Free File program, which gives some taxpayers access to free online preparation and filing services.

It attracted some criticism when a new contract put a $50,000 income limit on taxpayers eligible to use the software. The change allowed 70 percent of taxpayers to use the program, but that was less than the universal access allowed last year.

Senate tax-writers also sought to prohibit companies participating in the Free File program from advertising, marketing or selling financial products and services not directly related to tax preparation.

Olson and some consumer groups have criticized the solicitations.

Technological concerns
The IRS does not have the technology to accept electronically filed tax returns sent one by one, but the agency can accept returns sent in batches by professional tax preparers and software providers.

IRS officials have said it would be very costly to set up the technology to accept individual electronic returns.

Additional changes
The bill also included a host of other tax changes designed to protect consumers from unscrupulous tax professionals and make tax filing easier.

Tax-writers want to require paid tax preparers to pass a Treasury Department or a state exam proving their competency on tax issues, including ethics and low-income tax credits. After certification, professionals would be required to keep current with changing tax laws.

Tax preparers who offer refund anticipation loans, which let customers immediately take home an expected refund, would be required to register with the Treasury Department and give the government a schedule of their fees.

They also would be required to give customers clear statements of fees and interest charges associated with the loan, compared with other types of consumer credit.

Tax preparers would not be permitted to offer audit insurance, promising taxpayers they can pay extra to ensure they will owe no more money if the IRS finds fault with a return.

The Treasury Department would be asked to give grants to community groups to increase low-income taxpayer access to banks and study the feasibility of giving tax refunds through debit cards.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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