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E-filing taxes slows as free services cut

Growth in electronic filing of U.S. income tax returns has slowed due to new income restrictions for federally sanctioned free tax preparation and filing services, federal officials said Thursday.
/ Source: Reuters

Growth in electronic filing of U.S. income tax returns has slowed due to new income restrictions for federally sanctioned free tax preparation and filing services, federal officials said Thursday.

Through March 31, the Internal Revenue Service received 53.8 million electronically filed income tax returns for 2005, up about 3.3 percent from the same time last year.

However, the previous year’s total at the same point was up 7.3 percent from 2004, when the tally rose 12.1 percent from early April 2003.

The slower growth is due partly to an expected decline in the number of taxpayers who use Free File services available via the IRS’ www.irs.gov Web site, IRS Commissioner Mark Everson told a congressional subcommittee.

The Free File program provides links to tax software companies that agreed to provide free software and tax preparation services as part of the Free File Alliance.

More than 5 million filers used Free File in 2005, when several firms in the alliance allowed anyone to use their free services.

“While this was good for taxpayers in general, it posed a serious threat to the survival of the Alliance,” Everson told the Oversight subcommittee of the House Ways and Means Committee.

This year, the Alliance and the IRS agreed to limit the program to taxpayers with adjusted gross income of $50,000 or less.

Although this is a setback for electronic filing, which provides faster and cheaper processing of returns, industry officials said it brings the program back to its goal of helping low- and moderate-income taxpayers.

“Some may assert the program should provide Bill Gates and Warren Buffett, or other wealthy folks, with free returns. But I do not think a compelling policy case can be made that such high wealth individuals need such free services,” said Timothy Hugo, executive director of the Free File Alliance.

Everson said the IRS would continue to push electronic filing and noted that self-prepared returns filed from home computers grew 16.9 percent to 14.85 million through March 31. That is above the 2005 home filing growth rate of 14.4 percent but below the 21.3 percent increase in 2004.

The share of electronically filed tax returns by early April continues to climb, reaching 67 percent this year, versus 65 percent in 2005, 60 percent in 2004 and 54 percent in 2003.

The IRS has received nearly 80 million returns through March 31, about even with last year. It has issued 66.7 million refunds so far this year for a total of $154.3 billion -- an average of $2,314, up $104 from last year.