Pitches, Fees Found in 'Free File' Tax Service

By Albert B. Crenshaw
Washington Post Staff Writer
Friday, April 14, 2006

Taxpayers who use the "Free File" online tax return preparation services offered by private vendors in partnership with the Internal Revenue Service often are confronted by surprise fees, expensive add-ons, loan solicitations and other marketing pitches, an analysis by the Senate Finance Committee has found.

There is no obligation for taxpayers to buy any of the goods and services marketed on the Free File Web sites. But fees, such as charges for certain IRS forms, crop up so late in the process that they leave taxpayers with the uncomfortable choice of paying or starting their returns over with another preparer, the panel found.

Many of the program's Web sites advertised additional tax-related services, such as tax advice and refund anticipation loans, but some also made pitches for items that have little to do with taxes, including franchise opportunities.

For example, one site included a link to an international barter exchange that promises to bring customers at least $1,000 in new business in their first 12 months with the exchange. Its fees include enrollment ($25), plus 3 to 4 percent of each transaction, plus a $15 monthly accounting fee -- which the company promises to refund if the income does not materialize.

The study "indicates that use of the Free File programs may be anything but free," Finance Committee Chairman Charles E. Grassley (R-Iowa) said in a letter sent yesterday to IRS Commissioner Mark W. Everson.

The Free File program, in its fourth year, is a partnership between the IRS and software companies to encourage more taxpayers to file their returns electronically. The agency and the Free File Alliance of vendors agreed last fall to extend it for four more years. Twenty vendors are participating this year.

When the program was open to all taxpayers last year, more than 5 million returns were filed through it. This year, however, eligibility is limited to individual taxpayers with adjusted gross incomes of $50,000 or less.

Bert DuMars, director of electronic tax administration at the IRS, said the agency has little data on the impact of the marketing pitches to taxpayers. He said the IRS has analyzed refund anticipation loans and found that only six-tenths of 1 percent of taxpayers who use Free File have signed up for such loans.

He said all but a few of the vendors are small businesses. "They are offering a lot of free services, but they've got to figure out how to make a living," he said.

Tim Hugo, executive director of the Free File Alliance, agreed. "There has to be an opportunity for these companies to make a profit," he said, noting that "no one is required to buy anything on any of these sites."

However, the committee's report found that some of the sites seem structured as traps for the unwary.

One Free File site, for example, offered a link labeled "Get your $ in as little as 24 hours," which takes the taxpayer to a list of ways to get a refund, the analysis found. The link led to a Web page with a link to the tax service vendor's home page, but the return link did not bring users back to the free file page. Instead it takes the taxpayer to the vendor's home page, which offers return preparation starting at $9.95. "If you close out of the window, the free file offer is no longer open as a window," the report said.

Another site offered to sell franchises for tax-preparation services to Free File clients for $15,500. "You don't have to be a tax professional -- we do all the work," the study said, quoting from the site. "At the push of a few buttons, you can generate a substantial income during a short time, relax and enjoy the benefits of that income for the remainder of the year."

Finance Committee staff members said some of the marketing pitches they reported on had been taken down late yesterday.

Grassley said he is "worried that the IRS isn't providing enough protection for taxpayers by the obvious lack of oversight that would allow a company to attempt to mislead taxpayers into buying a $15,500 tax preparation franchise under the guise of helping taxpayers profit."

The chairman also criticized the $50,000 limit as excluding millions of taxpayers at a time when Congress and the IRS are seeking to boost electronic returns, which the IRS can process faster and more accurately.

Grassley told Everson he is looking into allowing the IRS to provide a direct filing portal to let all taxpayers file for free using the IRS Web site.

IRS's DuMars said that 93 million taxpayers qualify under the $50,000 limit and that it would be costly for the agency to provide this service itself.

Only three IRS employees work full-time on the Free File program, DuMars said.

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