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E-Filing Drawbacks Cited

The IRS' in-house consumer advocate says the current e-filing process is relatively cost free for the government but suffers from at least two "significant" drawbacks: it is not available to all taxpayers and it is not free for everyone.

Last fall, the IRS struck a deal with an alliance of tax preparers and software publishers that allowed up to 78 million Americans to file their tax returns electronically without charge.

Tax preparers such as H&R Block usually charge taxpayers a fee for online filing in addition to charges for the actual tax return preparation. According to the IRS, the average online filing fee is $12.50.

Under the terms of the agreement between the government and the Free File Alliance, tax preparers and other filing services that are members of the alliance must provide free online filing services to at least 10 percent of their customers.

In return, members of the alliance are promoted on the Free File website that provides taxpayers links to the free services.

"Given that e-filing saves the IRS money and furthers the agency's computer modernization objectives, an inability to provide a free file option to all taxpayers does not make sense," Nina Olson wrote in her annual report to Congress.

Olson said she was also concerned about the advertising the consortium members are using and the products, in addition to the actual e-filing service, they are pitching to Americans.

"Taxpayers wishing to use free file initially go the IRS website and then are re-directed to the commercial websites of the consortium members, where in many cases they are subjected to offers for products marketed either by the software company or by a business affiliate," Olson wrote.

Among the products being sold are audit protection, refund anticipation loans (RALS), individual retirement accounts and mortgage refinancing.

Olson said she does not believe the IRS "should allow private industry to sell RALS and other commercial products to taxpayers who are going to the IRS website to file their tax returns electronically."