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`Free File' Not Quite, Report Says

April 15, 2006|Kathy M. Kristof | Times Staff Writer

Maybe they should call it "Fee File."

The Internal Revenue Service's much-ballyhooed online tax filing service -- dubbed "Free File" by its creators -- isn't always free, according to a congressional report issued Friday.

The service, launched four years ago in the IRS' effort to get more people to file their taxes via the Internet, is touted by the agency as free of charge. But the vendors providing the Free File service frequently charge taxpayers for ancillary services -- such as resetting their online password or printing forms, according to Sen. Charles Grassley (R-Iowa).

The charges often pop up so late in the online filing process that taxpayers are likely to pay up just to avoid having to start over, said Grassley, whose Senate Finance Committee recently held hearings on the cost of filing federal tax returns.

Moreover, Free File is riddled with come-ons for costly add-on services, such as refund-anticipation loans, according to the report. And taxpayers with complex issues, such as claiming deductions for business expenses or losses from the 2005 hurricanes, are likely to find that the free service doesn't provide the forms and questionnaires they need.

In such instances, the Free File vendor is likely to refer the taxpayer to a for-profit site charging $29.95 to $49.95, according to the report. To get a form not automatically provided by a Free File vendor can cost $2.99; "printing services" -- having the software company provide you with a printed copy of your return -- can cost $4.95.

"An analysis of the Free File companies performed by my Finance Committee staff indicates that use of the Free File programs may be anything but free," said Grassley in a letter to IRS Commissioner Mark Everson.

Grassley urged Everson to renegotiate the Free File agreement and said he would investigate ways that the government could offer the service without going through private vendors.

The report provides ammunition for critics of Free File's public-private partnership. The service is offered by roughly two dozen tax-preparation software firms that promise to provide free services for taxpayers earning less than $50,000 annually. In exchange, the IRS site links directly to the sites of the tax-preparation companies -- a form of free advertising.

"Free File is nothing more than a corporate welfare program designed by tax preparers for tax preparers," said Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington. "It's not free except for low-income people, and they're often tricked into paying for the add-ons."

Until last year, Free File had no income restrictions. But the alliance providing the service renegotiated the deal to restrict free filing to those earning less than $50,000 annually. Others pay $20 and up to file their returns online, which can shave weeks off the time it takes to get a refund check from the IRS.

Grassley maintains that any taxpayer should be able to file electronically without charge.

Jean Ann Fox, director of consumer protection for the Consumer Federation of America, said: "At best, it's a loss leader for these filing companies that file your federal return for free but get you to pay for filing your state return. At worst, it's a bait-and-switch."

A spokesman for the Free File Alliance, the consortium of tax software companies, did not return phone calls Friday. The IRS defended the service, saying that the quality of the program has been improving each year. This year the agency has received 1,268 comments and criticisms, down 48% from last year, said Bert DuMars, director of the IRS' office of Electronic Tax Administration.

Agency officials acknowledged that use of Free File was also down by more than 20% this year. About 3.5 million taxpayers have used the service this year. Five million used the service in 2005, before the income restrictions were imposed.

The Senate report found that one of the most pernicious problems with Free File was the gantlet of advertising that taxpayers have to view while using the service. The ads pitch such dubious offerings as refund-anticipation loans and tax-preparation franchises.

"Only the sky limits your potential," said one site selling $15,500 tax-preparation franchises -- no experience necessary.

As for refund-anticipation loans, consumer advocates have long insisted that such loans are deceptive and usurious. Members of the Free File Alliance charge anywhere from $19.95 to $104.95 for the loans, according to the report, which works out to interest rates of 31% to 227%.

"Taxpayers entitled to a refund receive offers for anticipation loans; to have fees deducted from their refunds; or to get their refunds by cashier's check, prepaid Visa card or retail gift card -- all with hidden costs," Grassley said in his letter. "I'm not confident that the IRS put taxpayers first when negotiating the latest Free File agreement."

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