The Internal Revenue Service's free tax-filing program, which has had its share of controversy, got some more Friday as auditors said much of the program's industry-supplied software couldn't handle simple returns.
"Taxpayers have every reason to question whether they'd be better off with a pencil and an abacus than using the current free-file program," said Sen. Charles E. Grassley (R-Iowa). "That has to change."
The IRS has been offering free electronic filing for the last four years as part of a partnership with about 20 tax-software companies that agreed to provide free electronic filing for taxpayers with simple returns. In exchange, they enjoy a form of free advertising on the IRS website because it has links to the vendors' sites. About 95 million people, or 70% of taxpayers, qualify for the program based on income, but only about 3.9 million used it last filing season.
The program has been plagued with problems from the start. Some taxpayers said they were forced to pay for services that were supposed to be free. Others complained of incessant advertising for profit-generating services, such as refund anticipation loans and state tax return preparation. By and large, those problems have been fixed, according to the audit by a Treasury Department unit responsible for oversight of the IRS.
But the audit also found that there was no assurance of accuracy with the free-file software and that many of the programs simply couldn't handle basic tax situations.
* One-fourth of the free-file tax software programs would not allow taxpayers to take either the earned income tax credit or the child and dependent care credit without also claiming an exemption for a dependent, even though these credits don't always require that you claim a dependent.
* Almost half of the programs did not ask users for enough information to determine whether they were entitled to claim an exemption for a dependent.
* One program improperly allowed exemptions for dependents.
* Some software wouldn't allow taxpayers to claim more than four dependents.
The auditors also found that a section of the IRS website that promised to guide the user to an appropriate free-file vendor sometimes went astray, leading the taxpayer to a program that couldn't complete the return. For example, the IRS website recommended 16 vendors to people who were claiming casualty losses. But 11 of them didn't support the form needed to make such a claim.
Taxpayers who were sent to the wrong software program often didn't discover it until they were midway through the process, forcing them to start over with another free-file vendor or go elsewhere for their tax preparation -- and pay for it.
In a written response to the audit, the IRS agreed that it needed to work on its guide to vendors, but said it could not verify the accuracy of the vendors' software because the agency's contract with companies didn't give it the right to demand software corrections.
That response failed to satisfy Senate Finance Committee Chairman Max Baucus (D-Mont.).
"When the IRS refers taxpayers to an online filing service, those taxpayers have a right to expect accurate tax preparation," Baucus said.
"If the IRS really doesn't have the authority to require its free-file partners to get the software right, then they've got a bad agreement."