April 6, 2006

Electronic tax filing slows as free services cut

WASHINGTON (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 on 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

"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

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

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.