A committee of tax experts delivered an annual report to Congress recommending improvements in the IRS's Web and electronic filing services, including one suggestion that would punish tax preparers who don't file individual returns electronically.

The Electronic Tax Administration Advisory Committee listed that as its No. 1 recommendation, noting that it had made the same suggestion last year to no avail. "At this time, ETAAC believes that all reasonable voluntary means have been exhausted with respect to encouraging preparers to e-file individual tax returns, and it is time to take a stance by announcing an e-file mandate for tax return preparers," said the report. The mandate would apply to all paid preparers who use tax software and file more than 50 individual returns, with minimum penalties set for non-compliance.

However, there would also be waivers and "appropriate opt-out conditions" in situations where electronic filing isn't possible or practical. Exceptions might include manually prepared returns, ineligible returns and taxpayer preference.

ETAAC also recommended that the IRS "strongly encourage transmitters, software providers, online providers and preparers to eliminate fees for electronic filing, so as not to discourage the selection of the e-file option." The committee also wants the IRS to develop a free online filing system for employers to input and file their Form 941 quarterly federal tax returns. Employers who are mandated to file their W-2 forms electronically should also be required to file the 941 electronically. Reporting agents who file employment and unemployment returns for others should be required to file electronically.

In addition, the committee wants the IRS to do a better job of marketing its Free File program. "Today more than 97 million American taxpayers have access to free and convenient electronic filing through the Free File Alliance," said the report. "While more than 4.6 million taxpayers used this service in 2008, the large number of taxpayers not taking advantage of the Free File Alliance suggests that something more needs to be done."

A class-action lawsuit against the Free File Alliance has argued that the IRS has been pressured by tax software vendors into restricting services to a small group of taxpayers (see Tax Software Vendors Sued over E-filing Fees). The law firm representing the plaintiffs filed an amended complaint this month citing a 2006 report by the Treasury Inspector General for Tax Administration. According to the plaintiffs, the vendors threatened to leave the Free File program unless the IRS acceded to the terms of a 2005 renegotiated agreement. However, previous versions of the complaint have been dismissed by the judge hearing the case.

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