by Roger Russell

Reduced tax rates, more deductions and a determined push by the Internal Revenue Service to expand e-filing mark the beginning of the new filing season.

When the 2003 filing season winds down, the IRS estimates that close to 132 million individual returns will have been filed. The IRS hopes that 54 million of these will be filed electronically, an increase of seven million over last year’s 47 million e-filers.

A large amount of the increased e-filing will be due to the free online tax preparation offered through links from the IRS Web site to private vendor-members of the new free electronic filing consortium. "The new Free Filing Alliance is a breakthrough -- it’s a partnership between government and private industry," said William Nelson, a vice president at Republic Bank and a board member of the Council for Electronic Revenue Communication Advancement. "That will be the most interesting feature to look for in this tax season."

For the 2003 filing season, at least 60 percent, or 78 million, of individual taxpayers will be eligible for IRS Free File. Tax software companies and the federal government have teamed up to offer free online tax preparation and electronic filing services that are available through the IRS Web site.

Free File Alliance LLC, the consortium offering the services, is "proceeding along smoothly," said Mike Cavanaugh, executive director of CERCA. The alliance, which Cavanaugh helped shepherd into existence, is administered by CERCA.

"It should be a very good filing season for tax preparers," said Attlia Taluy, president of FileYourTaxes.com, the online tax filing service. "The economy is at a point where a lot of taxpayers are interested in filing early to get their refund, or using one of the instant refund products. New business startups during the past year will also contribute to some additional filing."

Mike Lister, president of Parsippany, N.J.-based Jackson Hewitt, sees smooth sailing for the tax season ahead. "There won’t be the bumps we experienced last year with the new legislation," he said. "Last year, we were ramping up with the changes in the law. This year, those have been built in so it’s easier for tax practitioners and software developers."

"The IRS has been earlier and faster with forms approval, and that usually bodes very well -- it’s always critical for e-filers like us," Lister added.

John Hewitt, president of Virginia Beach, Va.-based Liberty Tax Service, is also optimistic. "The new rules on the Earned Income Credit will greatly increase the number of people who qualify and the amount they receive. One thing that was taken away, though, is in the definition of Ôfoster child.’ Before, almost anyone could qualify, but now a foster child has to be placed by an authorized agency so you can’t claim your nephew or your girlfriend’s child."

People are filing earlier this year, according to Hewitt. "W-2s are earlier this year, and military taxpayers can get their own W-2 on the Internet," he said. "In some years, they had to wait until the last paycheck in January, but now they’re already printing them out from the Internet."

There’s been a lot of interest in the instant refund loans being offered by most of the tax services, according to Hewitt.

"We have it but we’re not advertising it heavily," he said. "It’s a little like bait and switch. It’s based on a good credit history, the same as in a department store, so not everybody qualifies."

"We’re looking for our biggest growth year ever," added Hewitt, whose tax service now has over 900 offices.

Another initiative beginning this year is the Customer Account Data Engine, or CADE, which will be rolled out in limited scope during the second quarter, and will be fully operational next tax season. "It will greatly speed up the refund process, and it’s part of the rationale behind the Ôinstant refunds,’ or refund anticipation loans, that are being offered this year," said Nelson.

Neither Lister nor Hewitt see a competitive danger from the Free File Alliance. "It won’t hurt our numbers," said Hewitt. "More people have paid preparers every year since [H&R] Block began in 1955, and other options in the past haven’t hurt. The IRS and the military offered free preparation in the past, and that didn’t hurt."

"The average fee is $120, and that’s what it costs to get your oil changed three or four times a year. Most taxpayers know that that’s less than what they can save by having their taxes done right," he added.

"We don’t have any competitive issues with the Free Filing Alliance," agreed Lister. "In essence, the IRS is partnering with the online industry to allow them to continue to do what they do. There’ll be a benefit for the segment of the public that uses online providers or for those who prepare their own returns.

He continued, "We don’t see it affecting our business at all. We’re a traditional brick-and-mortar business that’s location-oriented. We were born out of the convenience to consumers that want someone to help prepare their taxes."

Since Lister became president, Jackson Hewitt has upped its locations to more than 4,100 offices nationwide. "We’ve positioned ourselves in two areas of growth -- retail partnerships and an acquisition and conversion strategy," said Lister. "We’ve more than doubled our presence in the number of malls we’re in, and we’ve added regional players as well."

Jackson Hewitt, which files over 95 percent of its returns electronically, finds no reluctance on the part of taxpayers to e-file. "Most of our customers get refunds, and they appreciate the fact that e-filing gets their money back to them faster," said Lister. "Even if they have a balance due, the fact that the return gets acknowledged by the IRS is great since it eliminates a number of potential problems. The credit goes to our preparers -- we train them to educate the consumer about e-filing so they feel comfortable doing it."

E-filing is becoming more widely accepted, according to Dr. Chandra Bhansali, AccountantsWorld president. "Acceptance of e-filing has become much broader in scope. In the past, we had a tough time convincing preparers to go into e-filing, but at the seminars we’ve given so far this year, the overwhelming majority of our users say they will be offering it."

Although the online alliance has generated enthusiastic support, it also has its detractors.

The National Association of Enrolled Agents, in a letter to the IRS in August, charged that the IRS link to private companies’ "free" Web sites will, in fact, "extensively promote their commercial Web sites and, in fact, will automatically send taxpayers who do not meet their thresholds for free filing to their pay sites."

The NAEA said that some of the software companies participating in the consortium expect large increases in their online filing as a result.

John Vora, president of New Jersey-based TaxSimple, defended the concept. "There has to be a quid pro quo to make it attractive for the private companies to participate," he said.

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