by Roger Russell

A new Internal Revenue Service directive is causing consternation among members of the tax preparation industry. The IRS’s move to flag returns submitted through its Free File Alliance has prompted one vendor-member to pull out of the consortium, while industry giant Intuit says that it won’t comply.

The IRS launched the Free File Alliance last year as a public-private partnership with soft­ware companies in the tax preparation industry. The goal of the alliance is to increase the number of people who file their taxes electronically and decrease government costs.

Last year, 53 million returns were filed electronically, out of nearly 132 million total returns. The Free File Alliance accounted for 2.8 million of them.

“We’re pulling TaxBrain out of the Free File Alliance because we felt it was an infringement on the privacy of those individuals who wanted to take advantage of offers by the tax industry,” said Charles Petz, vice president of software development for Petz Enterprises, the owner of TaxBrain.

“We went through a long and difficult debate last summer on the issue, and we’re still not sure why the IRS wants to know who these people are,” he continued. “We feel there’s information gathered in the tax filing process that’s beyond the scope of administration of the tax law, and someone has to draw the line somewhere.”

Leroy Petz Sr., president of Petz Enterprises, said that the company would pursue public-service initiatives through community-based organizations that serve taxpayers who need assistance in preparing their returns.

Meanwhile, Intuit’s TurboTax said that it will remain in the alliance but won’t comply with the IRS directive to tag the free e-filers who use its TurboTax software.

“The debate about the electronic flagging of returns has been ongoing, and Intuit has told the IRS we can’t comply because we believe it would compromise the privacy of our customers and that’s something we just won’t do,” said company spokesperson Julie Miller. “The operating agreement we signed did not include the requirement to flag returns, but we have the full intent to continue to offer our free online tax services to disadvantaged and underserved taxpayers, because that’s the purpose of the Free File Alliance.”

Riverwoods, Ill.-based CCH will continue in the alliance with its CompleteTax offering, according to CCH spokesperson Leslie Bonacum.

Another alliance member sees no problem. “There’s nothing wrong with doing that, as long as it’s clear to customers that it’s being flagged,” said John Hewitt, president of Virginia Beach, Va.-based Liberty Tax Service. “The IRS knows more about us than the FBI or our employers, and even sometimes our spouses.”

Hewitt noted that some years ago, when Sears first put H&R Block in its stores, the percentage of Sears’ employees who utilized Block was less than that of the population as a whole. “At the time, Block was preparing one out of every seven tax returns,” said Hewitt. “Yet only 10 percent of Sears employees used Block for their own returns, because they thought that Sears owned Block and they didn’t want Sears to have their return information.”

Similarly, John Vora, president of Randolph, N.J.-based Tax­Simple, saw no problem.

“We don’t object to the IRS collecting such information because it doesn’t matter whether the government knows if a return came to them through the Free File Alliance or by other means,” Vora said. “I’m sure that the government has already discussed the priv­acy issues. My understanding is that they have cleared the issue with the Justice Department.”

IRS deputy chief for information technology services Terry Lutes objected to any suggestion that taxpayers’ privacy might be compromised. “At the IRS, taxpayers’ privacy is protected unequivocally. To suggest differently is flat-out wrong,” he said. “We have pro­cessed more than 300 million tax returns since the inception of electronic filing and have never once compromised the privacy of a taxpayer.”

“There is absolutely no change in IRS policy in identifying tax returns,” Lutes continued. “Historically, the IRS has tracked return data to assess and project e-file trends, ensure software product accuracy and determine staffing and marketing needs. For years, the IRS has been able to discern returns by software products, returns prepared at our walk-in locations and returns prepared for free at volunteer sites.”

“The IRS has asked for an identifier on returns prepared through the Free File Alliance,” Lutes said. “This would allow the IRS to assess the success of this joint private-public program. These same companies already use an indicator identifying their software to the IRS. This request, which is pending, is consistent with our current policy and past practices.”

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