by Roger Russell

The proposed Internal Revenue Service-software vendor consortium is beginning to take shape. While not all the participants are set, preliminary meetings have been held and vendors are weighing the pros and cons of their participation in.

The initial terms of the proposed agreement were released by the IRS in July. The IRS described the purpose of the agreement to provide for free, online tax return preparation and filing to individual taxpayers, thereby "supporting the IRS"s statutory goals of increased e-filing, pursuant to the IRS Restructuring Act of 1998, which encouraged the IRS to set a goal of having 80 percent of federal tax and information returns filed electronically by the year 2007."

According to the proposed agreement, a consortium of private sector companies will work together to offer free online tax filing services, an option that could benefit some 60 percent of taxpayers. The IRS will provide taxpayers with links to the free services offered by the consortium participants through a Web page, hosted at irs.gov. As a quid pro quo, the www.IRS has offered not to compete with the consortium during the term of the agreement.

The consortium is intended to be part of an existing, nonprofit corporation affiliated with The Council for Electronic Revenue Communication Advancement (CERCA).

"The consortium reflects a unique private and public participation," said Bob Taylor, the chief financial officer of Rome, Ga.-based Universal Tax Systems and a CERCA board member.

He continuted, "The government accomplishes what it needs by allowing the industry to provide the services, while the industry is the one that understands how to go about it. It makes sense not to tie up IRS resources in getting into the tax preparation business."

Universal Tax doesn"t have plans to participate at the present time, according to Taylor, because when it sold its consumer tax prep product to Intuit, it agreed not to compete for five years. "This could be something we might look at in the future," he said.

Both Intuit and H&R Block are expected to participate, since each has online versions of their consumer tax prep software. The hope of the consortium, according to Taylor, is to eventually end up with a dozen or more participants, although, initially it could be as low as four or five.

"The main reason companies are participating is that we feel that this will ensure that the IRS will not jump into the market and create a competitive product with industry," said Taylor. Essentially, he added, private industry is saying, "We"ll work with you and make free services available to increase e-filing among certain demographic groups, and in exchange you won’t create your own Web-based system."

Under the terms of the proposed agreement, if the IRS does decide to offer its own free tax preparation services, the consortium may terminate the agreement.

The consortium is tasked with offering free services from individual commercial sites, linked from a Web page that is hosted by the IRS. The free services are intended to be available to at least 60 percent of taxpayers. Each consortium member must tailor its offering to a number of taxpayers, which equals at least 10 percent of the number of individual tax returns that are filed in 2001.

"The offering percentage is measurable according to IRS statistics," explained Taylor. "For example, an offering might include taxpayers with adjusted gross income under a certain threshold."

CERCA will be the administrator, and each member will not see what the other is proposing, so neither will get a market advantage. "The IRS Web page will have different tiers, so if a vendor has an offering to 50 percent of taxpayers, it could be a tier one provider. A vendor with a 10 percent offering might be a tier four provider," said Taylor. "The plan is to rotate offers, with the IRS doing the marketing and public relations."

Although most tax software vendors look favorably on the proposal, many haven’t yet decided whether to participate. "The proposal has been put together really well," said Lynn Tenney, e-file manager for Kaysville Utah-based TaxWorks. "But at this point, we haven’t decided what our participation will be."

John Vora, chief executive of Randolph, N.J.-based TaxSimple, looks forward to participating in the consortium. "This will take off when the IRS advertises the companies that are participating," he said. "It saves us money in advertising to reach the mass market, and we can plow the savings back into supporting the system. Everybody benefits."

Not every vendor is on board, however. Drake Software, based in Franklin, N.C., doesn’t intend to participate. "Most of the people who favor it are there because they don’t want to compete with the IRS," said chief operating officer Tim Hubbs. "The bigger players were concerned that if the IRS got started, it wouldn’t stop and that would erode business. The compromise was to do more e-filing."

"In previous years, the IRS assured the industry that it would not be competing with private industry in the tax preparation arena," according to Hubbs. "This movement is anticompetitive because of the force the IRS wields. I don’t believe my position is different than most in the industry; they’re just afraid to express it."

Marc Albaum, a New York CPA, agrees that there is a potential to intrude on private enterprise, but doesn’t think it will play out that way. "My guess is that this will only work with very simple returns," he said. "Anything more complicated than that could cause problems for most taxpayers."

"It’s just like the people who buy TurboTax," said Albaum. "If they don’t know what they’re doing, even though the program walks them through it, they’ll miss deductions and they’ll end up paying more tax than they should have. Just walking through the program blindly is like buying a program to diagnose an illness - it’s a good selling point to go to a medical doctor, so this might be a good selling point to go to a CPA."

John Hewitt, president and ceo of Liberty Tax Service, said that he’s unconcerned about any negative impact on the tax preparation industry. "H&R Block began in the 1950s when the IRS prepared taxes for free, and Block’s strategy was to set up across the street from them," he said. "People didn’t want to wait in line, and they thought they could get a better deal at Block."

"It’s like changing your own oil," said Hewitt. "People don’t do it because it’s dirty, messy and inconvenient and they can get it done professionally and inexpensively."

When the IRS solicited comments last year about offering free tax preparation and e-filing, the industry watchdog Computer & Communications Industry Association warned against the government becoming too involved in the private sector. The current proposal, however, has met its approval.

"We believe that public-private partnerships like this leverage the government’s ability to provide information and promote best practices with industry’s expertise in technology and innovation," said Ed Black, president and ceo of CCIA.

"Such partnerships are, undoubtedly, the most effective means to promote services like electronic filing of tax returns, which will greatly benefit the IRS and state revenue agencies, as well as taxpayers themselves."

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