The Internal Revenue Service should determine whether using tax software creates any security and compliance risks, recommended the Government Accountability Office in a new report.

The GAO was asked to assess what is known about how pricing of tax software  influences electronic filing, the extent to which the IRS provides oversight of the software industry, and the risks to tax administration from using tax software. To do so, the GAO analyzed software prices, met with IRS and software company officials, examined IRS policies, and reviewed what is known about the accuracy, security and reliability of tax software.

The GAO’s recommendations include that the IRS require a software package identifier on printed returns, ensure  that taxpayer surveys ask specifically about the effects of 2009 price changes, implement a plan to monitor compliance with recommended security standards in 2010, and determine whether using tax software creates any security or compliance risks.

The GAO report pointed out that the IRS has little information about how the pricing of tax software affects taxpayers’ willingness to file tax returns electronically. In 2009, the two largest tax software companies, Intuit and H&R Block, eliminated separate fees to file federal tax returns electronically when using software purchased from retail locations or downloaded from a Web site.

As a result, the GAO noted, the IRS has an opportunity to study whether this and other changes are effective in increasing electronic filing. Additionally, the IRS would benefit from being able to identify which software package the taxpayer used to better target research and efforts to increase software use and electronic filing, said the report.

In response, IRS Deputy Commissioner Linda Stiff agreed with all of the GAO’s recommendations and outlined the actions that the IRS would take. "By February 2010, we will consult with Chief Counsel and develop a document summarizing whether and to what extent IRS is authorized to involve itself in the software industry's development of tax preparation software, what actions IRS could take to drive software companies to make changes and under what circumstances, what sanctions IRS could impose on software companies that refuse to make requested changes, and what additional authority IRS would need to do all of the above," she wrote. "Based on this information, IRS will determine its subsequent course of action."

The IRS has not conducted an assessment to determine whether taxpayers’ use of tax software poses any risks to tax administration, the GAO noted. IRS officials said the likely benefits of an assessment would not warrant the costs, but they have not determined either the benefits or costs of such an assessment.

Moreover, the IRS has also said that it is in the agency’s best interest to ensure that taxpayers can rely on commercial software to make electronic filing accurate, easy and efficient. If even small improvements in the accuracy of tax returns could be made by clarifying the guidance in tax software, the effect on revenue could be substantial. Without a risk assessment, the IRS does not know whether its existing oversight of the tax software industry is sufficient or needs to be expanded.

Reacting to the report, Senate Finance Committee Chairman Max Baucus, D-Mont., said he would keep an eye on tax software vendors and the IRS. "I intend to monitor progress at the IRS on this issue to make certain that the available software is something American taxpayers can continue to rely on to process their tax returns with accuracy and security."

Commmittee ranking member Charles Grassley, R-Iowa, added, "A little IRS oversight of tax preparation software could bring big results in tax accuracy and compliance."

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