Judge Dismisses Suit Against Tax Software Vendors

A federal judge has for the second time rejected a class action lawsuit against the Free File Alliance, the group of tax software vendors who provide free software and electronic filing to low-income taxpayers.

Judge Thomas N. O’Neill Jr. of the U.S. District Court for the Eastern District of Pennsylvania dismissed the amended complaint on Wednesday in the case of Byers v. Intuit, according to BNA’s Daily Tax Report. O’Neill had dismissed an earlier complaint in June 2008. The lawsuit was filed in November 2007 (see Tax Software Vendors Sued over E-filing Fees).

The plaintiffs claimed that the Free File program, hosted on the Internal Revenue Service’s Web site, was artificially limited to a segment of the population, taxpayers whose adjusted gross income is $54,000 (now $56,000) or less, when the program was introduced in 2002. That covers about 70 percent of the population, but leaves 30 percent of taxpayers without access to free tax software.

The plaintiffs pointed to a report by the Treasury Inspector General for Tax Administration on the Free File program, claiming the report indicated that software vendors pressured the IRS into restricting the service and threatened to drop out of the IRS’s Free File program unless their demands were met.

O’Neill did not find the plaintiffs’ arguments persuasive. “The IRS stated that it believed that the program had ‘successfully fulfilled the intent of the initiative,’” he wrote in his ruling. “This language strongly suggests that the restriction did not ‘hinder’ IRS policy.”

This tax season, the IRS has introduced a Free File Fillable Forms option that allows taxpayers of any income level to fill in their tax information online and file their taxes using Web-based forms. The online forms do not provide as much capability as third-party tax software like TurboTax, TaxCut and TaxAct, but they do include basic mathematical calculation functions.