There’s no question that the Free File program, the Internal Revenue Service’s partnership with the manufacturers of tax prep software, is a win-win deal on many fronts for both parties.In exchange for the manufacturers in the Free File Coalition making free filing offers to taxpayers on the basis of such factors as income (in 2007, taxpayers making less than $52,000 a year get access), the IRS has agreed not to offer taxpayers its own free alternative. The program, which includes participation from electronic prep heavyweights Intuit and H&R Block, is now in its fifth year.

But it was a fairly big deal when the IRS announced last week that all of the manufacturers in the coalition could no longer go about business as usual -- and that they had agreed to stop upselling ancillary services to taxpayers who used the Free File portal after quiet negotiations. The major change in the program for 2007 will limit the marketing of products such as refund anticipation loans. RALs have become the target of consumer groups in recent years, who complain that the loans, essentially an advance on a taxpayer's tax refund, carry exorbitant interest rates over the short-term.

The IRS said outside research revealed that only about 6 percent of Free File users purchased an ancillary product from a software provider, but that approximately half of those said that their purchase was unintended.

The announcement was made with a feel-good aura draped all over it, but was really just a first step in getting the program where it needs to be in terms of taxpayer friendliness. While navigating the portal,,,id=118986,00.html, is certainly not all that much more convoluted than navigating the nation’s tax code, there’s also no question that the program isn’t catching on with as broad a tax-paying population as it should be.

According to published reports, participation in the Free File program fell 22.7 percent in 2006 after income limits were imposed, with just 3.9 million participants on the year, down from 5 million users in 2005. That was a small percentage of the 70 million taxpayers who filed returns electronically. The IRS has said that approximately 70 percent of all taxpayers -- 93 million people -- will be eligible for Free File next year.

E-filing use, for both individual taxpayers and businesses, was up during the 2006 filing season. All of which is good news for the Treasury, which plans on saving billions of dollars thanks to electronic processing.

But there’s still some common-sense work to be done. Last year, in a protest of sorts, National Taxpayer Advocate Nina Olson confessed to Congress that she mailed in a printed version of her 2005 tax return in order to save $14.95.

"Although I deeply believe that e-filing is best for both taxpayers and the IRS, for a host of reasons, I resented the notion that I would have to pay separate fees to prepare my return and to file it [electronically]," she said in testimony before the Senate Finance Committee.

Olson was right on that point, just as she was on the ancillary offers point. But it remains to be seen is how long it takes for a more sensible compromise to be reached on the e-filing front.

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