Senators pushing for free electronic filing

But IRS wants industry to know government is not in competition.

Why do you have to pay for tax preparation software or use a tax preparer in order to file your return electronically? "All the forms and instructions are free, so why do we force taxpayers to pay a preparer or buy software to file electronically?" Sen. Baucus asked in a hearing on the topic. "Taxpayers don't have to go to a bookstore and buy forms to file a paper return."

The AP reports that despite a goal of having 80 percent of individual tax returns filed electronically by 2007, the IRS can't handle individual returns. They must be sent in batches by professional tax preparers, software manufacturers or online preparation providers.

Despite some congressional interest in the IRS offering a direct posting route, IRS and Treasury officials took pains to emphasize that the government would not compete with private sector.

"We aren't tax preparation people. We're not software development people," Treasury Sec. John Snow told Rep. Todd Tiahrt, R-Kan. "There's a private market out there that does that and does it well."

Bert DuMars, IRS director of electronic tax administration, told lawmakers he believed Congress had made it clear "that IRS should stay out of the tax software preparation business."

The IRS program FreeFile is limited to taxpayers making $50K or less. In FreeFile, software companies make free versions of their software available online for electronic filing.

The IRS' taxpayer advocate, Nina Olson, pointed out significant shortcomings with the Free File program. She said the government should put a basic tax form online and let taxpayers fill it in and file it directly to the IRS without charge.

Her office tested the 20 preparation sites available through Free File and found some sites had problems applying special rules for Hurricane Katrina victims, posed problems for some taxpayers reporting business income or omitted calculation of the alternative minimum tax.

"On the whole, we found that trying to navigate the Free File sites was a bit like living in the wild, wild West," she said.

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