Free File tax foul-ups and free fall

You use tax software, in part, because you want to make sure your returns are done correctly, right? Well, it seems that, at least in the case of some folks who use the IRS' free tax filing program, that's not happening.

A June 28 report from the Treasury Inspector General for Tax Administration (TIGTA) has the alarming news that Free File Alliance software does not always compute taxes correctly.

Oh, the software does fine in calculating the entries on the return. But whether those entries should be there in the first place is TIGTA's concern. Basically, some of the software used in the program doesn't accurately handle common tax scenarios.

Investigators found problems, for example, with how the programs dealt with the earned income tax credit, one of the most complicated tax provisions around, and the dependency exemption, another only slight less confusing filing factor.

Even more distressing, the IRS apparently isn't in a hurry to fix the problem.

Ominously (and lengthily!) entitled "Additional Action is Needed to Expand the Use and Improve the Administration of the Free File Program," tax inspectors report that the IRS rejected recommendation that software tax-law accuracy be tested when the agency conducts existing tests that guarantee each participating company's software "operates within the parameters of the Free File agreement."

Why no accuracy exams? The IRS says, "Testing of commercial tax preparation software to determine its accuracy in applying the tax law would be a monumental challenge."

OK. So the IRS finds a tax task too hard to comply with.

Hmmm. You think that if, upon encountering a daunting filing task, we taxpayers just ignored it because it is a "monumental challenge" the IRS would say OK? Nah, I don't think so either.

Problems with paid-for, too? The question that comes to my mind is how does this relate to these various companies' other, for sale, tax software offerings?

Do the companies make major changes to the programs they use on Free File? Or are the free ones the same as you and I might buy at an electronics store or download?

I do know that when I used a software package this filing season, it messed up my SEP-IRA calculation. Since I'm a tax geek, I do a down-and-dirty pencil and paper version first and then plug in the precise numbers in the software.

When the computer version showed a substantial variation from my paper form, I dug around in the software and fond the retirement plan problem.

Unfortunately for the hubby and me, the correct pencil and paper numbers were correct, producing much less favorable result when it came to our final tax bill.

This was one case when I wasn't happy to be right. But if I hadn't run my other set of numbers and relied solely on the software, I would have submitted a wrong return and heard about it -- and added charges -- later from the IRS.

And this TIGTA report makes me wonder if it was something I input improperly or a flaw in the software ... .

Congressional questions continue: This latest Free File issue is one where Congressional thinking is pretty much in line with Jane and John Q. Public. That is, get the program right, right now!

Some lawmakers have been considering changes to the public-private filing partnership for quite a while anyway. Specifically, they want direct return filing via an IRS Web portal that would offer free filing for all taxpayers, without the current system's income restrictions.

With this report as new ammunition, the leaders of the Senate Finance Committee took aim at the Free File Alliance.

"When the IRS refers taxpayers to an online filing service, those taxpayers have a right to expect accurate tax preparation," said Finance Committee Chairman Max Baucus, D-Mont. "If the IRS really doesn’t have the authority to require its Free File partners to get the software right, then they’ve got a bad agreement with these companies that doesn’t protect taxpayers as it should. ... [T]his report underscores the need for a direct filing portal on the IRS website, where the agency makes certain that the tools supplied to taxpayers comply with the tax code."

Baucus' GOP counterpart, Ranking Member Charles Grassley, was equally stern. "This is frustrating for Congress and taxpayers alike. We’re in the digital age. ... But we can’t get a free electronic filing option for taxpayers to work right," said the Iowa Republican. "Some of these software programs can’t properly compute a tax return using common basic scenarios. Reliability and accuracy are a problem. Taxpayers have every reason to question whether they'd be better off with a pencil and an abacus than using the current free-file program."

Free File free fall: Even before this latest issue, the Free File Alliance was facing problems.

The TIGTA report also noted that fewer taxpayers took advantage of the free electronic tax-filing service in 2007 than in previous years.

In 2005, a record 5.12 million taxpayers used the Free File Program, primarily because it was open to all taxpayers, regardless of income.

But the next year, the number of filers dropped to 3.9 million, probably because the IRS once again imposed income restrictions on users.

For the 2007 filing season, even though the program was basically the same and the income ceiling was bumped up from $50,000 to $52,000, the numbers were down again. Auditors found that as of April 14 only 3.3 million taxpayers filed via the Free File Alliance. That's a drop of 4.7 percent from the same period last year.

You can help the program boost its numbers, at least a little, if you filed for an extension. When you do get around to submitting your return, and you have through Oct. 15 to do so, you can e-file.

If you're eligible to use Free File Alliance, it also will be available through the extension period -- if you want to take the chance.