IRS Considers Plan That Could Allow Marketing Pitches

The Internal Revenue Service may soon offer electronic tax filing for free, but you could endure a marketing pitch from a private company if you sign up.

The IRS is mulling over various proposals to boost electronic filing, including giving software companies the right to solicit taxpayers in exchange for providing no-cost tax preparation software.

Some of the options under consideration have outraged privacy advocates and concerned software makers and others who worry that the IRS would soon be competing with private industry for customers.

The IRS “is going to have a real tough time convincing people that none of their tax information is being used to pitch these products to you,” said Chris Musto, vice president of research for Gomez Advisors, an online financial services research firm. “I’m resisting using the ‘d’ word, but this is dumb.”

The IRS, however, believes a lack of free electronic tax preparation and filing options have prevented some people from switching to e-filing, said IRS spokesman Don Roberts.

Congress has ordered the IRS to ensure that 80% of all tax returns are filed electronically by 2007. This year, only 26% of returns were submitted by computer; 4% were filed by telephone using the agency’s Telefile system.

In total, the IRS this year received electronic returns from about 5 million individual taxpayers and from 25 million professional tax preparers.

The IRS posted a request for information last week on its Web site that asked software companies and the public for ideas about how to provide taxpayers with free electronic tax preparation.

The request noted that many taxpayers want free electronic filing and “have indicated that they would prefer to file directly with the IRS” instead of using one of the many private companies that offer electronic tax preparation and filing, typically for a fee of less than $10 per return.

Roberts said one of the business models the IRS is examining is that of H.D. Vest, a financial services company that offers free tax preparation and filing in exchange for access to the taxpayer’s data. Taxpayers who use the H.D. Vest service are given the option of refusing the company’s request to provide information about its other financial products and services, but users are not able to hide private data from the firm.

H.D. Vest President Roger Ochs said 260,000 taxpayers completed their returns using the company’s free service this year, the first time it was offered, and that “very few” opted out of the marketing request.

By contrast, market leader Intuit says it does not use the data that customers submit on its TurboTax site for marketing purposes and does not view it without the customer’s permission. The information is encrypted and password-protected, said Colleen Ferrin, Intuit spokeswoman.

Turbotax provided free tax preparation this year for filers with adjusted gross incomes under $20,000 and also formed alliances with other companies, including mutual fund giant Vanguard Group, to provide no-cost preparation for their customers.

Roberts said the IRS hasn’t decided whether to provide free tax preparation itself, in conjunction with a private company or not at all. Roberts said the IRS would never give private taxpayer information to a company or allow a company access to private data without the taxpayer’s consent. But under one of the business models under consideration, the taxpayer could be presented with the option of consenting to receive more information.

Such public-private alliances are growing between government agencies and companies eager to tap a captive market, said Jason Catlett, president of Junkbusters Corp., a Green Brook, N.J., company that helps consumers protect their privacy from marketers.

Besides the inevitable privacy concerns is the issue of irritating taxpayers with marketing information, Catlett said. “I don’t want to be subjected to a barrage of advertising in order to file my tax return,” he said.

Tax preparation firms, meanwhile, are concerned that the IRS could be taking away their customers, either by creating its own software or allying with a provider.

H.D. Vest’s Ochs said his company has been talking with the IRS about expanding taxpayer access to free preparation, but has advised the agency that the expense of creating, testing and monitoring its own software would be prohibitive.

“Logically, it doesn’t make sense for them to do it themselves,” Ochs said.

Almost any action the IRS takes is bound to affect the private market, industry analyst Musto said.

“It’s like Microsoft handing out free browsers to compete with Netscape,” he said.