Tax Mystery Explained

With the upcoming April 15th tax deadline in view, Mr. I. O. Taxes, from Des Moines, asks, "Why do I have to pay a fee to file my tax return online/electronically when the alternative of mailing it in is free?"

According to the IRS, most people (70%) qualify for "Free File." Check it out here: http://www.irs.gov/efile/article/0,,id=118986,00.html. According to the web site, "Free File allows taxpayers with an Adjusted Gross Income (AGI) of $52,000 or less in 2006 to e-file their federal tax returns for free."

Let's assume that Mr. I. O. Taxes doesn't qualify for Free File. Where's the logic in having him pay a fee to file electronically? The costs that could be avoided by the IRS from taxpayers like him filing electronically instead of on paper argue for the IRS to pay taxpayers to file electronically, not vise versa.

Answer #1: People are stupid.
There are many people who expect to get a refund, and they are willing to pay the fee for the promise of getting their refund more quickly. If these people were smarter, they would adjusted their withholding so they got little or no refund. By overwithholding, they are providing the government an interest-free loan on their refund money. I guess there's nothing like that "Whoopee!" moment of getting your own money back from the government. (Can this be called a form of savings if it defers spending by 6 months?)

Answer #2: Tax prep firms are stupid.
The fee that is paid by the taxpayer goes not to the IRS but to an intermediary tax prep firm (an Authorized IRS e-file Provider) that "adds value" by shepherding the taxpayer's return from one computer to another. If these firms were smarter, they'd have figured out how to charge the IRS for helping them avoid costs. Go after the deep pockets, guys.

Answer #3: It's politics, stupid.
Some day, the IRS web site will let you enter your data and file your return, just like you can do at the TurboTax or H&R Block web sites today. When that happens, all those people who currently work at the IRS processing paper returns will be out of work. Ditto with many of the folks working at the tax prep firms today. These groups all have lobbyists currently working to avoid the future. Meanwhile, politicians know that the job-holders that would be put out of work are among their constituents. This is a case once again of special interests overcoming the public good. Politics as usual.