IRS sought to kill amendment

When Republican senators attached an amendment to the Treasury Department spending bill last week ordering the IRS to offer free electronic filing through a group of tax-preparation-software companies, Bush administration officials were so angry they demanded the companies sign a letter repudiating the amendment.

When Republican senators attached an amendment to the Treasury Department spending bill last week ordering the IRS to offer free electronic filing through a group of tax-preparation-software companies, Bush administration officials were so angry they demanded the companies sign a letter repudiating the amendment.

“I was surprised they wanted me to write a letter repudiating a United States senator,” said Tim Hugo, executive director of the Free File Alliance (FFA), the consortium representing the software companies.

Hugo and Steve Ryan, the FFA’s general counsel, rejected the IRS’s demand, writing in an e-mail to member companies that the agency is “upset that senators had the temerity to pass a provision prohibiting the IRS from spending money on developing and deploying competing software, other than a Free File type program.

“We cannot give away the rights of the Alliance members to talk to Congress. We have further refused to intervene as demanded to ‘discipline’ companies who exercise the rights guaranteed under the First Amendment to the Constitution to petition their government.”

The Hill has obtained a forwarded copy of the e-mail.

The fight between the IRS and the FFA — which represents such companies as Intuit, FreeTaxReturns.com, TaxWorks.com, TaxSlayer, ezTaxReturn.com and H&R Block — illustrates how an arcane issue can erupt into high-stakes politics.

The two sides reached an agreement this week that the companies will continue to provide the free service at the IRS website. But the deal was struck only after the FFA’s lobbyists used the appropriations process to gain the upper hand in the dispute in the face of Treasury and IRS tactics that they say were heavy-handed.

The free-file agreement renews a similar one reached in 2003. Both cede the tax-preparation market to private companies by prohibiting the IRS from becoming an agency that both polices and prepares tax returns.

In return for providing free service, the FFA members are listed on the IRS’s website, www.irs.gov. Nearly 5 million taxpayers used the free service to file their 2004 returns this year.

This summer, the FFA sought to extend its agreement with the IRS. The row between the two sides began last week when GOP Sens. Kit Bond (Mo.), chairman of the Appropriations subcommittee that oversees the Treasury Department; John Ensign (Nev.); and George Allen (Va.) attached an amendment to the spending bill ordering the IRS to provide taxpayers with “free individual tax electronic-filing preparation and filing services only through the Free File program.”  

Several senior administration officials were irked by that. Chris Smith, chief of staff to Treasury Secretary John Snow; Bert DuMars, head of the IRS’s Electronic Tax Administration; and Terry Lutes, associate chief information officer for IRS information-technology services, disliked the fact that FFA companies had been lobbying lawmakers to pass the amendment.

In response, the three officials pressured the companies in a phone call to sign a letter repudiating the Senate’s action.

“It is pretty stark power politics to do things this way,” Ryan wrote to his member companies, adding, “Things are in flux.”

IRS and Treasury spokesmen declined to comment about their agencies’ efforts to secure a retaliatory letter. Sources on both sides of the negotiations did not, however, dispute that such a demand was made.

A source close to the negotiations said the Treasury Department thought it was important that the negotiations take place between the parties and not through legislative maneuvering. The source also downplayed the effect of the amendment, pointing out that if Congress wanted it to be overturned it could do so by appropriating money for the IRS to develop its own tax-preparation software.

“This amendment was necessary, as the IRS has indicated on numerous occasions its [desire] to offer free return services to the taxpayer,” a lobbyist for the FFA said. “In essence, it would be a back-door revenue increase because you know the IRS would never err on the side of the consumer.”

In the end, Treasury and IRS officials backed away from their demands because the Senate had acted.

“Who cares what the IRS wanted,” a Senate staffer involved in the process said. “We won.”

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