Monday, November 19, 2007

Lawsuit says Block 'cartel' for electronic tax filing fees

Valley Tax Office

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Lawsuit says Block and others act as 'cartel' for electronic tax filing fees

Kansas City Star (MO) (KRT) via NewsEdge Corporation :

Nov. 16--A lawsuit filed Tuesday alleges a partnership between the IRS and private companies, including H&R Block Inc., has charged taxpayers excessive fees for providing "free" electronic tax filing services.

The lawsuit was filed in federal court in Philadelphia and seeks class-action status. It says the partnership, known as the Free File Alliance, is a "cartel" that has failed to set electronic filing fees according to federal law.

The suit alleges that cartel members "illegally reaped hundreds of millions, if not billions, of dollars in revenues" at the expense of taxpayers who have filed their returns electronically.

The suit names the Free File Alliance, Block and Block unit Block Digital Tax Solutions LLC, as well as Block software rival Intuit Inc., as defendants.

On Thursday, Tim Hugo, executive director of the Free File Alliance, said the suit was "totally without merit."

"This suit is so riddled with inaccuracies, you would think it was written by a first-year law student," he said.

Linda McDougall, a spokeswoman for Block, said the company had not reviewed the lawsuit yet and declined to comment.

The Free File Alliance program, now in its fifth year, is a partnership between the Internal Revenue Service and some 20 tax software companies designed to provide free electronic filing of tax returns. The alliance says that 15.4 million returns have been filed under the program since 2003 and that 70 percent of all taxpayers -- 95 million Americans -- are eligible to use it.

According to the IRS' Web site, taxpayers who earned $54,000 or less in 2007 are eligible to use Free File beginning in mid-January 2008. Taxpayers can access the service through

Once there, filers are notified that they are leaving the IRS site and being taken to the Web site of the company they have picked. The IRS warns filers that by going directly to a company's Web site and not through, they may be charged a fee for the preparation and filing of their returns.

The Free File program has come under criticism before.

In November 2006, then-Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, and ranking member Max Baucus, a Montana Democrat, told then-IRS Commissioner Mark Everson that the IRS had made the program "inaccessible, complicated and otherwise frustrating for taxpayers."

Earlier, Grassley had urged the IRS to rein in commercial offers made by alliance members. In a letter to Everson he said that an "underlying principle of the Free File Alliance is that no one should be forced to pay to electronically file a tax return. That principle has been and continues to be eroded."

And this year, a government audit found that common tax scenarios were not always handled accurately and that multiple calculation errors were made by the commercial software of Free File Alliance companies. The IRS disagreed with the audit's recommendation that it should test the software for tax code compliance, saying that would be all but impossible.

In response to the criticisms, Hugo said Thursday that the IRS' own surveys showed that more than 90 percent of taxpayers who availed themselves of e-filing would use it again.

He also said he had removed offers for Refund Anticipation Loans and other commercial products in the free-file network.

Alan M. Feldman, a Philadelphia attorney who represents the named plaintiff in the lawsuit, Philadelphia physician Stacie Byers, said that 95 million Americans may be eligible to file their returns free of charge, but fewer than 4 million last year actually used the program.

"Seventy-five million more did e-file," he said, "but they were all charged by H&R Block, Intuit and all the other members of the so-called Free File Alliance. In other words, the best evidence I have is that about 96 percent of all e-filers have been charged to file."

Feldman said that tax preparation software companies organized the Free File Alliance out of concern "that the IRS was going to do what every other civilized Western democracy has done, and that is to permit citizens to file their tax returns for free, electronically."

He alleged that the companies cut a deal with the IRS under which they agreed to allow free electronic filing for income-eligible filers in exchange for the exclusive right to charge everyone else and for the IRS not to compete with them.

The suit alleges that Free File Alliance members have ignored a federal law that requires them to set fees based on the cost of electronic filing to the government, "its value to taxpayers, the public policy or interest served, and other relevant facts."

"Despite that legal requirement, the cartel and its members instead set their fees based solely on their private business consideration and market power as the gatekeepers to the IRS," the complaint states.

To reach Dan Margolies, call 816-234-4481 or send e-mail to


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