[Federal Register Volume 67, Number 213 (Monday, November 4, 2002)]
[Notices]
[Pages 67247-67251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27909]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service


IRS' Intent To Enter Into an Agreement With Free File Alliance, 
LLC (i.e., Free File Alliance)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice.

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SUMMARY: This document contains the final agreement that has been 
agreed to by IRS and Free File Alliance (formerly referred to as the 
Consortium in the previous Federal Register Notice published on August 
8, 2002 (67 FR 51621), a non-profit corporation (under the provisions 
of 26 U.S.C. 501(c)(3)). This agreement will require companies of Free 
File Alliance to offer free on-line tax preparation and filing services 
to at least 60% of taxpayers. This document also responds to written 
comments and concerns that were submitted in response to the 
announcement of the draft agreement published as a Federal Register 
Notice, dated August 8, 2002 (67 FR 51621).

DATES: These free on-line tax preparation and filing services will be 
available for use by eligible taxpayers no later than December 31, 
2002, and will be located at http://www.irs.gov with a link from http://www.firstgov.gov.

SUPPLEMENTARY INFORMATION:

Background

    The Department of the Treasury and IRS announced, on August 8, 
2002, through a Federal Register Notice (67 FR 51621), a proposed 
agreement (the Agreement) with a consortium of companies (Free File 
Alliance) that will offer free on-line tax return preparation and 
filing services (Free Services) to at least 60% of taxpayers. IRS will 
provide eligible taxpayers with links to the Free Services offered by 
Free File Alliance members via a homepage managed and hosted through 
irs.gov and accessible through firstgov.gov. The Agreement and during 
its term, the IRS will not compete with the private sector by providing 
free on-line tax preparation and filing services to taxpayers.
    The IRS plans to enter into the Agreement with Free File Alliance 
to accomplish the following five objectives:
    1. Assuring access to a free and secure electronic preparation and 
filing option for additional taxpayers, building upon free electronic 
tax preparation and filing provided in the commercial market today;
    2. Making tax return preparation and filing easier and reducing the 
burden on individual taxpayers;
    3. Supporting the IRS's statutory goals of increased e-filing, 
pursuant to the IRS Restructuring and Reform Act of 1998, which 
encouraged the IRS to set a goal of having 80% of Federal tax and 
information returns filed electronically by the year 2007;
    4. Providing greater service and access to taxpayers; and
    5. Implementing one of the proposals in the President's FY'03 
budget,

[[Page 67248]]

specifically to encourage further growth in electronic filing by 
providing taxpayers the option to file their tax return on-line without 
charge using cooperation with, and encouraging competition within, the 
private sector to increase e-filing.

IRS Response to Comments and Concerns

    In the Federal Register Notice, the IRS requested comments and/or 
suggestions with respect to the draft Agreement. In response, the IRS 
received over seven hundred comments from various individuals and 
organizations. The vast majority of the feedback received supported the 
Agreement and its benefits to taxpayers. Most of the positive feedback 
received was from taxpayers; however supporting comments were also 
received from members of Congress, consumer groups, tax software 
companies, and technology associations. Themes running throughout this 
feedback were the advantages of public/private sector cooperation 
rather than direct government competition with the private sector, the 
economic value of the Agreement and Free Services to both the 
government and taxpayers, as well as other benefits of the Agreement to 
many taxpayers who have not previously taken advantage of electronic 
tax return filing. Taxpayers who e-file get their refunds twice as 
fast, experience fewer mistakes and errors, and consistently prefer e-
filing as measured by customer surveys. The draft Agreement will extend 
these taxpayer benefits by making Free Services available to 
approximately 78 million taxpayers.
    The most common concern voiced was that these Free Services would 
adversely impact accounting and legal tax professionals by attracting 
their clients to Free File Alliance products. However, IRS historical 
data shows that the migration of taxpayers from the services of 
accounting and legal tax professionals to low cost Internet filing 
options has been minimal. This is also not supported by the experience 
by comparable foreign governments. In Australia, for example, where the 
national government itself has offered free Internet filing for a 
number of years, over 70% of all taxpayers still use a tax 
professional. Free File Alliance products, and the marketing thereof, 
are expected to focus on taxpayers who currently self-prepare a paper 
return and mail it to the IRS. In support of its continuing partnership 
with the tax professionals, the IRS will continue to assist taxpayers 
desiring to e-file through a tax professional by providing, through its 
web site (irs.gov), a mechanism (zip code locator) to assist them in 
finding an e-file tax return preparer in their area.
    The next most common concern expressed was that on-line tax 
software products do not provide the same level of quality and service 
of a tax return preparer, thus possibly resulting in a greater tax 
obligation or more errors. It is important to note that the free 
offerings are not comparable to the services provided by an accounting 
or legal tax professional, because they service two distinct groups of 
taxpayers. The free offerings are expected to be of primary interest to 
those taxpayers who manually prepare their own tax return. Taxpayers 
who want more comprehensive services are expected to continue to seek 
the services of accounting or legal tax professionals. Regardless of 
the vehicle used to prepare and e-file a return, e-filed returns have a 
lower error rate than paper returns. It is also expected that Free File 
Alliance products will be equivalent to those offered for sale on the 
commercial market and thus are expected to have all of the features and 
operability of those commercial products.
    Other respondents, including some consumer groups, expressed 
concern that the Agreement does not sufficiently protect the interest 
of taxpayers, specifically low-income taxpayers, because it may expose 
them to the risk of receiving unsolicited products or services (e.g., 
Refund Anticipation Loans (RALs)). The Agreement clearly states the use 
of any Free Service cannot be contingent on the sale of any other 
product or service. It also provides that taxpayers will not have to go 
through additional steps or barriers to access the Free Service, beyond 
those steps required or imposed to access the comparable paid service. 
In addition, federal tax laws already strictly prohibit unauthorized 
marketing to taxpayers using a commercial tax preparation service. 
Accordingly, information entered to complete a tax return under this 
program will continue to be protected by Internal Revenue Code Section 
7216 (26 CFR 301.7216). This provision of law requires explicit 
taxpayer consent for tax return information to be used for any reason 
other than the preparation of the tax return, including for marketing 
purposes. IRS Publication 1345, Handbook for e-file Providers, also 
governs marketing and business practices for Electronic Return 
Orginators. In addition to the protections afforded by law, taxpayer 
privacy and security protections for consumers will be increased in 
that the Agreement requires that Free File Alliance products receive 
third party privacy and security certifications, and these additional 
requirements and certifications will be prominently displayed on the 
IRS web site.
    With respect to RALs, because taxpayers who e-file get their 
refunds twice as fast, the demand for costly tax refund loans should be 
reduced as a result of the Agreement. Also, the demand will be reduced 
significantly further as refund cycle times are shortened under IRS' 
Business Systems Modernization Plans. It should be noted that RALs are 
generally governed by state, not federal law. Even if Free File 
Alliance members had no financial products such as RALs offered within 
their products, taxpayers wanting a tax refund secured bank loan would 
still have them available through thousands of tax return preparers. 
However, to ensure that taxpayer and consumer interests are fully 
accounted for, the IRS is asking the statutory National Taxpayer 
Advocate, and the Taxpayer Advocacy Panel (a federal advisory committee 
comprised of over 100 taxpayers representing the 50 states) to advise 
the IRS regarding Free File Alliance activities. There was a range of 
comments (three or fewer), most of which reflected a general 
misunderstanding of the Agreement. Three respondents stated the IRS 
should not compete with the commercial marketplace by providing its own 
government application. As stated earlier, private industry with proven 
tax experience and expertise will be providing these Free Services, not 
the IRS.
    Three other respondents believed that the Free Services would not 
help taxpayers overcome the complexity of the tax law. It is important 
to point out that these complexities are inherent in the underlying tax 
laws themselves. The Free Services will nonetheless reduce taxpayer 
burden by making the tax return preparation, filing and payment process 
simpler and easier. In typical tax software applications the taxpayer 
need only input relevant tax information through a standard 
``interview'' format. Applications then interpret most complications of 
the tax process for the taxpayer, producing a final result suitable for 
filing with the IRS at no cost to the taxpayer. Two respondents 
believed that Free File Alliance members would be given an unfair 
advantage over non-Free File Alliance members. Membership in Free File 
Alliance is open to all companies that can satisfy the basic 
eligibility requirements. Interested companies should visit 
www.cerca.org for more

[[Page 67249]]

information. In addition, the IRS will also continue to list non-
participating software providers on the IRS web site.
    One respondent questioned whether the Agreement was consistent with 
antitrust laws. With respect to these concerns, on October 7, 2002, the 
Free File Alliance received a business review letter from the Antitrust 
Division of the United States Department of Justice (DOJ). The letter 
concluded that the Free File Alliance, as proposed, should pose no 
threat to competition in the market for providing tax services to 
individuals.

Final Analysis

    The overwhelming majority of the respondents supported the draft 
Agreement as an effective way to expand the availability of the 
benefits of e-filing through a public/private partnership. In 
evaluating all the comments and concerns received, the IRS has 
determined that the Agreement does not omit any necessary requirements; 
therefore, it is the IRS' intention to enter into this Agreement with 
the Free File Alliance, LLC. The final version of the Agreement is 
attached.

Drafting Information

    The principal author of these comments is Paul J. Mamo, IRS 
Electronic Tax Administration; however, other personnel from the 
Department of the Treasury and IRS participated in the development of 
this document.

    Dated: October 29, 2002.
Terence H. Lutes,
Director, Electronic Tax Administration, Internal Revenue Service.

Final Agreement

Free On-Line Electronic Tax Filing Agreement

    This Agreement is entered into, as of October 30, 2002, between the 
Internal Revenue Service (the ``IRS'') and the Free File Alliance, LLC 
a consortium of companies in the electronic tax preparation and filing 
industry (the ``Consortium''), a non-profit corporation (under the 
provisions of 26 U.S.C. Sec.  501(c)(3)) formed under the auspices of, 
and affiliated with, the Council for Electronic Revenue Communication 
Advancement. The Consortium has been formed to facilitate participation 
in this Agreement by commercial entities, which are members of the 
Consortium engaged in the business of electronic tax preparation and 
filing (``Consortium Participants'').

I. Purpose

    This Agreement provides for free on-line tax return preparation and 
filing to individual taxpayers, thereby meeting the following five 
objectives:
    1. Assuring access to a free and secure electronic preparation and 
filing option for additional taxpayers, building upon free electronic 
tax preparation and filing provided in the commercial market today;
    2. Making tax return preparation and filing easier and reducing the 
burden on individual taxpayers;
    3. Supporting the IRS's statutory goals of increased e-filing, 
pursuant to the IRS Restructuring and Reform Act of 1998, which 
encouraged the IRS to set a goal of having 80% of Federal tax and 
information returns filed electronically by the year 2007;
    4. Providing greater service and access to taxpayers; and
    5. Implementing one of the proposals in the President's FY'03 
budget, specifically to encourage further growth in electronic filing 
by providing taxpayers the option to file their tax return on-line 
without charge, using cooperation with, and encouraging competition 
within, the private sector to increase e-filing.

II. Summary

    To accomplish the above objectives, the IRS and the Consortium 
(together, ``the Parties'') will work together to offer free, on-line 
tax return preparation and filing services to taxpayers (``Free 
Services''). The Consortium will offer Free Services to taxpayers. The 
IRS will provide taxpayers with links to the Free Services offered by 
the Consortium Participants through a web page (described more fully in 
V. below; hereafter, the ``Web Page''), which will be hosted at irs.gov 
accessible through firstgov.gov. During the term of this Agreement, the 
IRS will not compete with the Consortium in providing free, on-line tax 
return preparation and filing services to taxpayers.
    This Agreement is the best method for meeting the above stated 
objectives because it will promote higher quality Free Services by 
utilizing the existing expertise of the private sector, maximize 
consumer choice, promote competition for such Free Services, and 
thereby meet the objectives in the least costly manner.

III. Scope of Offerings

    A. The Consortium will offer Free Services for eligible taxpayers 
(taxpayers meeting the qualifications for free offerings) from 
individual commercial sites. Such offerings, when taken in the 
aggregate, are intended to provide for Free Services to be available to 
60% or more of taxpayers. If at any point the Consortium's aggregate 
offerings of Free Services are available to fewer than 60% of 
taxpayers, the IRS may notify the Consortium of that fact. After 
receipt of such notice, the Consortium will have six months within 
which to raise the availability of such offerings to at least 60% of 
taxpayers. If the Consortium fails to achieve 60% within such six-month 
period, the IRS may terminate this Agreement. In making this decision, 
the IRS agrees to take into account the extent to which actual usage of 
Free Services has increased. Consortium offerings, taken together, will 
provide eligible taxpayers with a reasonable assurance that: (1) Free 
Services will be available on demand, and (2) these services will 
provide the ability to file the same federal tax forms which are 
fileable and available in the comparable paid on-line services offered 
by a selected Consortium Participant.
    B. The Consortium shall accept offerings only from entities that:
    1. Provide electronic, on-line tax preparation and filing of 
individual income tax returns:
    2. Will offer and can provide Free Services to a number of 
individual taxpayers, which equals or exceeds 10 percent (10%) of the 
number of individual income tax returns filed in the base year (CY 
2001).
    3. Offer on-line software approved by the IRS that generates 
returns that can be sent to the IRS via an IRS-approved channel.
    4. Are Authorized IRS E-File Providers in accord with IRS Rev. 
Proc. 2000-31.
    5. Are in compliance with applicable law, including but not limited 
to, Department of Treasury/IRS rules, including but not limited to 31 
C.F.R. Part 10, IRS Rev. Proc. 2000-31, current versions of IRS 
Publications 1345 and 1345-A, and 26 U.S.C. Sec.  7216.
    6. Demonstrate the competence and capability to deliver their free 
offerings. This competence and capability may be demonstrated either by 
providing evidence of prior experience in providing on-line or 
electronic filing services or by self-certification. Such self-
certification shall be reasonably and objectively determined by the 
Consortium, taking into account the above referenced need for 
competence and capability and the intent of the Agreement to avoid 
unnecessary barriers to entry. Consortium Participants must have 
adequate capacity to meet the expected demand for their Free Services. 
In addition to initial Participants, the Consortium will

[[Page 67250]]

accept later qualified applicants as Consortium Participants.
    7. Have a security seal certification program, from a third party 
agreed to by the Consortium and IRS. Certification will be based upon 
an assessment of the system's ability to protect taxpayer data.
    8. Comply with the privacy provisions of 26 U.S.C. Sec.  7216. Have 
a privacy seal certification program from a third party agreed to by 
the Consortium and IRS. Consortium participants are encouraged to use 
software that will enable their websites to state their privacy 
practices in a standard machine-readable format that can be retrieved 
automatically and interpreted easily by users. Consortium Participants 
shall also agree that provisions of Free Services shall not be 
conditioned on obtaining an eligible taxpayer's consent to 
solicitations of additional business.
    9. Will not contain or provide links to inappropriate content.
    10. Clearly disclose to users their customer service support 
options and privacy policy.
    11. Agree to have at least one link to the IRS web site (irs.gov).
    C. The Consortium will take reasonable steps to publicize the 
criteria for Consortium participation. The Consortium will provide to 
the IRS, on request, the names of unsuccessful applicants for 
Consortium participation and the reason for their rejection.

IV. Performance Standards

    A. The IRS will have the Consortium web page ready by December 31, 
2002. Consortium participants will have submitted their test returns 
produced by their software to the IRS sufficiently in advance of that 
date for testing. The IRS will not list on the Consortium web page a 
Consortium participant whose test returns have not been certified prior 
to the beginning of the filing season until that participant's test 
returns have been tested and certified.
    B. The Consortium will use its best efforts to assure that Free 
Services by individual Consortium Participants are performed in 
accordance with the terms of the Agreement and in accordance with the 
offer made by the Consortium Participant. If the IRS determines a 
particular offering of Free Services is deficient or that Free Services 
are not being properly performed, it will notify the Consortium in 
writing of that fact, and provide information regarding corrective 
actions it believes are needed.
    C. The undertaking by the Consortium under IV. A to offer Free 
Services at or above the 60% level shall apply only to January through 
April of each year (the primary tax filing season). Outside of the 
primary tax filing season, the Consortium shall encourage Consortium 
members to offer Free Services to the same extent that such services 
are offered by Consortium members for compensation.
    D. The Consortium will be responsible for establishing its 
governance standards. These standards shall be in accord with 
applicable law and regulations. The standards shall be consistent with 
the Consortium performing its obligations under this Agreement and be 
designed to maximize participation of industry members while meeting 
the requirements of the Agreement.
    E. IRS, in consultation with the Consortium, will develop an 
assessment process including usability performance measures to measure 
the extent to which the Agreement is accomplishing the objectives 
described in I., above. They will include at least:
    1. Uptime and reliability through the tax season.
    2. Delivery of the taxpayer to the Free Services in the minimum 
number of clicks consistent with usability design principles and the 
need to fully inform taxpayers about the free online services. . From 
the site the taxpayer arrives at by clicking on the Consortium page's 
link to the Consortium Participant, until the taxpayer arrives at the 
Free Services, there will be no more clicks than required of such 
Consortium Participant's paying customers, if applicable, consistent 
with usability design principles

V. Consortium Web Page Operation

    A. The IRS will host and maintain the Web Page. The Consortium will 
submit to the IRS proposed content for the Web Page, and the IRS shall 
determine the final content to appear on the Web Page. The IRS will 
ensure that there are links from appropriate Government sites to the 
Web Page.
    B. The design of the Web Page will conform to the following 
guidelines:
    1. The Consortium will determine rank order placement of links to 
individual offerings in accordance with reasonable, objective criteria. 
Each listing of an offering will provide a description of the scope of, 
and eligibility for, Free Services it offers.
    2. The Web Page will provide a link to each Consortium 
Participant's Free Services entry using a minimum number of clicks.
    3. No advertising will appear on the Web Page.
    4. The Consortium will create and supply to IRS proposed content 
for the Web Page using existing IRS content management procedures.
    5. The Web Page will be developed using usability design principles 
and will be updated based upon usability testing and other user 
feedback.
    C. Taxpayers will be able to use Consortium Participants' software 
to prepare and electronically file their own personal income tax 
returns using proprietary processes and systems which such Participants 
host and maintain.
    D. The Consortium will promptly notify the IRS of any planned or 
unplanned unavailability (i.e., downtime) of an offering that is 
anticipated to exceed five hours in duration. The IRS will annotate 
that offering's listing on the Web Page with a notice advising the 
public of the unavailability. The IRS may delist an offeror if its 
service remains unavailable for more than 24 hours, but shall re-list 
after restoration of availability; provided, however, if a Consortium 
Participant repeatedly has periods of such unavailability, the IRS 
shall be entitled to delist that Consortium Participant.

VI. Marketing

    A. The Parties will coordinate with each other their respective 
marketing of these Free Services to provide uniformity and maximize 
public awareness. Final decisions on the marketing campaign will remain 
with the IRS for IRS marketing expenditures and with the Consortium and 
the Consortium Participants for their marketing expenditures.
    B. The IRS will not endorse specific offerings or products, but 
will promote the availability of the Consortium's Free Services.
    C. The Parties will work with the States to explore how this 
Agreement can support the states. On-line tax preparation and e-filing 
of both federal and state returns can maximize benefits of this 
Agreement to taxpayers.
    D. The Consortium understands that the IRS may continue to provide 
Consortium Participants or non-Participants Partners links from 
Government sites to electronic preparers and filers.

VII. Term of Agreement; Termination

    A. This Agreement has an initial term of three years from its 
effective date with automatic options to renew for successive two-year 
periods. Representatives from the Parties will meet semiannually to 
review operation of this Agreement. The Parties will review the terms 
of this Agreement on an annual basis, and, upon mutual consent, can 
agree in writing to modify any provision of this Agreement.

[[Page 67251]]

    B. Either Party may terminate this Agreement for cause if the other 
Party fails to comply with this Agreement, and such failure is not 
cured within thirty days of written notice of such failure from the 
other Party.
    C. The IRS may terminate this Agreement without cause, such 
termination to be effective 12 months after the date of notice of such 
termination.
    D. Should the IRS decide to offer Free Services to taxpayers the 
IRS shall notify the Consortium immediately. If the IRS gives such 
notice during the tax season (between January 1st and April 15th, or 
the last day of the filing deadline if that date is changed from April 
15) of any year, the Consortium may, by written notice to the IRS, 
terminate this Agreement, effective on April 16th (or, if the filing 
deadline is changed from April 15, on the day following such new 
deadline) of that year. If the IRS gives such notice between April 16th 
(or, if the filing deadline is changed from April 15, on the day 
following such new deadline) and October 15th of any year, then the 
Consortium may, by written notice to the IRS other than during a tax 
season, terminate this Agreement, such termination to be effective no 
fewer than 30 days after the date of the Consortium's notice of such 
termination. If the IRS gives such notice between October 15 and 
December 31, the Consortium may by written notice immediately terminate 
this Agreement at any time on or before December 31.

VIII. Miscellaneous

    This Agreement represents the entire agreement between the Parties. 
This Agreement is governed by Federal law.

Internal Revenue Service

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Free File Alliance

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[FR Doc. 02-27909 Filed 10-30-02; 10:08 am]
BILLING CODE 4830-01-P