State to end free online tax-filing service

Del. Kathy J. Byron, R-Campbell, sponsored legislation to end the free online tax-filing service. Gov. Bob McDonnell signed the bill on Sunday.

For the past 10 years, Virginia has offered an online service that allows nearly every taxpayer in the commonwealth to file their state income-tax return for free.

In 2009, more than 278,000 Virginians took advantage of the state Department of Taxation's iFile program. This year, about 300,000 are expected to do so by the May 3 filing deadline. A recent survey of the service found that 98 percent of taxpayers using it were satisfied.

So why did the General Assembly vote to end the program?

It depends on whom you ask.

To some legislators, it's a question of defining what the government's core priorities should be, and the belief that taxpayers will be served better and be saved more money in the long run.

"It makes a lot of sense -- state government doesn't need to be doing everything," said Del. Kathy J. Byron, R-Campbell, who sponsored the legislation, House Bill 1349. "We've got to get back to the core services."

To others, it has more to do with politics -- the product of a successful lobbying effort by private tax-filing services to steer thousands of would-be free-filers to private businesses, who now will be able to charge a fee for the same service Virginians were getting for free.

"It looks like we are going to be able to go home and tell people we didn't raise their taxes," state Sen. R. Creigh Deeds, D-Bath, said during a Senate floor debate over House Bill 1349 at the close of the assembly's legislative session in March.

"But with this bill, we are going to tell some people they are going to have to pay more to file their taxes."

The bill passed the Senate 33-6 and the House of Delegates 86-10, with Democrats casting the only "no" votes. It was signed Sunday by Gov. Bob McDonnell.

The law, scheduled to take effect for the 2010 tax year, eliminates the state's iFile program. Nearly 97 percent of all Virginians who filed state taxes were eligible to file electronically, regardless of their income, under iFile.

The legislation replaces iFile with the "Virginia Free File" program. The program is modeled after the federal Free File program, established in 2002 between the Internal Revenue Service and the "Consortium" -- a group representing for-profit tax-preparation companies.

One of those companies, Seattle-based Intuit, has donated $113,500 to state lawmakers since 2001, according to records on file with the Virginia Public Access Project. The information-technology company owns TurboTax, one of the top tax software programs on the market.

In 2009, Intuit donated $10,000 to the Dominion Leadership Trust, a political action committee run by House Speaker William J. Howell, R-Stafford. The company operates a customer-service center about 4 miles from Howell's district office.

Last year Intuit also gave $7,500 to the McDonnell for Governor campaign and $5,000 to the Strong Majority PAC run by House Minority Leader Ward L. Armstrong, D-Henry.

Through a link on the IRS Web site, the industry group provides free online tax-filing services to 70 percent of federal taxpayers.

In exchange, they have been given the right to charge a fee for electronically filing returns for taxpayers with higher incomes. For tax year 2009, the threshold for free filing was below $57,000.

The Virginia Free File program, through its own industry group, the Free File Alliance, also will offer free online state tax preparation to 70 percent of Virginians with the lowest incomes.

But according to the fiscal impact statement prepared on the legislation by the Department of Taxation, more than 90,000 Virginians who currently use the state's iFile system no longer would be able to file for free.

In addition, the Department of Taxation would be obligated to provide a link on its Web site to tax services offered by the Free File Alliance and the IRS Free File program. As in the federal program, Virginians making more that $57,000 would have to pay a fee for filing electronically.

"We support the changeover from iFile to Free File Alliance," McDonnell spokeswoman Taylor Thornley said.

"Under the new system, Virginians who make under $57,000 [adjusted gross income] will still be able to file their federal and state taxes for free. It saves the state money, is a part of a national movement, and gives Virginians a better tax-filing service."

Proponents of the legislation said that fee would be minimal, around $10. But critics such as Deeds say it could be run up to $37, depending on the tax software vendor selected.

"People were getting something for nothing," he said. "Now it's going to cost something."

Maintaining the iFile program did not cost the state a lot of money -- about $49,200, according to the fiscal impact statement.

But the savings by switching programs could end up costing the state more money if the 90,000 filers who no longer will be able to file for free electronically go back to paper returns, which the Taxation Department estimates would cost $1 each to process.

The primary cost of switching will be borne by the taxpayers themselves, with the revenue generated going to the tax-filing companies. Still, proponents of the switch say it will save residents more than the cost of the filing fee.

During Senate debate on the bill, Sen. Stephen D. Newman, R-Lynchburg, said having a linking between state and federal tax-filing systems through the Free File Alliance will add convenience to the process.

He said commercial software programs offered better service by identifying more deductions and areas where taxpayers could save more on their returns -- savings that could more than pay for whatever filing fee might apply.

"Any time we can do a public-private partnership that offers different service choices and consultation, we are much better off," said Byron, the Campbell delegate.

She said the switch made sense by refocusing government resources during tough economic times and noted that 85,000 of the iFilers relied on local tax commissioner's offices to help them file their returns.

"At a time when we were looking at fees and coming up with all different scenarios to fund the core services of government, this is not a core service of government," she said. "Is this the best use of our resources?"

Contact Jim Nolan at (804) 649-6061 or

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