A Free Direct E-filing Tax Return System is a Fundamental Taxpayer Right

The Inflation Reduction Act (IRA) directed the IRS to a report on “the cost (including options for differential coverage based on taxpayer adjusted gross income and return complexity) of developing and running a free direct efile tax return system, including costs to build and administer each release, with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data;” as well as surveys of taxpayer opinions, expectations, and trust and an independent third-party assessment of feasibility, etc. (IRA § 10301(1)(B). The IRA included an appropriation of $15 million toward that effort. The report is due to be delivered to Congress on or before May 16, 2023.  It already has been the subject of much commentary and speculation, and this last week both the Wall Street Journal and Fox News touted findings from a leaked study by MITRE that allegedly reports survey results about taxpayers willingness to utilize an IRS direct file application.  Contrary to what these media reports conclude, the reported survey data (which I have not seen so cannot verify) show that a majority of US taxpayers appear to prefer some type of IRS direct e-file or automatically populated and calculated tax return.  But more on that later.

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I witnessed the inception of the e-filing movement since my days as an unenrolled return preparer and more intimately during my service as the National Taxpayer Advocate.  At the time I entered the IRS, Treasury and the White House wanted the IRS to create a free direct filing program that would be accessible through the WhiteHouse.gov website.  Commissioner Rossotti and Terry Lutes, then director of electronic tax administration, argued the IRS did not have the bandwidth to develop such a project itself and proposed entering into an agreement with commercial software companies to offer their products for free to share of the individual taxpayer population.  This decision was driven by two concerns:  (1) the Congressional mandate to achieve 80% e-filing of all federal tax and information returns by 2007 (IRS Restructuring and Reform Act of 1998 §2001(a)); and (2) the IRS’s limited capacity to handle another major IT project, given it was digging itself out from a major debacle of the 1990s, in which it blew through $4 billion on a tax systems modernization program without much to show for it.  Thus, the Free File Alliance was born.

At the time, I objected, pointing out that putting off direct filing would just end up with us (the taxpayers), twenty years hence, without any free e-filing product available to all taxpayers, once the commercial companies had established market dominance and then pulled out of the agreement.  This has pretty much come to pass.

The concept of direct e-filing has been around for quite some time; here is a post from Les discussing some background and current developments.  In fact, as I reported in my 2012 National Taxpayer Advocate Annual Report to Congress, in the IRS Restructuring Reform Act of 1998, Congress directed the IRS as follows:

Not later than December 31, 2006, the Secretary of the Treasury or the Secretary’s delegate shall develop procedures for the implementation of a return free tax system under which appropriate individuals would be permitted to comply with the Internal Revenue Code of 1986 without making the return required under section 6012 for taxable years beginning after 2007.   (RRA 98 § 2004)

Not later than December 31, 2006, the Secretary of the Treasury or the Secretary’s delegate shall develop procedures under which a taxpayer filing returns electronically (and their designees under section 6103(c) of the Internal Revenue Code of 1986) would be able to review the taxpayer’s account electronically, but only if all necessary safeguards to ensure the privacy of such information are in place.  

RRA 98 § 2005

My thinking about direct file is governed by some first principles that are worth reviewing, before examining some of the arguments raised in opposition to the tax agency providing free direct filing and also sharing an example of what some tax systems are able to deliver to their taxpayers.

First and foremost, no one should have to pay for the privilege of preparing and filing their tax returns.  Let’s not forget that taxes are a public good; they are not a commercial product like potato chips or an airline ticket.  I don’t care how much or how little taxable income you report; the government has an obligation to provide a method for you to prepare and file your tax returns without having to pay someone to help you – if you are so inclined.  Sure, lots of people don’t want to prepare their own tax returns and are perfectly willing to pay someone to do it for you.  I know this because I prepared returns from 1975 right up until I joined the IRS in 2001.  Each year I would try to convince my clients with the simplest returns that they could do it themselves, but still they wanted to pay me to prepare their tax returns for them.  Other taxpayers are comfortable preparing their own return with the assistance of commercial software, that links to their investment or business accounts, or just guides them through the tax maze. Still others use their annual trip to their return preparer as a financial check-up; they discuss retirement or business planning, or just saving for a rainy day.  That’s fine too, but if you don’t want to (or can’t) shell out money for the purpose of contributing to the public fisc, the government needs to provide a way for you to prepare and file your tax returns for free.  Period.

This brings us to the second underlying principle: choice of filing options is good.  The over 160 million US individual taxpayers are a very diverse lot and, as outlined above, they have very different filing preferences.  Their economic position widely varies – from wage-only/non-itemizing returns (about 59.3 million in Tax Year 2016, or 40% of all returns – see Annual Report research study here for more data) to sole proprietors (including gig economy workers) to taxpayers with complex pass-through income and investments.  This large and diverse tax population can and will support a variety of tax products, including one available for free that is provided by the federal government.

This brings us to our third principle: taxpayers should have access to their own tax data.  In the 21st century, data is increasingly available to tax administrators.  According to the IRS Data Book, in Fiscal Year 2022, the IRS received 5.4 billion information returns reporting data about income, deductions, and basis in assets.  Although taxpayers have the responsibility for complying with the tax laws, a fundamental principle of maintaining and increasing voluntary compliance is making it easy for taxpayers to comply.  That includes providing them with the income and other data the IRS receives about them, in order to avoid mistakes and omissions.

Now, the tax world is not static, and neither is the tax preparation environment.  What was not possible for tax agencies, technologically, back in the year 2000, is de rigueur for tax agencies today.  I have visited with many tax agencies over the decades and have witnessed how far ahead of the IRS they are in delivering free and easily accessible taxpayer accounts and tax preparation vehicles.  While some offer fully pre-populated returns, many others offer taxpayers the ability to see the income information the tax agency has about them, and either enter that information into a free online filing app, to be supplemented by other information such as sole-proprietorship income, or download the information to provide to one’s return preparer or import it into commercial tax preparation products.

If you are interested to see what a government-provided tax account with free online filing might look like, take a look at this demo of the Australian Tax Office’s taxpayer account here.  You can access the app on your smart phone, tablet, laptop, etc.  Australia has been building this in chunks since, oh, the early 2000s.  It takes about 15 minutes for taxpayers to file a return on this app, compared to the 8 hours the IRS estimates under the Paperwork Reduction Act for the non-business returns (3 hours for actual preparation).  Australians have choice, but about 37.5% (4.5 million out of 12 million) of individual filers prepare their return via the app for free.  (Les and I visited with ATO officials in late March/early April this year, for a Center for Taxpayer Rights project, and they kindly shared this demo with us then.)

So, what do the critics say about all this?  Some of the arguments are re-hashed from back in the 2000s.

  1. Direct filing with the IRS will enable the IRS to see all the changes you make in the process of preparing your return.  First of all, this argument shows ignorance of the powers Congress has granted to the IRS to administer the tax law.  The IRS is able to issue summons for any document or record (including electronic records) that is relevant to its investigation of a tax return.  The attorney-client privilege doesn’t apply to return preparation, and there is no absolute federal return preparer privilege.  So, regardless of whether you file electronically or on paper directly with the government, or through a software product, or through a return preparer, if the IRS wants to see the documents, drafts, etc. of what went into preparing a tax return, generally, it can get it.  As the NTA Annual Reports demonstrate year after year after year in reporting on the most litigated issues, quashing an IRS summons through the courts is very difficult.
  2. Direct filing with the IRS will enable the IRS to impose upon you the government’s interpretation of law.  The fear here is the IRS will build into the software certain rules such that will prevent some taxpayers from claiming a particular deduction or credit via an e-filed return.  To some extent this is already happening today – e.g., the IRS rejects e-filing of returns (commercially or otherwise prepared) where the taxpayer or dependent has been claimed on an earlier e-filed return for that year.  The IRS still allows the taxpayer to file a return on paper claiming the child, and then sorting out who is entitled to the child-related benefits later on in the process.  This approach violates the Beard v. Commissioner rule of what constitutes a return.  My understanding is Treasury is aware of this issue.  The way to address this issue is to require open source access to the underlying assumptions of the direct filing tool – that way the tax community can identifying assumptions built into the program.  Another protection is to replace the e-file rejection with a simple pop-up notifying the taxpayer of the issue (duplicate filing of a child, claim for a credit in excess of the number of years allowed, etc.) but allow the taxpayer to proceed with e-filing the original return if they choose to do so.  There are solutions to these concerns that will protect the rights of all taxpayers, not just those who use the IRS direct filing tool.
  3. Direct filing with the IRS competes with the private sector.  This proposition is similar to saying the Government Printing Office has been and is competing with the private sector by printing paper tax forms, instructions, and publication.  Geez, folks, it is a federal tax code, not a private commercial tax code.  In the 21st century, an IRS direct file option is the digital analog to the government-printed paper return of the 20th century.
  4. There already is a free direct filing option – namely, filing on paper.  This argument was floated by a spokesperson for Intuit.  The National Taxpayer Advocate has called paper kryptonite for the IRS.  Anyone who has been anywhere other than hiding under a rock for the last three years knows we need to eliminate as much paper as possible from our tax filing system.  Moreover, for those who rely on refundable tax credits and other refunds in order to meet basic living expenses, filing on paper is not a justifiable option., given the significant delays, even in the best of times, that are associated with paper tax return processing.
  5. Nobody wants to use an IRS direct filing option. This is what the Wall Street Journal editorial and Fox News reported as the ultimate findings of the leaked Mitre survey. I have not seen this survey – I assume it will be provided to Congress and made public along with the IRS and other third party report due May 16th – so I can’t vouch for the accuracy of what is being reported. But taking the reported numbers at face value, the survey actually shows a substantial level of support for an IRS direct filing option. Here are a few data points the media reported: When asked if they would use direct e-file if it included preparation of state returns, 15% of respondents said they would direct e-file; 48% said they would use their current software; and 37% said they would prefer the IRS to automatically file their individual taxes for them (the pre-population option).  (Without the state option, 12% said they would use direct e-file and 60% would use current software.)

So let’s parse these numbers.  In Fiscal Year 2022, the IRS received over 160.5 million individual income tax returns.  Of those, 3.2 million were prepared and filed via the free Free File Alliance option, the products offered up in 2001 as an alternative to the IRS direct filing proposal.  15% of 160.5 million is over 24 million taxpayers, or a 750% increase in free electronic preparation and filing.  12% is 19.2 million taxpayers, or an over 600% increase.  Contrary to how this data has been presented in the press, the survey responses show that a significant number of taxpayers find a direct filing option very desirable, while allowing for alternative choices.  In fact, when including the 37% who say they would like the IRS to automatically calculate their taxes, a majority of US taxpayers see an IRS role in return preparation as a positive thing.

Since 2002 or so, I have publicly advocated for the IRS to provide a free, direct electronic return preparation and filing app that allows taxpayers to download their tax data either into that application, or into commercial and tax preparers’ return preparation products.  This approach honors the government’s fundamental obligation to the taxpayers who fund it, while protecting taxpayer choice and transparency.  Less inclusive approaches impose burden and cost on taxpayers, which in turn breeds taxpayer resentment.  Moreover, the direct filing option is an immediate and natural outgrowth of a robust online taxpayer account, which everyone agrees is a necessary component of a modern tax system.  So, unless you want a tax system that is mired in the mid-20th century, it would be good to keep an open mind when reviewing the upcoming IRS Direct File report.

East Coast Bias

The case of Park v. Commissioner, Dk. No. 3312-22S shows a bias in the Tax Court’s electronic filing system that disadvantages petitioners in time zones to the west of Washington, D.C. Think of the Park decision as the Tax Court’s equivalent of the View of the World from 9th Avenue.  It also serves as a reminder of Tax Court practices we have discussed before regarding the policing of cases to determine timeliness discussed here and here, as well as burdens placed by the IRS on electronic tax return filers we have discussed previously here and here. The Parks, who live in California, have their Tax Court case dismissed even though they filed on the 90th day viewed from the lens of California.  It is dismissed because it arrived at the Tax Court two minutes after the East Coast based deadline. Let’s look at the facts in more detail.


The IRS sent the Parks a notice of deficiency (SNOD) on November 29, 2021. The Court says that the SNOD stated the last date to file the petition was February 28, 2022. Note that 90 from November 29 would be February 27. In 2021 February 27 was a Sunday moving the last date to file to Monday, February 28 pursuant to IRC 7503. 

The court states the petition was filed on Tuesday, March 1, 92 days after the mailing of the SNOD. In this case, the Court finds that the filing occurred one day after the last date to file the petition.

After the filing of the petition, the IRS answered the case on April 25, 2022, within the 60-day time period for filing an answer. The parties submitted a proposed stipulated decision on May 11, 2022, which would have resolved the case. The timing of the proposed stipulated decision suggests that the petitioners convinced the respondent very quickly that the notice was wrong. It’s possible that the IRS convinced petitioners that quickly that the notice was right, but in my experience, cases that settle this quickly usually do so because the petitioner provides information that immediately convinces the Chief Counsel attorneys that they do not owe the tax shown on the SNOD. Kudos to the Chief Counsel attorneys for working the case so quickly acknowledging the proper result.

The Tax Court initially filed the stipulated decision but later struck it from the docket and, seven months later, on December 11, 2022, issued an order to show cause why the Court should not dismiss the case for lack of jurisdiction. I don’t know the issue in this case because I have not ordered the documents, but if this were a case in which taxpayers were receiving a refund note that the refund would have been held by the IRS, awaiting the signature of the judge on the decision document. Because the stipulated decision was filed almost immediately after the answer, this case would be on the Court’s general docket, unassigned to a specific judge, and under the office of the Chief Judge.

The parties responded to the order by the end of December. On February 22, 2023, nine months after the parties had reached an agreement in this case, the Court dismissed it. Assuming I am right that the IRS agreed that the taxpayer did not owe the amount set out in the SNOD, the dismissal will not cause the taxpayer problems. The IRS will honor the agreement, which means it will not make an assessment of the deficiency proposed in the SNOD, and it will pay a refund if any is due. So, the taxpayer in this situation will not be harmed by the dismissal.

Why did the court dismiss the case? Under its interpretation of its jurisdiction, whether that’s 6213 or 6214, depending on the judge, the taxpayer must file a timely petition, and the court must dismiss an untimely filed case even where the parties have reached an agreement. The Court explains why it views this petition as late:

On December 30, 2022, petitioners filed a Response to Order to Show Cause, in which they argue that the petition was filed at 12:01 a.m. on March 1, 2022, and the Court should consider that the petition was submitted from the State of California at 9:01 p.m. on February 28, 2022. In addition, Petitioners also argue that they last saved the petition at 8:54 p.m. on February 28, 2022, to their computer and the petition was likely submitted by them before the petition was received by the Court.

In pertinent part, the Court’s DAWSON Petitioner Training Guide, at page 10, states, “The Court MUST receive your electronically filed Petition no later than 12:59 [sic] pm Eastern Time on the last date to file. Petitions received after this time are considered untimely and your case may be dismissed for lack of jurisdiction.” A copy of the DAWSON Petitioner Training Guide is posted in the Rules & Guidance section of the Court’s website at www.ustaxcourt.gov.

The Court’s quote from page 10 of its guide contains a misstatement. The guide says the electronic petition must be received not later than 11:59 pm Eastern Time. Notice that the petition must be received by that time. It’s not the time the petitioner sends the petition. I have never checked to see if there was a difference between the time I sent a document to the court and the time the court received it. The docket sheet does not record time down to the minute but lists the day. The “farm” internet I have is quite slow, and sometimes I think documents I send to others or that others send to me are sent by the electronic equivalent of the Pony Express rather than going and coming instantaneously. 

I would certainly never recommend waiting until almost midnight on the day a petition is due in order to transmit a petition for numerous reasons. The electronic submission rule adopted by the Tax Court, however, disadvantages all petitioners who do not live on the East Coast. This rule is not required by the statute or at least not facially required. The Park case is not a good case to challenge this rule, but even if Hallmark correctly states the Tax Court’s jurisdiction regarding timeliness, the Tax Court’s electronic filing rule might not stand up to a challenge based on jurisdiction.

So, the Parks filed two minutes late. The Tax Court took seven months to bring this to the parties’ attention. If the time period is not jurisdictional, the Court does not have to police its docket filings down to the minute. It might still find the Parks lacked a good excuse for filing two minutes late and dismiss their case, but it would only do so if the IRS raised the issue. Is this the way we want the Tax Court to spend its time and the time of the parties?

Is this the way we want to treat taxpayers west of the Eastern Time Zone? The Tax Court wants to promote electronic filing. Kicking out a petitioner who may or may not have transmitted the document before 9:00 PM Pacific Time does not seem like a way to promote electronic filing of petitions. The Tax Court did not choose this rule because it is East Coast centric. It did so to avoid petitioners and practitioners on the East Coast playing games and getting extra time to file based on the time zones in the western United States that can be several hours after the deadline in the east. 

I don’t know if the Court has the IT capability to know the time zone from which a petition is submitted or if it would be comfortable requiring a statement from the petitioner regarding that time zone. A petitioner on the East Coast could get extra time by electronically transmitting the petition to a friend in Hawaii and having them go to the post office or an approved private delivery service and getting the petition date stamped before the end of the 90th day. 

Petitioners need to check to make sure their electronic transmission has appeared on the Court’s docket, but documents are not immediately posted there. It can, at times, take days before a document is posted. What if the Parks transmitted their petition on February 25, 2022, but something in the electronic transmission on their end, the Court’s end, or somewhere in between held up its receipt until March 1? Under the electronic filing rules, the Court would dismiss their case. 

Unlike the electronic filing of a tax return, where you generally get a ping back within a day, (and are given a grace period to perfect a rejected return and still have it treated as timely) it can take longer for a petition to appear as docketed, and the “ping back” that it has been accepted is the docket entry if it is accepted. This has similarities to the problems the IRS creates when it penalizes taxpayers who timely file electronic returns, but something goes wrong in the transmission and their preparer does not inform the taxpayer of the problem, potentially creating large penalties. 

The California Office of Tax Appeals Weighs in on Boyle and Electronically Filed Returns

Today’s guest blogger is Joseph Cole, LL.M.  He is an Associate Attorney at RJS Law in San Diego, California.  His practice includes federal and state tax controversy. Today’s post discusses a recent California case applying the Boyle doctrine to an electronically filed return.  Like many cases applying the Boyle doctrine, the California case denied relief to taxpayers who erroneously believed their accountants had timely e-filed their returns.  However, the California case demonstrates that there may be potential cracks in the wall of the Boyle doctrine as it applies to electronically filed returns.  Keith 

The Boyle Doctrine’s application to cases involving electronic filing of returns has been an issue of scholarly debate and litigation.  Some of the posts on this blog covering the Boyle doctrine and its application to electronically filed returns can be found here , here, and here.   The California Office of Tax Appeals (OTA) recently weighed in on the Boyle doctrine and its application to electronically filed returns in the recent Appeal of Fisher (2022-OTA-337P) decision.  While the OTA ultimately ruled against the appellant taxpayer, the decision’s approach may leave room for the Boyle doctrine to be contoured to meet the realities of the age of electronic filing.


The US Supreme court held in the 1985 US v. Boyle case that a taxpayer could not have its late filing or late payment penalties abated for reasonable cause because the taxpayer’s accountant failed to timely file tax returns or timely pay taxes for the taxpayer.  In other words, Boyle created a “bright line” rule that a taxpayer cannot delegate his or her duty to timely file and timely pay taxes to an accountant or professional tax preparer.  Under a broad reading of Boyle, a taxpayer is always liable for late payment and late filing penalties if their accountant or professional tax preparer fails to electronically file a return, regardless of how or why a taxpayer relied on their accountant or professional tax preparer to timely and properly file an electronic return.  Technical errors like software bugs, network connection issues, or any of the myriad of issues that can prevent the proper electronic filing of a tax return are irrelevant under a broad reading of Boyle

The broad reading of Boyle has come under attack in recent litigation.  Taxpayers have argued that Boyle was decided at a time when taxpayers mailed paper returns rather than electronically filed returns, so courts should not obtusely apply the Boyle holding to situations where taxpayers relied on their accountant to electronically file returns. The taxpayers argue a simple, bright line reading of Boyle made sense in a world where all that was generally required to timely meet tax obligations was to stick a tax return in a mailbox on or before April 15th (or March 15th, September 15th, or October 15th).  Taxpayers have argued in today’s world some nuance may be in order because filing a return in today’s world often involves the use of software and computers that are more complex than the hinge of a mailbox.   Taxpayers have also argued they exercised ordinary business care and prudence when they received assurances from their accountants and tax preparers that their accountants and tax preparers electronically filed returns.  The courts have generally not accepted these arguments, but they have not always categorically dismissed these arguments either. At times courts possibly left the door open for taxpayers to successfully distinguish Boyle as in Padda.

The Appeal of Fisher (2022-OTA-337P) involves a familiar fact pattern that many of us have come across.  The appellant taxpayers retained an accountant to file their 2016 tax returns.  The appellant taxpayers received confirmation from their accounting firm that the accounting firm electronically filed the appellant taxpayers’ returns before the deadline.  The accounting firm, however, did not receive any confirmation from the State that the 2016 return was either accepted or rejected by the State.  The software the accounting firm used would typically send a notice to the accounting firm indicating a return’s acceptance or rejection by the State.  The appellant taxpayers disputed their late filing penalties arguing they had reasonable cause for not timely filing their 2016 California State tax return. 

Like some other states, the California late filing penalty statute is substantially similar to IRC §6651.  Both the California statute and IRC §6651 use a “reasonable cause” standard in determining whether late penalties are applicable.  The Fisher opinion, as well as other California opinions regarding late filing and late payment penalties, cite Boyle and other federal precedents.  The Fisher opinion also uses the ordinary business care and prudence standard cited by the federal treasury regulations. (See Treas. Reg. §301.6651-1(c)(1)).

The Fisher Opinion took a few approaches in its ruling against the appellant taxpayers.  It first determined that the ordinary business care and prudence standard is not satisfied when taxpayers delegate the task of electronically filing a tax return to their accountant. According to Fisher, the ordinary business care and prudence standard also requires taxpayers to follow up with their accountant.  According to Fisher, the ordinary business care and prudence standard requires taxpayers to make sure returns are “successfully transmitted” and take “corrective action” if the returns are not successfully transmitted. 

The Fisher Opinion then cited recent federal court cases for the proposition that the advent of electronic filing did not create grounds to distinguish Boyle.  The Fisher Opinion reiterates the recent federal case law still takes the hard, “bright line” approach that Boyle non-delegation applies regardless of whether returns are mailed or electronically filed.  The Fisher opinion argues taxpayers still have the option mailing paper returns rather than using complex tax software.  It neglects to address how professional tax preparers are generally required to electronically file most returns.

The Fisher Opinion then finally addresses the argument the taxpayers made that electronically filing a return was analogous to mailing a paper return.  The Fisher Opinion dismissed this argument stating penalties are abated when a taxpayer mails a paper return only when the taxpayer produces the required proof of timely mailing like a certified mailing receipt.  In the Fisher case, the taxpayers had no proof of electronic filing because their accountant never received confirmation their tax return was transmitted to the State.

While the taxpayers in the Fisher Opinion did not prevail, the Fisher Opinion’s approach does potentially leave the door open for the case law to eventually accommodate taxpayers who reasonably rely on their accountants and professional tax preparers to electronically file returns.  Two aspects of the Fisher Opinion leave room for reasonable cause.  First, the OTA sides against the taxpayers because they did not adequately follow up with their accountants.  Under the Fisher decision approach, a taxpayer may be deemed to exercise ordinary business care and prudence if they get some assurance their accountant or tax preparer successfully transmitted to their return or take some other reasonably prudent follow-up measures with their accountant or professional tax preparer. 

Second, Fisher sides against the taxpayers because they did not have any proof of electronic filing.  A taxpayer who timely obtains some proof of timely electronic filing may be able to distinguish Fisher.  The taxpayer may be able to successfully argue not only did they exercise due diligence by obtaining a record of timely electronic filing from their accountant or professional tax preparer, but the unsuccessful electronic filing is more analogous to a mailed paper return because the taxpayer has a proof of filing comparable to a taxpayer that timely mailed a return and had proof of mailing. 

The OTA like other courts has used the Boyle doctrine to rule against taxpayers who mistakenly believed their accountants timely filed electronic returns.  However, the OTA is showing there are potential cracks in the wall of the Boyle doctrine and its application to electronically filed returns.  The Fisher decision suggests that Boyle can be contoured to allow a taxpayer to rely on their preparer provided there is appropriate follow up or diligence on the part of the taxpayer. 

How Did We Get Here? 2-D Barcoding and the Paper Return Backlog – A Missed Opportunity

In her February 17, 2022 testimony before the Senate Finance Committee, the National Taxpayer Advocate reported that as of February 5, 2022, the IRS had 23.5 million returns and correspondence in its inventory requiring manual processing.  This number includes 17.6 million original and amended individual and business returns, down from the 35.5 million tax returns frozen for manual review at the end of the 2021 filing season on May 17, 2021, but up from the 10.3 million returns unprocessed at the end of December 2021.

Needless to say, this is a big mess.  While not all of the return filing backlog could have been avoided, given the months the IRS mail processing was either fully shut down or impeded because of pandemic conditions, there was a solution that would have sped up the processing of returns significantly.  That solution is 2-D Barcoding or some variation thereof.

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This is not a new idea.  In fact, in the “most serious problem” discussion about e-filing in the 2004 National Taxpayer Advocate Annual Report to Congress (pages 89-109), I noted that 31% of individual returns were prepared on a computer and subsequently printed out and mailed.  The IRS calls these tax returns “V-coders” because they are coded with a “V” when the IRS processes them.  At the time, the IRS was struggling to achieve the e-filing mandate of 80% of all returns by 2007, established in the IRS Restructuring and Reform Act of 1998 and codified in IRC § 6011(f)(1) and (2).  By the 2004 filing season, only 61 million of the 128 million individual returns were e-filed, or 48%.

We proposed the IRS implement 2-D barcoding, by which computer-prepared returns would generate a horizontal and vertical code containing all information on the return upon printing.  Upon receiving the paper return, the IRS could scan the code, which would convert the information into digital form and allow the return to be treated the same as an e-filed return.  Although it would not eliminate the need for human beings to open returns, this approach eliminates the need for manual keystroking of data from the paper return and quality review of that keystroking; it also allows all data to be captured, rather than select fields, improving audit selection and other downstream compliance operations.

In a September 2004 memorandum responding to our inquiry about such implementation, the Director of Customer Account Services, Wage & Investment Operating Division responded that the IRS was not pursuing 2-D bar coding for individual returns because “promoting this method of paper filing would slow the growth of e-filing.”  (See footnote 72 on page 102 of the 2004 NTA Annual Report to Congress.)   Note that at the time IRS did have this technology and was using it to scan paper Form 1065 and Form 1120S Schedule K1s, as well as paper Form 941s.  And note that in 2004, at least 17 states were using 2-D barcoding for paper return filings.

In its formal response to the report’s preliminary recommendation that the IRS initiate processing of 2-D barcodes on paper returns, the IRS stated “… the IRS believes that offering taxpayers a paper alternative to e-file is counterproductive to Congressional e-file goals and sends taxpayers a mixed message as to what Service policy is with respect to e-file.”

In response to this myopic position, TAS responded:

While 2-D bar coded returns may not produce as many benefits as e-filed returns, the IRS must acknowledge that a certain population of taxpayers will always refuse to e-file for one reason or another. Even when the IRS meets the 80 percent goal, it will still need to make paper returns available to the 20 percent of taxpayers who continue to file in such manner. We disagree with the IRS’s point that offering this technology to individual taxpayers would send mixed signals. If taxpayers are properly informed about the benefits exclusive to e-file, it is doubtful that 2-D bar coding technology will attract current or prospective e-filers. However, such technology will still benefit those unpersuaded paper filers and the IRS by avoiding transcription errors and reducing processing costs.

2004 NTA Annual Report to Congress, P. 108, citations omitted.

I reiterated this recommendation in 2006 and 2008 testimony before the Senate Finance Committee and the House Ways and Means Oversight Subcommittee, respectively, and other hearings over the years, as well as in many subsequent Annual Reports, including the 2019 Purple Book, which compiles the NTA’s legislative recommendations.  The 2020, 2021, and 2022 Purple Books continue to reiterate this recommendation.

The idea gained traction despite the IRS opposition:  section 2104 of a bipartisan early version of the Taxpayer First Act actually included a mandate for 2-D bar coding.  The proposed mandate would have been effective for returns filed after December 31, 2019.  Ummm … let’s see: the pandemic arose after December 31, 2019.  So if that mandate had passed or been included in the Taxpayer First Act ultimately enacted, IRS would have the capability of scanning those millions of returns backlogged during the pandemic and get them into the e-filing system.

It now looks like the IRS may finally be coming around to this idea.  The 2022 Purple Book reports “[t]he IRS has indicated an interest in adding 2-D barcodes on all IRS forms and outgoing correspondence due to the industry-proven efficiencies associated with extracting machine-readable data from paper returns and correspondence.  It is exploring both 2-D barcode and OCR [optical character recognition] technology with the software industry as part of a pilot program.”

Now we come full circle.  On December 17, 2021, IRS Chief Counsel issued Program Manager Technical Advice (PMTA) 2022-02 regarding the IRS’s authority to mandate that tax-software developers embed a 2-D barcode in all tax returns.  The memo notes that the current IRS process of manually entering paper return information is “resource intensive and error prone.”   In a very cursory (one-paragraph!) analysis, Chief Counsel concluded the IRS cannot require tax software developers to embed barcodes on returns prepared on their software, because “Section 6011(e)(1), which provides the Treasury Department and the IRS authority to prescribe regulations to determine ‘which returns must be filed on magnetic media or in other machine-readable form,’ does not apply here, because the proposed mandate is not directed to taxpayers or other filers.”

One has to wonder what would have happened if, in 2004, IRS has embraced the idea of 2-D barcoding and sought Chief Counsel advice at that time.  Having the legal opinion that a mandate required legislation, would Congress have enacted such a mandate, given the significant taxpayer benefits and resource benefits of such a mandate and the minimal burden on software developers?  At the very least, would the mandate of the earlier version of the Taxpayer First Act have made it into the final version?

We’ll never know for sure, but one thing we do know is that had the IRS responded to our 2004 recommendation about 2-D barcoding in a positive fashion rather than one-size-fits-all approach it adopts so often, we would not be in the mess we are in now.  This sad history lesson demonstrates that resources is not always the reason for lack of progress.

TIGTA Audit Flags Inconsistency in IRS Treatment of E-filed Returns

A recent report from TIGTA highlights the IRS’s inconsistent treatment of millions of e-filed returns that have errors.  IRS e-file processes consider an e-filed tax return as “filed” when the IRS accepts the return for processing, not when the IRS originally receives the return. The TIGTA report reveals that IRS does not have the  “the ability to use the date an e-filed return was initially received as the return filing date.” This is a problem because under the commonly used Beard test the IRS routinely rejects legally sufficient returns, triggering delinquency penalties and uncertainty as to the statute of limitations on assessment, a topic that Keith discussed in Rejecting Returns that Meet Beard. That post covered Fowler v Comm’r, which held that a rejected an e-filed return the return still triggered the 3-year limitation period on assessment. The TIGTA report suggests that there are systemic issues stemming from the IRS practice of rejecting e-filed returns, issues that will likely require a legislative fix or a significant change to internal IRS practices.


Unlike submitting a return by snail email, when e-filing a return it generates the possibility of the IRS rejecting a return (so called validation problems). Even if an e-filed return is validated, as with paper returns sent via regular mail, the IRS may notice errors that trigger Error Resolution System (ERS) scrutiny. TIGTA notes that there were about 26 million ERS issues on 2019 individual returns, with over 24 million of those errors attributable to “when the tax liability, balance due amount or refund computed is incorrect, or when information on the return does not match the information on a supporting form or schedule.” Not surprisingly the numbers of these types of errors are much higher on paper returns, (appx 15.3 million to 8.9 million).

For some errors, the IRS process for ERS scrutiny generally involves a tax return examiner contacting a taxpayer to correct the error; if over 40 business days elapse without a response the return is often released for processing, though is still tagged with the error code that delayed the processing.

All of this background gets us to the problem that TIGTA flagged, namely inconsistent IRS processes on e-filed returns with errors:

Our review found that IRS processes do not consistently provide taxpayers the opportunity to self-correct errors on e-filed tax returns. For example, some e-filed returns with a missing form are rejected to provide the taxpayer the opportunity to self-correct the error (i.e., attach the missing form and resubmit the e-file return) while others are accepted and sent to the ERS for manual correction by an IRS tax examiner, which suspends the return and holds the refund until the error condition is resolved.

This inconsistency can leads to later problems, as the statutory filing date of a tax return is, as TIGTA notes, “the date the IRS receives a legally valid tax return from the taxpayer.” Yet despite the statutory filing date, which is key for issues like delinquency penalties and the start date for determining when the statute of limitations on assessment expires  “e-file processes do not consider a rejected e-file tax return to be “received” until the taxpayer resubmits the rejected return and the IRS accepts it for processing.”

This rejection can lead to problems, especially if someone is e-filing at or close to the filing deadline.  To be sure this problem is mitigated by the resubmission policy that IRS has adopted. Publication 1345 discusses that process, which allows for sending a snail mail return within 10 calendar days of an e-file rejection:

If the taxpayer chooses not to have the electronic portion of the return corrected and transmitted to the IRS, or if the IRS cannot accept the return for processing, the taxpayer must file a paper return. To timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing. Taxpayers should include an explanation in the paper return as to why they are filing the return after the due date.

As TIGTA suggests, the rejection of e-filed returns that satisfy the Beard test is common. If a taxpayer fails to correct the return (or corrects after the 10-day period) there is the likelihood that a return that would qualify as a return under Beard is not treated by the IRS as filed. IRS desire to maximize taxpayer self-correction of returns makes sense; it can reduce burden, speed up refunds, and avoid possible downstream costs. Yet it seems that millions of e-filed returns that IRS rejects are likely to constitute validly filed tax returns. When facing possible delinquency penalties or there are questions about the SOL on assessment it is important to consider whether the IRS previously rejected an attempted e-filed return.

Padda v Comm’r: Possible Opening in Defending Against Late Filing Penalty When Preparer Fails to E-file Timely

Courts have generally not excused taxpayers from late filing penalties when the taxpayer defense is that that the return preparer was responsible for the delinquency.  Decades ago the Supreme Court in Boyle held that reliance on a third party to file a return does not establish reasonable cause because “[i]t requires no special training or effort to ascertain a deadline and make sure that it is met.”  We have previously discussed how Boyle seems incongruent with e-filing. As I noted last year in Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases “the basic question is whether courts should reconsider the bright line Boyle rule when a taxpayer provides her tax information to her preparer and the preparer purports to e-file the return, but for some reason the IRS rejects the return and the taxpayer arguably has little reason to suspect that the return was not actually filed.”

So far taxpayers have not been successful in arguing that courts should distinguish BoylePadda v Commissioner is the latest case applying Boyle in these circumstances. Like other cases where the taxpayer’s late filing was due to a preparer’s mistake the court did not relieve the taxpayer from penalties. What is unusual though is that in rejecting the defense Padda implicitly acknowledges that differing circumstances might lead to a taxpayer win.


I will summarize the facts and discuss the slight opening the opinion suggests.

The opinion nicely summarizes what went wrong:

Padda and Kane’s 2012 federal individual income tax return was due October 15, 2013. On October 15, 2013, Padda and Kane signed IRS Form 8879, “IRS e-file Signature Authorization” to authorize Ehrenreich’s accounting firm to electronically file their 2012 Form 1040, “U.S. Individual Income Tax Return”. On October 15, 2013, Ehrenreich’s accounting firm was electronically filing several tax returns just before midnight. Ehrenreich’s accounting firm created an electronic version of Padda and Kane’s return on October 15, 2013, at 11:59 p.m. It transmitted the electronic version to the IRS on October 16, 2013, at 12 a.m. On October 16, 2013, the IRS rejected the return as a duplicate submission. Ehrenreich’s accounting firm electronically resent the return on October 25, 2013, and it was received and accepted by the IRS the same day.

Prior to trial, the IRS and spouses Padda and Kane stipulated that the return was filed on October 25, 2013. The IRS had proposed late filing penalties under Section 6651, which trigger a 5% penalty of the amount required to be shown on the return if the failure to file is under a month, as the case here. In arguing that they had exercised reasonable care and prudence, the taxpayers explained that “1) Ehrenreich’s accounting firm pressed a button only a few seconds late, (2) they relied on Ehrenreich’s accounting firm to timely file the return, and
(3) they themselves could not have pressed the button to timely file the return.”

In rejecting the defense, the Padda opinion cites to Boyle and other cases which provide that taxpayers cannot delegate their filing obligation other than in circumstances where the advice pertains to whether a return needs to be filed at all. 

What I find interesting is that the opinion could have just cited Boyle and stopped there. Instead, it suggested that a relationship with a preparer who had history with the taxpayer of submitting e-filed returns on time might have led to a different outcome:

Even if sometimes it might be reasonable for a taxpayer to rely on his or her accountant to timely file his or her returns (contrary to the caselaw), it was not reasonable in this particular case for Padda and Kane to rely on Ehrenreich’s firm to timely file their return. Padda and Kane have relied on Ehrenreich’s firm to file their returns every year since at least 2006. And every year since then, except for 2011, their return was filed late. Yet they have continued to use Ehrenreich’s firm to file their return year after year. Padda and Kane’s failure to ensure that Ehrenreich’s firm timely filed their 2012 return demonstrates a lack of ordinary business care, particularly in the light of the firm’s history of delinquent filings.

Given the the firm’s delinquent filing history, the opinion concluded that the taxpayers failed to establish that they had reasonable cause for the late filing.


We wait for perhaps better facts for a court to distinguish Boyle. The Boyle-blanket rule seems out of place in today’s world where there may be little way to monitor preparers who taxpayers should be able to expect can meet a deadline. Padda suggests, though does not explicitly embrace, that some reliance may be reasonable, but when there is a long past history of delinquency, even if the taxpayer was not in a position to monitor the particular filing, it will be difficult to find that the taxpayer has a winning reasonable cause defense.

Senate Investigation Concludes IRS Free File Program is Not Meeting Eligible Taxpayers’ Needs

Today we welcome first time guest blogger Evan Phoenix. Evan is an ABA Tax Section Christine Brunswick Public Service Fellow with Bet Tzedek in Los Angeles. In this post Evan describes a recent senate subcommittee memo on the IRS Free File program. The memo and this post are quite critical of the IRS’s oversight of the program and of certain program members. Needless to say, the Free File Alliance (FFA) and its members likely have a different take. Intuit, for example, points out that the memo “acknowledges Intuit’s voluntary investment in paid advertising of Free File, our email communication with customers beyond what is required, and reiterates findings by the previously published MITRE report and recommendations Intuit has supported, many of which are already enacted in the new MOU between FFA and IRS.” Christine

A recent memorandum by staff of the Senate’s Permanent Subcommittee on Investigations (“PSI Memo”) concludes that deficient IRS oversight of the Free File Program has resulted in the program struggling to meet its mission to provide free tax preparation and e-filing services to economically disadvantaged populations. 

The IRS Free File program has been discussed in previous posts here and here.

The PSI Memo highlights the fact that multiple independent entities have reviewed the Free File program since 2018 and provided clear recommendations for improvement with respect to observed issues. For example, the PSI memo notes that in 2018 the Internal Revenue Service Advisory Council (IRSAC) concluded that “the IRS’s deficient oversight and performance standards for the Free File program put vulnerable taxpayers at risk, and make it difficult to ensure that FFA members are upholding their obligation …”

The need to ameliorate deficiencies in the Free File Program has been exacerbated by the COVID pandemic as many private tax prep businesses and VITA sites have been closed during the tax filing season. Given the uncertainty of the situation, it is incumbent on the IRS to concentrate on protecting economically disadvantaged taxpayers by future-proofing the Free File Program to meet the needs of the vulnerable in our communities. Delays in filing taxes means delays in receiving desperately needed refunds—such as the refundable EITC, which is the largest anti-poverty initiative  in the country—for economically disadvantaged taxpayers fighting to survive the devastating effects of COVID-19. The EITC and the Child Tax Credit greatly reduce poverty for working families. These working family credits lifted an estimated 8.9 million people out of poverty in 2017, more than half of whom were children. However, “paid tax preparer fees are diminishing the EITC” with fees between 12% to 22%, and as high as 25% of the EITC.    

The PSI Memo covers five topics—a brief history of the Free File Program, a summary of IRS oversight of the program, a discussion of the importance of online search engines in taxpayers’ selection of tax preparation software, the IRS’s Free File Program marketing strategy, and recent IRS changes to strengthen the program. I will discuss these issues under three headings—(1) Brief History, (2) Recent Improvements to Free File Program, and (3) Future-Proofing Free File Program Benefits.  



Topic one of the PSI Memo discusses the Free File Program history. In 1998, Congress directed the IRS to work with the tax preparation industry to ensure at least 80% of all federal tax returns were electronically filed by 2007. In 2002, the IRS entered into the Free Online Electronic Tax Filing Agreement with several electronic tax prep companies that had banded together as the Free File Alliance (“FFA”).  Under this agreement, FFA members committed to offering free online tax prep and filing services, known as Free File. The IRS and FFA also agreed to coordinate for the marketing of these free offerings to “provide uniformity and maximize public awareness.” In 2005, the IRS and FFA also developed a Memorandum of Understanding (“MOU”) to identify the service standards for Free File members and the procedures for resolving disputes.  The most recent version of the MOU runs through October 31, 2021.

Pursuant to the FFA agreement, private-sector tax prep providers agree to provide tax prep and e-filing services to vulnerable taxpayers at no cost to the taxpayer or the government; in exchange, the government agrees to not compete with FFA members by refraining from offering free online tax prep or e-filing services. Since its inception in 2002, the IRS reports the Free File Program has produced “more than 53 million free returns e-filed and an estimated $1.6 billion in savings to taxpayers.” Despite each stakeholder’s vested interest in the success of the Free File Program, the PSI Memo highlights that the program has come under scrutiny repeatedly for falling short of its objectives. The PSI Memo finds that “[u]ntil recently, the IRS conducted little oversight of the Free File program.”

Topic two of the PSI Memo provides a summary of IRS oversight of the Free File Program in the last decade. The PSI Memo highlights the fact that “[t]hree different independent entities have reviewed the Free File program since 2018 and provided recommendations for improvement, but the program continues to struggle to serve eligible taxpayers.” The PSI Memo reports that TIGTA’s 2007 review of “the effectiveness of the Free File program […] found that the IRS could improve its efforts to evaluate, promote, and administer the Free File program.”


Next, I’ll discuss topic five and three of the PSI Memo together. Topic five is an analysis of recent changes the IRS has made to strengthen the Free File program, and topic three discusses the importance of online search engine results in helping taxpayers choose a tax preparation software.

Prior reports revealed that some FFA members had taken deliberate actions to reduce access to the Free File Program by using coding to prevent the program from being populated in organic online web searches, a practice known as de-indexing. This is particularly troublesome because, as the MITRE 2019 assessment report (“MITRE 2019 Report”) of the program revealed, “[m]ost taxpayers find their preferred tax preparation product through online searches using an online search engine.”

The PSI Memo found:

[f]or the first 15 years of the Free File program, the IRS declined to take a position on whether FFA companies should index Free File websites to appear in online search engines, nor did FFA companies seek guidance from the IRS on whether their indexing practices complied with the MOU. As a result, participating FFA companies took different approaches in deciding whether to code their Free File program.

MITRE found that five of the twelve FFA members engaged in non-indexing their Free File websites. Upon questioning by MITRE, “most [FFA] members” stated that they “believed” this practice complied with the MOU terms. The PSI Memo emphasizes that TIGTA agreed with the IRS that the MOU did not explicitly prohibit de-indexing, but stated “it was against the spirit of the Free File program.” Indeed, this practice seems inconsistent with the FFA’s clear mission of providing low-income taxpayers with tax prep services for free, and its agreement with the IRS to “provide uniformity and maximize public awareness.”

Following public reports exposing the FFA members for using coding in this way, in December 2019, the IRS and FFA members agreed to an addendum to the Free File MOU prohibiting any practice that would exclude Free File websites from organic searches and standardizes the naming of Free File offerings to “IRS Free File program delivered by (Member company name or product name).” The PSI memo notes that FFA executives said that they “discover more program violations than the IRS and believe [the FFA] is tougher on their members than the IRS [… and] added that members do “a lot of self-policing” and report violations by other members.”

Recent news of the departure of one of the FFA members has raised many questions. After being a 20-year member, H&R Block recently announced its withdrawal from the FFA. H&R Block was one of the FFA members that engaged in the de-coding practice aimed at steering taxpayers away from the Free File Program. H&R Block will continue to offer its own free-filing options on its website, but it will remove its return filing software from the IRS’s Free File website after the extended filing season ends on October 15, 2020. Nina Olson, executive director of the Center for Taxpayer Rights, told Tax Notes (subscription required) that the withdrawal “is a perfect storm of things—the cumulative effect of the negative articles, the TFA, the [IRS] nonfiler portal, etc.”  Perhaps H&R Block’s performance of MOU requirements or stated position regarding certain requirements foreshadowed its recent announcement to exit the program.  Specifically, the PSI Memo highlights H&R Block’s position regarding marketing, stating it does not believe it should be marketing the program “in any manner;” therefore, it does not engage in any efforts to market the Free File program. H&R Block sends one reminder email, as required by the MOU, to individuals who used the company’s Free File product the prior year. Whereas, Intuit sends six to eight reminder emails each year to previous Fee File users.  

Although H&R Block will withdraw from the FFA, it will continue to benefit from the collective bargaining benefits of the agreement with the remaining eleven members because the IRS will continue to honor its commitment to not compete against the FFA members. H&R Block will have all of the benefits and none of the oversight or accountability. What is to stop other members from following suit?

The MOU addendum is a great step in the right direction, however, as the PSI memo highlights, there is still much more that needs to be done to ensure the program meets the needs of taxpayers.


The PSI Memo notes that,

[d]espite these challenges, the Free File program continues to provide a valuable service for millions of Americans. To support Free File, the IRS should increase its oversight of FFA members and dedicate funding—including increased funding from Congress, if necessary—to market the Free File program. The IRS should ensure FFA members comply with new guidance that attempts to avoid similarities between Free File branding and branding for commercial tax preparation products that could confuse taxpayers.

These recommendations echo those made previously by TIGTA, MITRE, and the National Taxpayer Advocate.

Increase Member Oversight and Accountability

A February 2020 Treasury Inspector General For Tax Administration Report (TIGTA 2020 Report) concluded that complexity, confusion, and a lack of taxpayer awareness about the Free File program led to low levels of eligible taxpayer participation, and that this was partially due to the IRS’s insufficient oversight of the Free File Program. These findings are consistent with those in the NTA 2019 Annual Report to Congress (“2019 ARC”), presented in a section titled, “Substantial Free File Program Changes Are Necessary to Meet the Needs of Eligible Taxpayers.” 

Among other things, TIGTA recommended that IRS management update its testing review guide to ensure adherence to the MOU by FFA members. Increasing member oversight and accountability will help ensure consistency to the FFA mission that will benefit the program. The IRS partially agreed with this recommendation.

Dedicate Funds to Marketing

Topic four in the PSI Memo is a discussion of the IRS marketing strategy for the Free File program. The PSI Memo finds that “[a] lack of investment in marketing by the IRS likely led to a lack of consumer awareness that hampered participation in the Free File program.” The TIGTA 2020 Report explains that in addition to deterring effects of the confusion of the Free File Program, the lack of taxpayer awareness about the operation and requirements contributes to lack of participation by eligible taxpayers.  The TIGTA Report explains that insufficient actions have been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website.  “To participate in the Program, taxpayers must access the IRS.gov Free File web page and select a link on this web page directing them to a Free File Inc. member’s website. However, this provision is not in the […] MOU and most taxpayers are unaware of this requirement.” The PSI memo also highlights that the lack of taxpayer awareness is directly related to the fact that the IRS has no budget for marketing the Free File program, and Congress has not appropriated funds for it. 

TIGTA made several recommendations connected to marketing and taxpayer education. First, TIGTA recommended that the IRS “develop and implement a comprehensive outreach and advertising plan to inform eligible taxpayers about the Free File program and how to participate.” (Recommendation 1) The IRS agreed with this recommendation. Second, TIGTA recommended that the IRS.gov Free File page contain comprehensive eligibility criteria for each product. (Recommendation 2) The IRS agreed, but stated this was already the case. Importantly, TIGTA also recommended that the IRS inform taxpayers of their right to be free from cross-marketing or upselling of fee-based services on Free File program software. (Recommendation 7) This practice confuses taxpayers and gives the specious impression of IRS endorsement. The IRS agreed with this recommendation, and in response created a new webpage, Know Your Protections Under the IRS Free File Program. Whether taxpayers will find this information without additional marketing seems doubtful. We will hopefully see the new comprehensive outreach and advertising plan by the next filing season.


I personally have used Free File software, and I definitely saw how certain parts can be confusing. Thanks to my experience as a VITA volunteer and coordinator, I was able to work through it, but it is unlikely that most eligible taxpayers have VITA training and experience.

One example of a confusing surprise that confronts taxpayers is the fee for a state tax return. Free File allows eligible taxpayers to file their federal tax return for free, but there can be a fee ranging from $14.99 to $54.95 to prepare your state tax return for some taxpayers. When the payment request popped up for my state return, I backtracked to the first page to double check if there were any disclosures about payments associated with state tax returns or if I had unknowingly navigated away from the Free File program. The main page says “free state return options are available,” but nothing about payments. The payment is disclosed once you choose a product to use. The products generally break down into two groups—the first group says “No free state tax preparation in any states,” and the second group says “Free state return, for some states.” California is not on the list of states eligible for free state tax preparation.

However, I recommend checking the website of your state taxing authority for free state tax preparation software if your state is not eligible for free state tax preparation services. California, for example, provides CalFile to e-file your state tax return directly to the Franchise Tax Board for free. Realistically, I think most eligible taxpayers will eat the costs to avoid going through the daunting task of preparing their state tax return from scratch when the federal tax software can transfer the information over to the state if they pay.

Another point of confusion is the constant upselling gimmicks promising a better refund gives the impression that the Free File program may be inferior to the paid software, giving me cause to think that my refund could be higher if I paid for another product. Thankfully, I know better, but these gimmicks are likely to successfully steer vulnerable taxpayers with little or no understanding of tax preparation away from the beneficial Free File program that will save them a substantial sum of money.

Given the enormous potential of the Free File Program to meet its mission of best serving vulnerable taxpayers’ needs, one can only hope the IRS heeds the constructive criticism outlined in the PSI Memo, which echoes previously reported issues. The IRS has risen to the challenge of meeting taxpayers’ needs many times before, e.g., the implementation of IRS Settlement days and the commendable rapid mobilization and implementation of the EIP initiative in response to COVID-19. I’m confident the IRS can rise to the challenge of making the necessary improvements to the Free File Program to meet the needs of eligible taxpayers. The question is, when?

Claiming a Refund Without Signing the Return

In the refund case of Gregory v. United States, No. 1:19-cv-00386 (Ct. Cl. 2020) the Court of Federal Claims denies the refund claim of a couple because they did not sign the amended return.  The issue of signatures has become more important during the pandemic because of the difficulties of meeting in person.  For the Gregorys the issue probably involved distance because they were working the Australian outback.  Still, the case shows that an actual signature can be an important step in making a request to the IRS.

The outcome for the Gregorys may change for others in their situation in the future.  On August 17, 2020, in IR-2020-182, the IRS announced that ” [m]arking a major milestone in tax administration, the Internal Revenue Service announced today that taxpayers can now submit Form 1040-X electronically with commercial tax-filing software.”  Read on and find out what happened to the Gregorys when electronic filing of amended returns was unavailable.


The Gregorys are U.S. citizens but during the period at issue they worked as defense contractors at a facility near Alice Springs, Australia starting in 2015.  They timely filed their original 2015 return claiming a small refund.  The IRS sent them a notice of adjustment seeking to assess an additional liability.  I suspect the inquiry caused the Gregorys to ask around about their taxes.  This was their first year in Australia on this contract.  If it was their first year filing a non-resident return, they had many things to learn.  Over the course of the next couple of years they started learning them and they hired an accounting firm to review their return.  That firm determined that they had overpaid their taxes by more than $20,000 and prepared an amended return claiming the exclusion for foreign earned income and the exclusion for employer provided housing.  The amended return was signed by an employee of the preparer of the amended return and not by the Gregorys.

The IRS reviewed the amended return and allowed the refund claim but for $1,039 related to the housing exclusion.  They received a check and no doubt happily paid the preparer of their amended return for setting them on the right path in dealing with the special issues raised when working overseas.  For reasons that do not make economic sense to me, the Gregorys decided to file suit to recover the relatively small disallowed amount.  Instead of filing in district court, they filed in the Court of Federal Claims, an alternate forum for refund suits.

The IRS moved to dismiss the case arguing that the Gregorys did not sign the refund claim making the claim invalid.  The Gregorys countered that the IRS accepted the refund claim and paid them a refund of most of the amount claimed and should not, after doing so, raise the issue of valid signature.

The Court of Federal Claims went through the test of what a taxpayer must do in order to file a valid claim and obtain jurisdiction in a refund suit.  First, a taxpayer must meet the Flora full payment rule.  Second, a taxpayer must file a claim.  Third, the taxpayer must provide “the amount, date, and place of each payment to be refunded, as well as a copy of the refund claim when filing suit in the Court of Federal Claims.”  The Gregorys problem stems from the second requirement – a valid claim.

The court then walked through what makes a valid claim stating, inter alia, that it “must be verified by a written declaration that it is made under the penalties of perjury.”  The court explained why having it signed under penalties of perjury is important.  It also referred to the possibility of having the return signed by someone holding a power of attorney if the POA is attached to the return.  Here, it was not.

Then the court addressed the waiver doctrine raised by the taxpayers in their defense.  The court acknowledged that the IRS can waive compliance with its own regulatory requirements but cannot waive compliance with statutory requirements.  IRC 6061 requires “any return, statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary.”  IRC 6065 provides “[e]xcept as otherwise prescribed by the Secretary, any return, declaration, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall contain or be verified by a written declaration that is made under the penalties of perjury.”  Regulation 301.6402-2(c) allows for someone other than the taxpayer to sign under penalties of perjury only if a POA form accompanies the return.

The IRS argued that in partially allowing the refund claim it waived the regulation requiring the attachment of the POA but that to the extent it did not agree with the claim, it did not, and could not waive the signature requirement in litigation by allowing a part of the claim.  It pointed out the taxpayers’ argument could allow individuals to avoid the penalties of perjury requirement altogether.  The court agreed and dismissed the case.

Signature issues are becoming more and more important.  Electronic signatures are becoming more prevalent.  We now allow remote notarization in many states.  Individuals in many assisted living facilities that have locked down have no practical means of physically signing documents and often do not have computer capabilities.  Getting signatures or some type of verification on documents that allows the government or the interested party to know the validity of the approval while at the same time addressing the practical difficulties created by the pandemic, requires careful attention.

While the IRS allows individuals to file tax returns electronically, it has not historically allowed the filing of amended returns electronically requiring individuals like the Gregorys who live thousands of miles from their preparer to make arrangements to meet the signature requirements.  I don’t fault the IRS for wanting documents signed under penalties of perjury and requiring proof that the person submitting the claim is really the taxpayer.  Electronic signature tools exist.  New rules are coming out. 

The IRS issued a memo on March 27, 2020 that provides a temporary deviation from IRM signature procedures. The memo allows IRS employees on the collection side to accept images of signatures and e-signatures on a number of documents, including SOL assessment/collection extensions, closing statements, POAs, and generally any document collected “outside of standard filing procedures.”  The Tax Court issued a press release on August 6, 2020 which announces that electronically-filed stipulations with digital signatures will be accepted by the Court.  In Massachusetts, the Supreme Judicial Court issued a rule that authorizes e-signatures for all documents filed with Mass. courts. Numerous federal district courts have issued new rules accepting e-signatures, which can be found on this page.

Maybe next time the Gregorys can move forward in a case like this with the friendlier e-file rules, which could allow them to work with their accountant from thousands of miles away and still file a valid amended return.  I remain curious about their decision to sue for such a small amount and wonder about the decision dynamic that led to this case in a refund posture.