Following what sources say were contentious negotiations, the IRS announced on October 25 an agreement with a consortium of software companies over the rights to the Service's free online tax return preparation program.

Under the terms of the agreement on the IRS's Free File program, the group of companies, known as the Free File Alliance (FFA), will guarantee free online tax preparation to taxpayers with adjusted gross incomes under $50,000. The services will be available to 70 percent of taxpayers, or roughly 93 million, during the 2006 filing season. The four-year deal also allows some alliance members to market refund anticipation loans (RALs) -- under some restrictions -- through the program.

The IRS called the agreement "an innovative public-private arrangement" that "will mean enhanced services to taxpayers, improved disclosure regarding refund anticipation loans and greater assurances of privacy protection."

The announcement comes on the heels of the addition last week of a provision to the 2006 Senate Treasury funding bill intended to bar the IRS from creating its own tax preparation software. The measure was originally introduced by Sen. John Ensign, R-Nev., who heads the Republican High Tech Task Force and has strong ties to the technology and computer industries. Some observers speculated that the measure would seriously weaken the IRS's bargaining position.

The amendment's inclusion strained negotiations between the IRS and the alliance during the past weeks, sources told Tax Analysts. Sources said the IRS initially walked away from the negotiating table once the Senate passed the provision but later resumed talks. According to sources, the IRS also demanded that FFA representatives sign a letter to Congress repudiating the measure and "discipline" companies that lobbied for the provision.

Bert DuMars, IRS Electronic Tax Administration director, acknowledged that the negotiations were heated at times, but denied that the IRS had ever walked out on them. DuMars declined to elaborate on the specifics of the negotiations, saying they were irrelevant.

"There were tense moments, but there are always tense moments in negotiations. The key thing was that at the end of the day we came to an agreement," DuMars said. He added that the plan that was agreed to had been on the table well before the Ensign amendment was added to the Treasury bill.

IRS, Industry Reach Agreement on Free File