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Legislation Changes Virginia's Online Tax Preparation Program

Virginia replaces free online tax filing system with public-private solution that charges fees to 'high-income' residents.

Virginia will replace its free online tax filing service with one that charges a fee to citizens with higher incomes -- a move that some lawmakers say is the result of heavy lobbying.

Gov. Bob McDonnell signed the Virginia Free File Act (HB 1349) Sunday, April 11, which eliminates the state's free iFile system in favor of the Virginia Free File program -- a program modeled after a federal partnership between the IRS and the Free File Alliance, a consortium representing for-profit tax software providers including Intuit, H&R Block, and The bill goes into effect next tax season and makes Virginia the 21st state to adopt the Free File Alliance program.

About 90,000 Virginians who use the iFile system won't be eligible for the Free File program next year, according to a state report on the new system's fiscal impact, said Virginia Taxation Department spokeswoman Ginny Slaughter. Last year, 278,271 Virginians used the iFile program, she said, and 217,000 have used it so far this year. That figure is expected to rise to roughly 300,000, as the state tax deadline is May 3.

The iFile program cost the state less than $50,000 to maintain annually, Slaughter said, and the cost to implement and maintain the new program is unclear. "We have not had an opportunity to analyze this yet," Slaughter wrote in an e-mail. "There may be a small initial cost to implement the program, but we do not anticipate any ongoing costs."

The Software and Information Industry Association (SIAA) -- a trade association for the software and digital content industries -- applauded the state's efforts. "Replacing costly government tax department systems with state-of-the-art private-sector products and services at no cost to either the public treasury or the taxpayer is good government," SIAA President Ken Wasch said in a prepared statement. "Unlike traditional government contracts, such as the previous Virginia 'iFile' program, participating Free File companies are not paid to provide their tax services."

The maximum income threshold under the Free File program -- which is modeled after the federal Free File program and adjusts annually for inflation -- is $57,000 for the 2009 tax season. Taxpayers who don't meet income eligibility requirements and still want to file electronically will pay a fee set by the individual vendor, Slaughter said.

State Sen. R. Creigh Deeds, a Democrat who opposed the bill, said the fees could range from $10 to $37 for those who don't qualify for the free service. "It seems to me this is a way to 'deincentivize' electronic filing," he said, adding those who don't qualify for the free program might opt to file their state tax returns the traditional way -- on paper and by mail -- which will end up costing the state more to process.

Although those affected don't amount to a large number of Virginians, the iFile program is efficient and not a costly burden to the state, Deeds said. "(The bill) turns it over to the private sector," he said. At first blush, the Free File program seems to help make the state more efficient, he said, but one doesn't have to dig deep to realize the iFile system works and the new system will cost the state more if people are discouraged from e-filing due to the fee.

"The idea behind electronic filing is it's more efficient and if you can't do it electronically, you're going to have to do it the old-fashioned way," Deeds said. "People are going to have to process it, but you're going to have a few private-sector companies that are going to make a bunch of money."

Tax software companies have criticized free state-run tax filing services like Virginia's iFile and California's ReadyReturn as unfair competition with their commercial tax-preparation products. News of the switch in Virginia came from the Richmond Times-Dispatch which published a detailed article on the subject Wednesday, April 14, highlighting various donations from tax preparation companies to state lawmakers, the governor's campaign and political action committees.

Messages seeking comment from the governor's office weren't returned by deadline.


Karen is a former staff writer for Government Technology magazine.
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