In a case of unchecked government outsourcing, the law firms Feldman Shepherd Wohlgelernter Tanner & Weinstock and Cooley & Handy, this week filed a class action suit against a group of income tax software companies that are part of a cartel known as the Free File Alliance LLC. The suit, brought by Philadelphia resident Stacie Byers, alleges that cartel members including H&R Block and Intuit unlawfully charged millions of U.S. taxpayers excessive e-filing fees. Damages are estimated in the billions of dollars.
"This amounts to a tax on e-filing tax returns. Hardworking taxpayers deserve better," said Feldman Shepherd partner Thomas More Marrone. "This is government outsourcing at its worst."
The complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, asserts that the IRS contracted with the cartel to collect e-filed federal tax returns on its behalf. As agents of the IRS, federal law required cartel members to set "fair and uniform" fees for e-filing. But cartel members set their fees based solely on profit, the complaint states.
"The private tax software companies have used the 'Free File' arrangement to push commercial products they sell, and until recently tried to get taxpayers to buy high-rate refund anticipation loans," said Alan M. Feldman, Managing Partner of Feldman Shepherd.
"The name 'Free File Alliance' is clearly misleading," Marrone said. "E- filing has become an enormous profit center for cartel members."
The class action seeks a full refund of all fees paid for e-filing, as well as injunctive relief. Defendants include all members of the cartel which charged fees to electronically file federal tax returns. Cooley & Handy partner Kevin Handy said, "The U.S. should join other civilized nations in allowing its citizens to e-file tax returns for free. The truth is it costs the government less to process an e-filed return than a paper one."
Under the terms of the Free File Alliance, the software makers provide free e-filing for low- and moderate-income taxpayers, defined as taxpayers who earn less than $52,000.
The goal is to have the free service reach 70 percent of taxpayers, or about 95 million people. However, use of the program is voluntary and only 5.1 million people took part in the free filing program in 2006, according to the alliance Web site, even though the IRS reports that more than 54 percent of all taxpayers filed returns electronically in 2006.