A major debate is brewing within the tax industry that may result in Congress mandating that the Internal Revenue Service (IRS) offer its own free-filing service.

IRS Commissioner Mark Everson said last week that poor quality of tax return preparation by private companies, along with “predatory” refund anticipation loans, is feeding the debate over whether the IRS should allow taxpayers to file their federal income tax returns online without assistance from a tax preparer, Government Executive reported.

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The IRS already allows free electronic tax filing, but since last tax season access was open only to taxpayers with adjusted gross incomes of $50,000 or less. The service is provided by the Free File Alliance, a tax software consortium.

A Nov. 2 letter to Everson from Sens. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, and Max Baucus, D-Mont., the committee's ranking member, stated that the IRS needs to improve oversight of the Free File program and encourage alliance members to provide services to taxpayers that are truly free.

"If the tax preparation industry cannot provide free basic filing services without hidden costs and traps, perhaps it is time to consider having the IRS provide a direct filing portal to enable all taxpayers to file electronically without cost," the senators stated, according to Government Executive.

The Senate Finance Committee noted that the stricter income limits eliminated 39 million taxpayers from program eligibility. The Treasury Inspector General for Tax Administration (TIGTA) said in a report that the change caused a 23 percent drop in Free File participation between 2005 and 2006, Government Computer News reported.

Many taxpayers who are not eligible for the Free File program prepare their own returns electronically but print and mail them, TIGTA said. In 2005, the IRS found that 72.5 percent of those who filed paper returns prepared them on a computer. If those taxpayers filed their returns electronically, the IRS would save about $106.7 million in processing, TIGTA said.

However, critics question whether the IRS should play such a role in tax filing because it would take business away from private tax preparers, Federal Computer Week reported. National Taxpayer Advocate Nina Olson, in congressional testimony early this year, called that concern “nonsense.” She said, “Since the inception of the tax system, there have always been two categories of taxpayers – those who are comfortable enough with the rules to self-prepare their returns and those who turn to paid professionals for assistance.”

The IRS is to respond to the committee about how it will improve free filing in the next filing season by Nov. 17. Meanwhile, the Government Accountability Office (GAO) also will examine the costs and obstacles for the IRS to develop its own free Web portal.