Lawsuit Alleges Government Outsourcing to Tax Software and e-Filing Companies
Wrongfully Privatized Tax Return E-Filing – Charged Billions in Unlawful Fees

PHILADELPHIA (Nov. 14, 2007) – In a case of unchecked government outsourcing, the law firm of Feldman Shepherd Wohlgelernter Tanner Weinstock & Dodig, together with the law firm 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 such as H&R Block and Intuit Inc. 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 than this,” said Feldman Shepherd partner Thomas More Marrone. “This is government outsourcing at its worst.”

In a complaint filed in the U.S. District Court for the Eastern District of Pennsylvania, Byers and the proposed plaintiff class assert that the Internal Revenue Service (IRS) contracted with the Free File Alliance to collect e-filed federal tax returns on its behalf. The agreement the IRS made with the cartel was supposed to provide free e-filing of tax returns to 70% of Americans. In fact, only 3.8 million taxpayers filed their returns for free in 2006. In 2007, only families with adjusted gross income of less than $52,000 qualified for free filing.

As agents of the IRS, federal law required cartel members to set “fair and uniform” fees for this e-filing. But cartel members instead set their fees based solely on profit, the complaint states.

Compounding the matter, the IRS has provided substantial incentives for e-filing including faster processing, more rapid refunds, and reduced chances of being audited. But there is no way for taxpayers or tax preparers who file electronically to file directly with the government. Instead, electronic filing must be done through cartel members. As a result, the vast majority of taxpayers pay for the "privilege" of e-filing. “The private tax software companies have used the ‘Free File’ arrangement with the IRS 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 so-called “Free File” program was promoted as a way to encourage lower-income taxpayers to electronically file their tax returns without charge. It hasn’t worked out that way: only about 4 million persons, or less than 5% of e-filed returns, actually filed for free under the Free File Alliance’s criteria. But the hidden agenda – diverting to private companies like Intuit and H & R Block the exclusive right to collect fees from 75 million other taxpayers who e-file their returns – has been a smashing success for the tax software industry, earning them hundreds of millions of dollars.

According to Feldman, “Federal law does not permit charges for government services that are not reasonably related to the actual cost of providing the service. We think the e-filing of federal tax returns is an intrinsic government service, and it’s just wrong to allow anyone, let alone private commercial interests, to charge whatever the market will bear for what the IRS should be providing for free.”

Byers, with proposed class members, is seeking a full refund of all fees paid for electronic filing as well as injunctive relief. The lawsuit names as defendants all members of the cartel which charged Byers or members of the proposed class - including tax preparation professionals - to electronically file federal tax returns. These defendants control the vast majority of the market share in terms of tax return preparation software, Internet-based tax return preparation services and e-filing services. 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.”