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entitled 'Tax Administration: Many Taxpayers Rely on Tax Software and 
IRS Needs to Assess Associated Risks' which was released on April 2, 
2009. 

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Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

February 2009: 

Tax Administration: 

Many Taxpayers Rely on Tax Software and IRS Needs to Assess Associated 
Risks: 

GAO-09-297: 

GAO Highlights: 

Highlights of GAO-09-297, a report to the Committee on Finance, U.S. 
Senate. 

Why GAO Did This Study: 

Individual taxpayers used commercial tax software to prepare over 39 
million tax returns in 2007, making it critical to the tax 
administration system. The majority were then filed electronically, 
resulting in fewer errors and reduced processing costs compared to 
paper returns. 

GAO was asked to assess what is known about how pricing of tax software 
influences electronic filing, the extent to which the Internal Revenue 
Service (IRS) provides oversight of the software industry, and the 
risks to tax administration from using tax software. To do so, GAO 
analyzed software prices, met with IRS and software company officials, 
examined IRS policies, and reviewed what is known about the accuracy, 
security, and reliability of tax software. 

What GAO Found: 

IRS has little information about how the pricing of tax software 
affects taxpayers’ willingness to file tax returns electronically. In 
2009, the two largest tax software companies eliminated separate fees 
to file federal tax returns electronically when using software 
purchased from retail locations or downloaded from a Web site. As a 
result, IRS has an opportunity to study whether this and other changes 
are effective in increasing electronic filing. Additionally, IRS would 
benefit from being able to identify which software package the taxpayer 
used to better target research and efforts to increase software use and 
electronic filing. 

IRS provides some oversight of the tax software industry but does not 
fully monitor compliance with established security and privacy 
standards. Further, IRS has not developed a plan to monitor compliance 
with new standards, which are optional in 2009 but may be mandatory in 
2010. Without appropriate monitoring, IRS has limited assurance that 
the standards are being implemented or complied with. 

IRS has not conducted an assessment to determine whether taxpayers’ use 
of tax software poses any risks to tax administration. Risks include 
that IRS may be missing opportunities to systemically identify areas to 
improve software guidance and enhance information security. IRS 
officials said the likely benefits of an assessment would not warrant 
the costs but have not determined either the benefits or costs of such 
an assessment. Moreover, IRS has also said that it is in the agency’s 
best interest to ensure that taxpayers can rely on commercial software 
to make electronic filing accurate, easy, and efficient. Further, if 
even small improvements in the accuracy of tax returns could be made by 
clarifying the guidance in tax software, the effect on revenue could be 
substantial. Without a risk assessment, IRS does not know whether its 
existing oversight of the tax software industry is sufficient or needs 
to be expanded. 

Figure: Preparation and Filing Methods of Individual Income Tax Returns 
Filed, 2007: 

[Refer to PDF for image: illustration] 

Preparation method: Paid preparers using professional software prepared 
77.7 returns electronically; 
Filing method, electronically: 55.2 million; 
Filing method, paper returns filed by mail: 22.5 million. 

Preparation method: Individual taxpayers using commercial software 
prepared 39.5 million returns electronically; 
Filing method, electronically: 26.3 million; 
Filing method, paper returns filed by mail: 13.2 million. 

Preparation method: Individual taxpayers or their paid preparers 
manually prepared 21.2 million returns on paper; 
Filing method, electronically: 0; 
Filing method, paper returns filed by mail: 21.2 million. 

Total returns filed electronically: 81.5 million; 
Total paper returns filed by mail: 56.9 million. 

Source: GAO analysis of IRS data. 

[End of figure] 

What GAO Recommends: 

GAO’s recommendations include that IRS require a software package 
identifier, ensure taxpayer surveys ask specifically about the effects 
of 2009 price changes, implement a plan to monitor compliance with 
recommended security standards in 2010, and determine whether using tax 
software creates any security or compliance risks. 

In response, the IRS Deputy Commissioner agreed with all of GAO’s 
recommendations and outlined the actions that IRS would take. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/products/GAO-09-297]. For more 
information, contact James White, (202) 512-9110, whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

IRS Has Little Information about How Tax Software Pricing Strategies 
Affect Taxpayers' Willingness to Use Software and File Electronically: 

IRS Oversight of the Tax Software Industry Is Not Comprehensive or 
Systematic: 

IRS Has Not Assessed the Risks to Tax Administration of the Use of 
Commercial Tax Software by Individuals: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: Tax Software Markets and 2008 and 2009 Pricing of Tax 
Software for Return Preparation and Electronic Filing: 

Appendix III: Advantages and Disadvantages of Alternative Tax 
Preparation and Filing Methods: 

Appendix IV: Laws Applicable to Tax Service Companies: 

Appendix V: Tax Software Industry Groups and Advisory Councils: 

Appendix VI: Proposed Security and Privacy Requirements: 

Appendix VII: Comments from the Department of Treasury: 

Appendix VIII: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Comparison of 2008 and 2009 Prices of Top Three Retail/ 
Downloadable Tax Software Packages for Return Preparation and Filing: 

Table 2: Comparison of 2008 and 2009 Prices of Top Three Online Tax 
Software Packages for Return Preparation and Electronic Filing: 

Table 3: Advantages and Disadvantages of Alternative Tax Preparation 
and Filing Methods: 

Table 4: Federal Laws Protecting Taxpayer Information: 

Table 5: Descriptions of Industry Groups and Advisory Councils: 

Table 6: Proposed Security and Privacy Requirements for Authorized 
Electronic Filing Transmitters: 

Figure: 

Figure 1: Preparation and Filing Methods of Individual Income Tax 
Returns Filed, 2007: 

Abbreviations: 

ADP: Automatic Data Processing: 

CAPTCHA: Completely Automated Public Turing Test To Tell Computers and 
Humans Apart: 

CCH: Commerce Clearinghouse: 

CERCA: Council for Electronic Revenue Communication Advancement: 

CRA: Canadian Revenue Agency: 

EITC: Earned Income Tax Credit: 

ERO: Electronic Return Originator: 

ETA: Electronic Tax Administration: 

ETAAC: Electronic Tax Administration and Advisory Committee: 

FFA: Free File Alliance, LLC: 

FTA: Federation of Tax Administrators: 

FTC: Federal Trade Commission: 

GAO: Government Accountability Office: 

GLB: Gramm-Leach-Bliley Act: 

ISP: Intermediate Service Providers: 

IRC: Internal Revenue Code: 

IRS: Internal Revenue Service: 

MOU: Memorandum of Understanding: 

NACTP: National Association of Computerized Tax Processors: 

NAM: National Account Manager: 

NTA: National Taxpayer Advocate: 

OMB: Office of Management and Budget: 

PATS: Participants Acceptance Testing System: 

PCI: Payment Card Industry: 

SEC: Securities and Exchange Commission: 

SSL: Secure Socket Layer: 

TIGTA: Treasury Inspector General for Tax Administration: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

February 25, 2009: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

In 2007, over 39 million income tax returns were prepared by 
individuals using commercial tax software such as TurboTax, TaxCut, or 
TaxAct, and more than 66 percent of those returns were then filed 
electronically. This volume makes commercial tax preparation software a 
critical part of the tax administration system. 

Both taxpayers and the Internal Revenue Service (IRS) benefit from 
commercial tax software. Taxpayers use tax software as an alternative 
to hiring a paid preparer or manually preparing tax returns on their 
own. Taxpayers rely on tax software to answer tax law questions, 
prepare tax returns that are accurate, and, in many cases, file those 
returns electronically. Taxpayers also expect tax software to ensure 
the security and privacy of their tax information. Tax software that 
does not help taxpayers prepare accurate returns or that cannot be 
trusted to file electronically in a secure and timely manner could 
contribute to taxpayer noncompliance, the need for costly IRS 
enforcement actions, and taxpayers reverting to error-prone paper 
filing. It is in IRS's best interest to ensure that taxpayers can rely 
on commercial software to make electronic filing easy and efficient. 

In recent reports, we have assessed the quality of services provided by 
paid tax return preparers because of the important role they play in 
the tax administration system and recommended that IRS do more to 
monitor the accuracy of returns prepared by paid preparers.[Footnote 1] 
However, less is known about the quality of tax software, why some 
taxpayers decide to use it, and its impact on electronic filing. 
Because of this lack of information, and your interest in making tax 
administration more effective, you asked us to study the use and 
quality of individual tax software. 

As requested, our objectives were to assess (1) what is known about how 
pricing strategies affect the use of tax software and electronic 
filing; (2) the extent to which IRS provides oversight of the tax 
software industry to help ensure tax returns are accurate, taxpayer 
information is secure, and electronic filing systems are reliable; and 
(3) what is known about the risks of the reliance on commercial tax 
software used by individuals. 

To meet our objectives, we: 

* analyzed prices for the top three tax software companies for both 
online and retail/downloaded products for filing seasons 2008 and 2009 
and reviewed studies examining the effects of varying pricing 
structures;[Footnote 2] 

* obtained and analyzed internal revenue manuals, industry standards, 
and government guidance and compared them to IRS's current procedures; 

* determined IRS's legal authority to regulate the accuracy and 
security of commercial tax software; 

* obtained and analyzed IRS security testing reports, certifications, 
new security requirements, and data on unauthorized disclosures of 
taxpayer information; 

* reviewed Office of Management and Budget (OMB), GAO, and industry 
best practices for assessing risks; 

* documented the availability of IRS risk assessments and of IRS and 
selected tax software companies' contingency plans and lessons learned 
documentation; 

* reviewed results from a limited number of others' tests of how 
accurately and consistently tax software applied tax laws; and: 

* reviewed the effects of electronic filing disruptions in the United 
States, Canada, and Great Britain.[Footnote 3] 

Additionally, for all objectives, we reviewed pertinent reports and 
interviewed officials from IRS, the Treasury Inspector General for Tax 
Administration (TIGTA), the Electronic Tax Administration and Advisory 
Committee, and the IRS Oversight Board. We also interviewed officials 
from industry advisory councils and select tax software companies, and 
visited a major tax software company's data center. Our review focused 
on tax software designed for individuals who prepare their own returns, 
not software used by paid preparers, certified public accountants, 
attorneys, or other tax preparers.[Footnote 4] 

We conducted this performance audit from April 2008 through February 
2009 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. See 
appendix I for more details on our scope and methodology. 

Background: 

While a large number of tax software companies offer return preparation 
and electronic filing services, three companies provide the tax 
software used by the majority of individuals who prepare and file their 
returns electronically (see app. II).[Footnote 5] One company's 
product--Intuit's TurboTax--represented over half of the returns filed 
electronically by individual taxpayers. These and other tax software 
companies generally offer several versions of retail, online, and 
downloadable software packages that taxpayers can use to prepare 
federal and state tax returns.[Footnote 6] They generally charge less 
for versions that are designed to handle simple tax returns and charge 
more for versions that can prepare more complicated returns such as 
those dealing with business expenses. In 2008, the three companies also 
employed two basic pricing strategies. One strategy was to charge 
separate, incremental fees for federal return preparation, state return 
preparation, and electronic filing. For example, in 2008, one company 
charged about $40 for federal return preparation, with incremental fees 
of about $20 for electronic filing. The other pricing strategy used was 
to bundle several services together--typically return preparation and 
electronic filing--and charge one price for the bundle. 

Tax software is one of the three major methods that taxpayers use to 
prepare their returns. As figure 1 illustrates, over 39 million (or 28 
percent) of the approximately 138 million individual income tax returns 
filed in 2007 were prepared by individuals using tax software. Over 77 
million individuals used a paid preparer to prepare returns 
electronically in 2007, and 71 percent of those returns were also 
submitted electronically to IRS. The remaining 21 million returns were 
manually prepared by individuals or their paid preparers. After 
preparation, taxpayers can either electronically file their return or 
mail a paper copy to IRS. Figure 1 shows that millions of taxpayers who 
had a return prepared electronically (either by using tax software or a 
paid preparer) filed paper copies. Such returns are called "v-coded" 
because IRS codes such returns with a "v" to process and track them 
separately from other paper-filed returns. 

Figure 1: Preparation and Filing Methods of Individual Income Tax 
Returns Filed, 2007: 

[Refer to PDF for image: illustration] 

Preparation method: Paid preparers using professional software prepared 
77.7 returns electronically; 
Filing method, electronically: 55.2 million; 
Filing method, paper returns filed by mail: 22.5 million. 

Preparation method: Individual taxpayers using commercial software 
prepared 39.5 million returns electronically[A]; 
Filing method, electronically: 26.3 million; 
Filing method, paper returns filed by mail: 13.2 million. 

Preparation method: Individual taxpayers or their paid preparers 
manually prepared 21.2 million returns on paper; 
Filing method, electronically: 0; 
Filing method, paper returns filed by mail: 21.2 million. 

Total returns filed electronically: 81.5 million; 
Total paper returns filed by mail: 56.9 million. 

Source: GAO analysis of IRS data. 

Note: Sums may not add due to rounding. These are the most current, 
complete data available from IRS. 

[A] This figure includes about 4 million returns filed through the Free 
File Alliance. 

[End of figure] 

Many of the companies that sell tax software also have partnered with 
IRS to provide free electronic preparation and filing to eligible 
taxpayers. Those taxpayers have the option of filing their returns for 
free using products from the Free File Alliance, LLC (FFA)--a 
consortium of tax preparation companies that provides online electronic 
preparation and filing to eligible taxpayers at no charge.[Footnote 7] 
Figure 1 includes the approximately 4 million FFA returns filed in 2007 
by individuals using commercial software. 

To help improve paper processing, about half of the state revenue 
agencies use a bar coding technology to convert data on paper returns 
to electronic data. Bar coding is less expensive and more accurate than 
processing paper returns because it eliminates manual transcription but 
is still more expensive and less efficient than electronic filing. 
[Footnote 8] IRS does not use this technology for processing 
individuals tax returns. 

Returns filed electronically have significant advantages for IRS and 
taxpayers compared to paper-filed returns as discussed below and 
further detailed in appendix III. 

* IRS estimates that processing an electronically filed return costs 
the agency $0.35 per return while processing a paper return costs $2.87 
per return.[Footnote 9] Using IRS's current cost estimates based on 
fiscal year 2005 return data, we estimate IRS would have saved 
approximately $143 million if the 56.9 million paper returns in 2007 
had been filed electronically. 

* Electronically filed returns also have higher accuracy rates than 
paper-filed returns because tax software eliminates transcription and 
other errors. 

* IRS processes electronically filed returns in less than half the time 
it takes to process paper returns, facilitating faster refunds. 
[Footnote 10] 

* We have previously reported that electronically filed returns have 
the potential to improve IRS's enforcement programs.[Footnote 11] IRS 
does not use all tax return information in its automated compliance 
checking programs because IRS policy is to post the same information 
from electronic and paper returns, and the cost of transcription 
prevents IRS from transcribing paper returns in full. IRS officials 
previously estimated in 2007 that having all tax return information 
available electronically would result in a $175 million increase in tax 
revenue annually from at least one of its compliance programs.[Footnote 
12] 

IRS recently issued the results of the first phase of its Advancing E- 
file study, which examines tax filing behavior and characteristics and 
contains potential options to increase electronic filing.[Footnote 13] 

We have previously reported that IRS's ability to achieve efficiencies 
depends on its continuing ability to increase electronic filing. We 
recently suggested that Congress mandate that paid tax return preparers 
use electronic filing and that IRS require software companies to 
include bar codes on individual paper returns.[Footnote 14] IRS agreed 
to study the latter option. 

IRS has responsibility for enforcing tax laws in the Internal Revenue 
Code (IRC). In addition, IRC section 6011 provides specific authority 
for IRS to prescribe forms and regulations for tax returns, including 
the information required on those returns and whether they must be 
filed electronically.[Footnote 15] The IRC imposes civil and criminal 
penalties on paid tax return preparers, which include tax software 
companies, for unauthorized disclosure or use of a taxpayer's personal 
and tax-related information.[Footnote 16] In addition to tax law 
penalties, the providers of services for preparing and filing tax 
returns are subject to the privacy and safeguarding rules created under 
the Gramm-Leach-Bliley Act (see app. IV).[Footnote 17] 

IRS Has Little Information about How Tax Software Pricing Strategies 
Affect Taxpayers' Willingness to Use Software and File Electronically: 

For the 2009 tax filing season, the two largest tax software companies 
that previously charged separate electronic filing fees for federal 
returns in some of their retail and downloadable products have 
eliminated those electronic filing fees. Moreover, the three largest 
companies will bundle federal tax preparation with electronic filing 
for all of their products (see app. II). However, for some products, 
the companies will still charge separate, incremental fees for other 
services such as state return preparation, state electronic filing, and 
return review by a tax professional. According to industry 
representatives, IRS officials suggested they eliminate separate 
federal filing fees to encourage electronic filing. However, the effect 
of these changes on electronic filing will not begin to be known until 
the end of the present tax filing period and will be difficult to 
determine. On one hand, taxpayers who buy a tax software package that 
includes a bundle of services may be encouraged to use software and 
file electronically because there is no longer a separate charge for 
doing so. On the other hand, if the cost of such a package is 
significantly higher, it may discourage taxpayers' use of tax software 
since they may not be able to purchase a less expensive package that 
does not include electronic filing. 

The two largest tax software companies that eliminated federal 
electronic filing fees also made some other pricing changes for 
preparing and electronically filing both federal and state tax returns 
in 2009 including: 

* online tax packages are generally priced lower than in 2008; 

* online tax packages are generally priced lower than retail/ 
downloadable packages; and: 

* most retail/downloadable packages remained essentially the same in 
price when compared to 2008. 

For the third largest tax software company, its package prices for both 
online and retail/downloadable products remained the same in 2009 as in 
2008 because the preparation and electronic filing fees remained the 
same in both years. See appendix II for more details. 

Another change in 2009 is that IRS and FFA have agreed to provide a 
fillable version of federal tax forms. These fillable tax forms, which 
taxpayers can complete online and file electronically, will provide a 
basic calculator function but will not provide the question-and-answer 
format similar to commercial tax software. The forms will be accessible 
for free to all taxpayers via IRS's Web site and are in addition to 
FFA's current free products for eligible taxpayers described in the 
background of this report. 

As part of the upcoming second phase of its Advancing E-file study, IRS 
plans further surveys to obtain taxpayers' views on electronic filing. 
[Footnote 18] However, it does not plan to include questions, for 
example, about the effect of 2009 pricing changes on taxpayers' 
willingness to file electronically. Currently, IRS has little such 
information. For example, IRS and the Oversight Board surveys to date 
have not addressed how a separate charge for electronic filing affects 
taxpayers' willingness to file electronically.[Footnote 19] 

With the 2009 changes, however, IRS has an opportunity to directly 
measure the effect of eliminating separate fees to file federal tax 
returns electronically, making changes to software pricing overall, and 
making electronic tax forms available so that all taxpayers can 
complete and file for free online. We recognize that such a direct 
study would not be simple to conduct because, for example, it may be 
difficult to isolate the effect of multiple price changes and factors 
other than price, such as accuracy and security, which also affect 
taxpayers' willingness to file electronically. Further, prior year data 
are limited. However, even limited information about how taxpayers' 
electronic filing behavior changes after price changes would give IRS 
an empirical basis for supporting the continued elimination of separate 
fees for electronic filing and other pricing changes as well as 
complementing surveys of taxpayers' views. 

Ideally, to study the effect of pricing on electronic filing rates, IRS 
would need to know the software package and version used by each 
taxpayer in order to know the approximate price paid.[Footnote 20] 
Currently, IRS requires a software identification number on 
electronically filed returns, which does not identify the specific 
software package or version used to prepare those returns. IRS does not 
require any type of software identification number on v-coded returns 
(returns prepared using software but filed on paper).[Footnote 21] 
Having a more complete software identification number would not only 
allow IRS to better target its research but also its enforcement 
activities and efforts to increase use of tax software and electronic 
filing.[Footnote 22] Officials from one software company told us that 
such a change could be easily made by their company at a relatively low 
cost. 

IRS Oversight of the Tax Software Industry Is Not Comprehensive or 
Systematic: 

In its Advancing E-file study, IRS reported that one of the most 
important factors influencing taxpayers' use of tax software is its 
ability to accurately apply tax laws. IRS requires tax software to pass 
its Participants Acceptance Testing System (PATS), which includes 
verifying that computations are correct, tax rate schedules are 
updated, and returns transmitted electronically are compatible with IRS 
systems. However, PATS does not go further in testing to determine, for 
example, whether the guidance tax software provides is sufficient in 
helping taxpayers prepare accurate tax returns. 

IRS developed a National Account Manager (NAM) position in 2000 to 
serve as the main communication channel between the tax software 
industry and IRS. NAMs communicate in regularly scheduled conference 
calls with tax software companies about issues of mutual interest 
including tax law changes, updates to IRS forms and publications, and 
the upcoming tax filing season. Software companies also contact the 
NAMs when they encounter technical issues such as a disruption to 
electronic filing. IRS also works with tax software industry groups and 
advisory councils, such as the Council for Electronic Revenue 
Communication Advancement, on annual updates to tax laws and procedures 
(see app. V). 

IRS monitors acceptance rates for electronically transmitted returns, 
including the reasons for rejected returns, throughout the tax filing 
season and provides a "report card" to software companies at the end of 
each filing season.[Footnote 23] Rejected returns are sent back to the 
taxpayer for correction and resubmission. IRS's monitoring efforts 
allow the agency and software companies to identify and resolve 
problems with electronically filed returns. 

For example, in 2008, IRS asked tax software companies to hold returns 
with the Alternative Minimum Tax until IRS was able to process them. 
Through its monitoring efforts, IRS officials identified companies that 
were transmitting those types of returns which IRS then rejected. IRS 
sent notices to these companies, which reduced the number of rejected 
returns. 

IRS has worked with the tax software industry on an ad hoc basis to 
clarify the guidance provided by tax software. For example, for 2009: 

* IRS is working with software companies to ensure their packages make 
users enter a "yes" or "no" response to questions about having a 
foreign bank account and signature authority. Prior to this change, 
some companies' software defaulted to a "no" response. 

Another example involving commercial software used by paid preparers 
rather than individual taxpayers shows that IRS can work with the 
software companies to influence and improve guidance: 

* IRS's Earned Income Tax Credit (EITC) office worked with a group of 
tax software developers to ensure software used by paid preparers 
eliminated default answers where taxpayers' answers are critical to 
return EITC accuracy, and incorporated a "note" capability in the tax 
software enabling the preparer to record additional inquiries and 
taxpayer responses.[Footnote 24] 

IRS officials, however, acknowledged that these efforts were not the 
result of a comprehensive and systematic approach to improving the 
guidance provided by software. IRS does not have plans to review tax 
software to see if the guidance it provides to taxpayers is sufficient 
in helping them prepare accurate returns, in part because IRS relies on 
the extensive scenario and other testing done by the industry as 
discussed in the next section. As a result, IRS does not know if it is 
missing opportunities to improve tax software guidance to better ensure 
compliance. As an example of such an opportunity, we recently 
recommended that IRS expand outreach efforts to external stakeholders, 
including software providers, as part of an effort to reduce common 
types of misreporting related to rental real estate.[Footnote 25] IRS 
agreed with these and most of the recommendations in that report and 
outlined the actions it plans to take to address those recommendations. 

Security and Privacy of Taxpayer Information: 

IRS has provided limited oversight of the software industry's efforts 
to ensure that taxpayer information is secure. Taxpayers who file their 
returns on their home computers using online, retail, or downloadable 
tax software products are sending their returns to authorized 
electronic filing providers. IRS does not have the capability to 
receive electronic returns directly from individual taxpayers. Only IRS-
authorized electronic filing providers, including Electronic Return 
Originators (ERO) and software companies, among others, can transmit 
tax returns electronically to IRS.[Footnote 26] According to TIGTA, 
EROs were responsible for the majority of electronically filed tax 
returns accepted by IRS in 2007.[Footnote 27] IRS regulates authorized 
electronic filing providers by conducting suitability checks of 
applicants during the application screening process, including checks 
of the applicants' criminal backgrounds, credit histories, and tax 
compliance.[Footnote 28] Once approved, authorized electronic filing 
providers are subject to IRS monitoring visits, which are conducted to 
ensure that the providers are meeting requirements such as ensuring 
security systems are in place to prevent unauthorized access to 
taxpayer data. However, in 2007, TIGTA identified deficiencies in IRS's 
monitoring program. For example, IRS did not suspend electronic filing 
providers who were in violation of program requirements even though 
they had been issued notifications of suspension.[Footnote 29] In 
response, IRS added a new control procedure, effective January 30, 
2008, to better track suspension cases. 

IRS has also established security and privacy requirements that apply 
to FFA members. For example, according to IRS officials, FFA members 
must adhere to the Payment Card Industry (PCI) standards and third- 
party security and privacy certifications, and use PCI-approved 
companies to conduct penetration and vulnerability testing.[Footnote 
30] 

IRS has a Memorandum of Understanding (MOU) with FFA requiring members 
to provide IRS with documentation demonstrating compliance with 
security standards. However, IRS does not fully monitor compliance with 
existing FFA security and privacy requirements. Although IRS receives 
FFA security reports, it does not actively review or validate those 
reports unless a problem, such as a security incident, is reported. 

For 2009, IRS is suggesting that all authorized electronic filing 
providers that participate in online filing adhere to new security and 
privacy standards, the majority of which are similar to existing FFA 
requirements; however, IRS is not requiring compliance with those 
standards (see appendix VI). These standards are optional in 2009 
because IRS finalized them late in 2008. IRS has no plans to determine 
if tax software companies that are authorized electronic filing 
providers participating in online filing are adhering to advisory 
security and privacy standards for the 2009 filing season. Because the 
new standards would apply to a relatively few number of companies and 
include the three largest, the costs to collect information on 
adherence to the standards would be low. For the 2010 filing season, 
IRS may make those standards mandatory. Also, IRS is considering 
expanding these standards to include software companies that offer 
retail and downloadable products but has not yet established a time 
frame for doing so. IRS officials stated they are considering 
developing a plan to monitor compliance with these security and privacy 
standards for 2010. Without appropriate monitoring, IRS has limited 
assurance that the standards have been adequately implemented or 
software companies are complying with the standards. As a result, IRS 
does not know whether the confidentiality and integrity of the 
taxpayers' data are at an increased risk of being inadequately 
protected against fraud and identity theft. 

Reliability of Electronic Filing: 

Tax software companies have been reliable providers of electronic 
filing services, with one recent exception which did not have a 
significant effect on tax administration. In 2007, customers of some of 
Intuit's products experienced a disruption in their ability to file 
electronically on tax day.[Footnote 31] For approximately 13 hours, 
taxpayers could not reliably file their returns electronically through 
Intuit to IRS. According to IRS, about 171,000 tax returns were 
affected. IRS accommodated affected taxpayers by extending the tax 
filing deadline and not applying late filing penalties. IRS reported 
that the disruption did not delay processing of tax returns, payments 
to the government, or refunds to taxpayers because IRS already had a 
processing backlog of millions of returns at that time. Intuit agreed 
to pay any other penalties that customers incurred and also refunded 
any electronic filing fees charged during the disruption. 

IRS's MOU with FFA requires the latter's members to maintain a 
continual level of service throughout the filing season. For example, 
members are not permitted to schedule any planned blackouts of service 
during that time. However, IRS does not monitor compliance with this 
requirement and does not have a similar requirement for non-FFA tax 
software companies. Additionally, while IRS's PATS testing reviews tax 
software to ensure that returns transmitted electronically are 
compatible with IRS systems before the start of the filing season, it 
does not do so throughout the filing season. All industry 
representatives we spoke with believed that testing throughout the 
filing season was important because of the potential effect of late tax 
law changes. 

IRS Has Not Assessed the Risks to Tax Administration of the Use of 
Commercial Tax Software by Individuals: 

Despite devoting some resources to oversight of the tax software 
industry, IRS has not conducted an assessment to understand whether 
reliance on commercial tax software poses any significant risks to tax 
administration. Broadly defined, risk assessment involves (1) 
identifying future, potentially negative outcomes and (2) estimating 
the likelihood they will occur. In IRS's case, those outcomes include 
the possibility of security breaches, disruptions in electronic filing, 
and missed opportunities to identify and correct compliance problems. 
While the likelihood of these outcomes occurring may be low, IRS does 
not know whether this is the case. 

OMB's and our guidance suggest that agencies conduct risk assessments 
to identify risks that could impede the efficient and effective 
achievement of their goals and allow managers to identify the most 
significant areas in which to place or enhance internal controls. 
[Footnote 32] Moreover, by increasing awareness of risks, these 
assessments can generate support for the policies and controls that are 
adopted in order to help ensure that these policies and controls 
operate as intended. Further, federal law requires agencies to 
implement an information security program that includes periodic 
assessments of risk.[Footnote 33] 

According to IRS officials, the agency has not conducted a risk 
assessment because it does not believe the benefits warrant the cost of 
such an assessment. IRS and software industry officials we spoke with 
believe it is in the industry's financial interest to ensure that 
taxpayers can rely on tax software. In their annual filing reports, 
both Intuit and H&R Block identified financial losses and harm to their 
reputation as potential risks of system failures or interruptions. 
[Footnote 34] For example, Intuit reported one of the many risks to its 
company is that the interruption or failure of its information and 
communication systems could cause customers to revert to paper filings, 
resulting in reduced company revenues. In addition, according to IRS 
officials and tax software industry representatives, the industry has 
not yet experienced a significant problem with tax software or 
electronic filing. IRS and tax software industry officials further 
stated that the industry is better suited to conduct extensive scenario 
and security testing because of the significant cost of conducting such 
testing. Software industry officials reported spending tens of millions 
of dollars each year on testing to ensure accuracy. Further, they 
reported employing hundreds of tax analysts to review and simplify IRS 
instructions, publications, and forms; monitor proposed changes to tax 
legislation; and consult with IRS and state revenue agencies to ensure 
accurate interpretations of tax laws. Intuit officials reported 
complying with recognized international security standards.[Footnote 
35] Intuit officials also reported undergoing a biennial third-party 
security assessment, as well as proactively conducting ongoing security 
application assessments and vulnerability and penetration testing. 
Industry representatives noted the current public-private partnership 
between IRS and the software industry provides reliable coverage for 
electronic filing through redundancy in the market, unlike other 
countries that offer only a government-sponsored Internet filing 
option. 

While the above may be true and financial and other incentives may 
exist, IRS's position is not based on an actual, systemic assessment 
that identifies potential negative outcomes and the likelihood of their 
occurrence. Further, there are several reasons to believe that the 
benefits of assessing the risks associated with reliance on commercial 
tax software are significant. 

As already noted, IRS has said that it is in the agency's best interest 
to ensure that taxpayers can rely on commercial tax software to make 
electronic filing accurate, easy, and efficient. Continued growth in 
electronic filing depends on increasing use by individual taxpayers and 
maintaining their confidence in the accuracy as well as the security 
and privacy of their tax information, and the reliability of electronic 
filing. However, IRS does not know whether there are security and 
privacy risks because it has not monitored existing requirements. While 
tax software companies have not reported significant security breaches 
involving taxpayer data either residing on their databases or during 
electronic transmission to IRS in recent years, cases of lost or stolen 
data at other taxing authorities illustrate the potential negative 
outcomes of such a breach. For example, in 2007, Oregon's Department of 
Revenue experienced a breach in which electronic files containing 
confidential taxpayer information may have been compromised by an ex- 
employee downloading a contaminated file. 

While tax administration has not been significantly affected by 
disruptions to electronic filing, as noted previously, on tax day 2007, 
about 171,000 Intuit customers experienced a 13-hour disruption. During 
this time, Intuit customers could not reliably file their returns 
electronically with Intuit, and ultimately to IRS, but this disruption 
did not significantly affect tax administration. Additionally, Canada 
and Great Britain recently experienced disruptions with their 
electronic filing systems (see text box).[Footnote 36] 

Text box: Examples of Electronic Filing System Disruptions in Other 
Countries: 

While the tax and electronic filing systems in the United States are 
not directly analogous to other countries’ systems, at least two 
countries have experienced disruptions. For example, the Canadian 
Revenue Agency (CRA) experienced an electronic filing disruption in 
March 2007 that lasted for 9 days. CRA was unable to process returns 
filed on paper or electronically during that time. Additionally, on 
January 31, 2008, the United Kingdom’s electronic tax filing service 
experienced a system disruption. Taxpayers were given an extra 24 hours 
to file returns. Although IRS has multiple filing options and has not 
experienced similar disruptions large enough to significantly affect 
returns processing, it does not know the potential for such disruptions 
or the likelihood of their occurrence. If the U.S. tax system was to 
experience a similarly large disruption, IRS may not be able to process 
returns in a timely fashion. 

Source: GAO. 

[End of text box] 

If enhancements to tax software could produce even small improvements 
in voluntary compliance by taxpayers, the additional dollars of tax 
revenue could be substantial. Tens of billions of the $290 billion 
dollar net tax gap (after IRS's collection efforts) are associated with 
sole proprietors and individual owners of rental real estate.[Footnote 
37] We have made several recent recommendations intended to improve the 
compliance of these taxpayers by enhancing the clarity of tax software 
which, as we noted, IRS plans to address in most cases.[Footnote 38] 
However, IRS has not conducted research on the correlation between tax 
software and compliance--such as whether and how tax software packages 
influence compliance. Such research could be enhanced even more by the 
use of a single software identification number, which would allow IRS 
to identify the specific software package used by a taxpayer. Although 
limited testing of hypothetical scenarios by TIGTA and the National 
Taxpayer Advocate led them to identify possible software weaknesses 
that might affect compliance, this testing was based on a 
nonstatistical sample of scenarios and software packages.[Footnote 39] 
Because there are millions of potential scenarios and each one is 
different, it is not possible to generalize from the nonstatistical 
samples and reach conclusions about the overall effect of tax software 
on compliance. Furthermore, hypothetical scenarios do not provide 
evidence about how taxpayers actually use the software or whether 
taxpayers are actually complying with tax laws. 

IRS is already devoting resources to oversight of the tax software 
industry, as described in the previous section. IRS does conduct some 
testing, has developed the NAM position to communicate with the 
software industry, and tracks some performance. Also, according to IRS 
officials, in 2010 IRS plans to devote additional resources to 
implement new security and privacy requirements and monitor compliance. 

While significant problems have not occurred to date, without 
performing a risk assessment--the first step in risk management and 
mitigation--IRS does not know the potential magnitude or nature of 
problems or their likelihood of occurring. As a result, IRS does not 
have an informed basis for making resource allocation decisions, taking 
steps to mitigate any significant risks, or avoiding costly risk 
mitigation in areas where the risks are low. 

Conclusions: 

Commercial tax software--which is used by tens of millions of 
taxpayers--is a critical part of the tax administration system and a 
potential tool for increasing electronic filing. However, IRS does not 
identify which software packages taxpayers use or have information on 
the correlation between particular packages and compliance. Further, 
IRS does not know whether changes to software pricing would be an 
effective strategy for increasing electronic filing. Nor does IRS have 
assurance that tax software companies are adequately protecting and 
securing taxpayer data, another possible influence on taxpayers' 
willingness to file electronically. 

Despite its role in influencing electronic filing and the accuracy of 
tax returns, IRS has not conducted a risk assessment of taxpayers' 
reliance on tax software. Such an assessment could be done alone or as 
part of a broader study that would include paid preparers. Without a 
risk assessment, IRS does not know whether its existing investment in 
oversight of the tax software industry is too great, about right, or 
needs to be expanded. 

Recommendations for Executive Action: 

To help increase electronic filing and allow IRS to better target its 
efforts, we recommend that the Commissioner of Internal Revenue direct 
the appropriate officials to take the following six actions: 

1. require tax software companies, as soon as practical, to include a 
software identification number that specifically identifies the 
software package used to prepare tax returns, which can be used in IRS 
research efforts; 

2. ensure that, as part of the second phase of IRS's Advancing E-file 
Study, surveys ask taxpayers the effect of tax software pricing changes 
and the opportunity to file for free using online tax forms on IRS's 
Web site on their decision to either file or not file tax returns 
electronically; 

3. to the extent possible, study the effect of the 2009 pricing changes 
and the opportunity to file for free using online tax forms on IRS's 
Web site on taxpayers' use of tax software and electronic filing rates; 

4. determine if tax software companies that are authorized to 
participate in online filing are adhering to advisory security and 
privacy standards for the 2009 filing season; 

5. develop and implement a plan for effectively monitoring compliance 
with recommended security and privacy standards for the 2010 filing 
season; and: 

6. assess the extent to which the reliance on tax software creates 
significant risks to tax administration, particularly in the areas of 
tax return accuracy, the security and privacy of taxpayer information, 
and the reliability of electronic filing. 

Agency Comments: 

The Deputy Commissioner of Internal Revenue provided written comments 
in a February 19, 2009 letter in which she agreed with all our 
recommendations and outlined IRS's actions to address those 
recommendations (see app. VII). With respect to requiring tax software 
companies to identify the software package used, IRS plans to require 
an identification number on paper tax returns created using software. 
Related to ensuring that Advancing E-file surveys ask taxpayers about 
the effect of tax software pricing changes, IRS reported those surveys 
had already been finalized. In its place, IRS will be analyzing 
monetary disincentives associated with taxpayers' choice of filing 
method and plans to study the effect of the pricing changes on taxpayer 
electronic filing decisions. With respect to ensuring authorized 
electronic filing providers adhere to the advisory security and privacy 
standards for the 2009 filing season, IRS reported it plans to sample 
and observe online providers' Web sites to determine compliance. If IRS 
decides to make the standards mandatory, the agency will develop a 
monitoring and enforcement plan. Finally, to assess risks related to 
the reliance on tax software, IRS plans to summarize whether and the 
extent to which the agency is authorized to be involved in aspects of 
the software industry, including what additional authority it would 
need to impose changes and sanctions. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of the report until 30 days 
after its date. At that time, we will send copies of this report to the 
Secretary of the Treasury; the Commissioner of Internal Revenue; the 
Director, Office of Management and Budget; relevant congressional 
committees; and other interested parties. This report is available at 
no charge on GAO's Web site at [hyperlink, http://www.gao.gov. 

For further information regarding this report, please contact James R. 
White, Director, Strategic Issues, at (202) 512-9110 or whitej@gao.gov 
or Gregory C. Wilshusen, Director, Information Security Issues, at 
(202) 512-6244 or wilshuseng@gao.gov. Contacts for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Individuals making key contributions to this 
report can be found in appendix VIII. 

Signed by: 

James R. White: 
Director, Tax Issues Strategic Issues Team: 

Signed by: 

Gregory C. Wilshusen: 
Director, Information Security Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To determine what is known about how pricing strategies affect the use 
of tax software and electronic filing, we obtained and analyzed the 
prices for the top three tax software companies for both online and 
retail or downloaded products for filing seasons 2008 and 2009. These 
costs did not include any rebates or promotional prices. We limited our 
data analysis to the top three software companies because they account 
for 88 percent of all returns filed electronically by individuals and 
accepted by the Internal Revenue Service (IRS). We also reviewed 
literature concerning the economics of information goods, including 
software pricing. 

Further, we obtained and analyzed findings from IRS's Taxpayer 
Satisfaction Studies and reviewed the IRS Oversight Board's November 
2006 Taxpayer Customer Service and Channel Preference Survey to 
determine why federal taxpayers do not file returns electronically. 

To determine the extent to which IRS provides oversight of the tax 
software industry to help ensure tax returns are accurate, we reviewed 
and summarized IRS's legal authority to regulate the accuracy and 
security of commercial tax software. We also obtained and analyzed 
internal revenue manuals, industry standards, and government guidance 
and compared them to IRS's current procedures. We reviewed the Free 
File Alliance, LLC (FFA) Memorandum of Agreement (MOU) outlining IRS 
and FFA's agreements to provide free income tax software to 
individuals. 

To determine the extent to which IRS provides oversight of the tax 
software industry to help ensure that taxpayer information is secure, 
we interviewed IRS and FFA officials. In addition, we obtained and 
analyzed IRS's new electronic filing security and privacy standards, 
comparing them to industry standards. We also reviewed the FFA MOU to 
assess the extent to which security and privacy requirements were 
already in place for FFA members. 

To determine the extent to which IRS helps ensure electronic filing 
systems are reliable, we reviewed IRS requirements for electronic 
return originators, the FFA MOU, and documents and literature 
describing a significant disruption in electronic filing at Intuit. We 
also reviewed documents and interviewed Intuit officials to determine 
the extent of the disruption and corroborated the information they 
provided during interviews with IRS officials to determine the effect 
the disruption had on taxpayers and the agency. 

To determine what is known about the risks of the reliance on 
commercial tax software used by individuals, we reviewed Office of 
Management and Budget (OMB) and GAO guidance, including the criteria 
for assessing risk at an agency as well as industry best practices for 
risk assessments and internal controls; and interviewed IRS officials 
to determine what risk assessments IRS had in place. We also reviewed 
selected tax software companies' filing statements with the Securities 
and Exchange Commission to determine if they identified any risks. We 
also interviewed IRS and software industry officials to determine what 
steps they took to identify and address risks. 

We reviewed the Treasury Inspector General for Tax Administration's 
(TIGTA) and National Taxpayer Advocate's (NTA) reports detailing their 
respective tests of how accurately and consistently tax software 
applied tax laws. Because the various tax software tests we reviewed 
were limited to a subset of tax software packages and used a 
nonstatistical sample of tax scenarios, their results were not 
generalizable to all types of taxpayers, tax filing situations, tax 
laws, or the entire tax software industry. We also reviewed literature 
on the effect of significant electronic filing disruptions in tax 
software systems in selected other countries. We selected Canada and 
Great Britain because these were the examples that IRS provided on 
electronic filing disruptions in other countries. 

For background purposes, we also used IRS data to compare the cost of 
processing returns, and obtained and analyzed math error authority 
data, reject errors, and processing times across the different tax 
return filing methods.[Footnote 40] 

Additionally, for all objectives, we reviewed reports and interviewed 
officials including those from IRS, NTA, TIGTA, FFA, the Electronic Tax 
Administration and Advisory Committee, the Federation of Tax 
Administrators and the IRS Oversight Board. We also interviewed 
officials from select industry groups such as the Council for 
Electronic Revenue Communication Advancement, the National Association 
of Computerized Tax Processors, and selected tax software companies. We 
visited a major tax software provider's data center. Our work was done 
primarily at IRS Headquarters in Washington, D.C. and its division 
offices in New Carrollton, Maryland, and Atlanta, Georgia. 

We conducted this performance audit from April 2008 through February 
2009 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Tax Software Markets and 2008 and 2009 Pricing of Tax 
Software for Return Preparation and Electronic Filing: 

While a large number of companies offered tax preparation services in 
2008, the top three tax software companies electronically filed 88 
percent of returns prepared by individual taxpayers (as opposed to the 
returns prepared and electronically filed by paid preparers). Each of 
the companies outside the top three held less than 3 percent of the tax 
software market as measured by the number of electronically filed 
returns.[Footnote 41] However, tax software companies also compete with 
the paid preparer industry as well as manual preparation. 

Based on a review of pricing literature for software companies, tax 
software companies, like other software and information technology 
companies, have low marginal costs and high fixed costs for product 
development.[Footnote 42] In such markets, if the price charged to 
taxpayers is equal to the marginal cost, companies will not be able to 
cover their average cost of production and cannot stay in business. 
Therefore, companies in these markets will attempt to recover more of 
their fixed costs through various forms of price discrimination. Price 
discrimination can take the form of developing different versions of 
the product to match the needs of different types of consumers, who are 
then charged different prices according to their willingness to pay. 

The literature also suggests that companies in these markets may offer 
products that consist of several services bundled together--sometimes 
charging separate prices for each service or charging a single price 
for different combinations (bundles) of services. The bundling strategy 
is thought to potentially increase a company's revenue by attracting 
consumers who may value particular elements of the bundled product. Tax 
software companies bundle some or all of the following services or 
features: federal tax preparation, state tax preparation, electronic 
filing for federal and state returns, help services and technical 
support, return printing services, storage of information from prior 
returns, links to outside providers of relevant information (W-2s), and 
built-in accuracy checks. 

Some tax software companies offer only online services to taxpayers, 
while others offer the option of downloading the program to a home 
computer or purchasing software from a retail location. The pricing 
structure may vary depending on whether a taxpayer prepares a return 
online or purchases a retail or downloadable program (see tables 1 and 
2). In 2008, the largest companies offering online preparation products 
for federal returns usually bundled electronic filing with federal 
return preparation. However, if the program was downloaded or purchased 
at a retail location, electronic filing often involved a separate 
charge. 

For the 2009 tax filing season, the two largest tax software companies 
that previously charged separate electronic filing fees for federal 
returns for some of their products have eliminated those electronic 
filing fees. The three largest companies will bundle federal tax 
preparation with electronic filing for all of their products. For some 
products, the companies will still charge separate, incremental fees 
for other services such as preparation and electronic filing for state 
returns, as well as return review. The two largest tax software 
companies that eliminated federal electronic filing fees also made some 
other pricing changes for preparing and electronically filing both a 
federal and state tax return in 2009 including: 

* online tax packages are generally priced lower than 2008; 

* online tax packages are generally priced lower than retail/ 
downloadable packages; and: 

* most retail/downloadable packages remained essentially the same in 
price when compared to 2008. 

For the third largest tax software company, its package prices for both 
online and retail/downloadable products remained the same in 2009 as in 
2008 because the preparation and electronic filing fees remained the 
same in both years. 

Table 1: Comparison of 2008 and 2009 Prices of Top Three Retail/ 
Downloadable Tax Software Packages for Return Preparation and 
Filing[A]: 

TurboTax: Basic; 
Federal: Preparation: 2008: $19.95; 
Federal: Preparation: 2009: $29.95; 
Federal: Electronic filing: 2008: $17.95; 
Federal: Electronic filing: 2009: $0; 
State: Preparation: 2008: $34.95; 
State: Preparation: 2009: $39.95; 
State: Electronic filing: 2008: $17.95; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: $90.80; 
Total package price[B]: 2009: $89.85. 

TurboTax: Deluxe; 
Federal: Preparation: 2008: $44.95; 
Federal: Preparation: 2009: $59.95; 
Federal: Electronic filing: 2008: $17.95; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: $17.95; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: $80.85; 
Total package price[B]: 2009: $79.90. 

TurboTax: Premier; 
Federal: Preparation: 2008: $74.95; 
Federal: Preparation: 2009: $89.95; 
Federal: Electronic filing: 2008: $17.95; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: $17.95; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: $110.85; 
Total package price[B]: 2009: $109.90. 

TurboTax: Home & Business; 
Federal: Preparation: 2008: $89.95; 
Federal: Preparation: 2009: $99.95; 
Federal: Electronic filing: 2008: $17.95; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: $17.95; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: $125.85; 
Total package price[B]: 2009: $119.90. 

TurboTax: Business; 
Federal: Preparation: 2008: $99.95; 
Federal: Preparation: 2009: $109.95; 
Federal: Electronic filing: 2008: $17.95; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $49.95; 
State: Preparation: 2009: $49.95; 
State: Electronic filing: 2008: $17.95; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $185.80; 
Total package price[B]: 2009: $159.90. 

TaxCut: Basic Federal + E-file; 
Federal: Preparation: 2008: N/A; 
Federal: Preparation: 2009: $19.95; 
Federal: Electronic filing: 2008: N/A; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: N/A; 
State: Preparation: 2009: $29.95; 
State: Electronic filing: 2008: N/A; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: N/A; 
Total package price[B]: 2009: $69.85. 

TaxCut: : Premium Federal + E-file; 
Federal: Preparation: 2008: N/A; 
Federal: Preparation: 2009: $34.95; 
Federal: Electronic filing: 2008: N/A; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: N/A; 
State: Preparation: 2009: $29.95; 
State: Electronic filing: 2008: N/A; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: N/A; 
Total package price[B]: 2009: $84.85. 

TaxCut: Premium Federal + State; 
Federal: Preparation: 2008: $39.95; 
Federal: Preparation: 2009: N/A; 
Federal: Electronic filing: 2008: $19.95; 
Federal: Electronic filing: 2009: N/A; 
State: Preparation: 2008: N/A; 
State: Preparation: 2009: N/A; 
State: Electronic filing: 2008: $19.95; 
State: Electronic filing: 2009: N/A; 
Total package price[B]: 2008: $59.90; 
Total package price[B]: 2009: N/A. 

TaxCut: Premium Federal + State + E-file; 
Federal: Preparation: 2008: $69.95; 
Federal: Preparation: 2009: $49.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: $69.95; 
Total package price[B]: 2009: $69.90. 

TaxCut: Home & Business + E-file; 
Federal: Preparation: 2008: $89.95; 
Federal: Preparation: 2009: $79.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: $19.95; 
Total package price[B]: 2008: $89.95; 
Total package price[B]: 2009: $99.90. 

TaxAct: Standard; 
Federal: Preparation: 2008: 0; 
Federal: Preparation: 2009: 0; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $13.95; 
State: Preparation: 2009: $13.95; 
State: Electronic filing: 2008: $7.95; 
State: Electronic filing: 2009: $7.95; 
Total package price[B]: 2008: $21.90; 
Total package price[B]: 2009: $21.90. 

TaxAct: Deluxe; 
Federal: Preparation: 2008: $12.95; 
Federal: Preparation: 2009: $12.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $13.95; 
State: Preparation: 2009: $13.95; 
State: Electronic filing: 2008: $7.95; 
State: Electronic filing: 2009: $7.95; 
Total package price[B]: 2008: $34.85; 
Total package price[B]: 2009: $34.85. 

TaxAct: Ultimate; 
Federal: Preparation: 2008: $19.95; 
Federal: Preparation: 2009: $19.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: $7.95; 
State: Electronic filing: 2009: $7.95; 
Total package price[B]: 2008: $27.90; 
Total package price[B]: 2009: $27.90. 

TaxAct: Home & Business; 
Federal: Preparation: 2008: N/A; 
Federal: Preparation: 2009: $44.95; 
Federal: Electronic filing: 2008: N/A; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: N/A; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: N/A; 
State: Electronic filing: 2009: $7.95; 
Total package price[B]: 2008: N/A; 
Total package price[B]: 2009: $52.90. 

Source: GAO. 

N/A means not applicable because those packages were not offered at the 
time or this feature was not available with this package. 

[A] 2008 prices refer to products used to prepare and file 2007 tax 
returns and 2009 prices refer to products used to prepare and file 2008 
tax returns. 

[B] The total package price includes charges for preparing and filing 
one federal and one state return only. 

[End of table] 

Table 2: Comparison of 2008 and 2009 Prices of Top Three Online Tax 
Software Packages for Return Preparation and Electronic Filing[A]: 

TurboTax: Free Edition; 
Federal: Preparation: 2008: $0; 
Federal: Preparation: 2009: $0; 
Federal: Electronic filing: 2008: $0; 
Federal: Electronic filing: 2009: $0; 
State: Preparation: 2008: $30.95; 
State: Preparation: 2009: $25.95; 
State: Electronic filing: 2008: $0; 
State: Electronic filing: 2009: $0; 
Total package price[B]: 2008: $30.95; 
Total package price[B]: 2009: $25.95. 

TurboTax: Basic; 
Federal: Preparation: 2008: $29.95; 
Federal: Preparation: 2009: $14.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $34.95; 
State: Preparation: 2009: $34.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $64.90; 
Total package price[B]: 2009: $49.90. 

TurboTax: Deluxe; 
Federal: Preparation: 2008: $49.95; 
Federal: Preparation: 2009: $29.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $34.95; 
State: Preparation: 2009: $34.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $84.90; 
Total package price[B]: 2009: $64.90. 

TurboTax: Premier; 
Federal: Preparation: 2008: $74.95; 
Federal: Preparation: 2009: $49.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $34.95; 
State: Preparation: 2009: $34.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $109.90; 
Total package price[B]: 2009: $84.90. 

TurboTax: Home & Business; 
Federal: Preparation: 2008: $99.95; 
Federal: Preparation: 2009: $74.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $34.95; 
State: Preparation: 2009: $34.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $134.90; 
Total package price[B]: 2009: $109.90. 

TaxCut: Free Edition; 
Federal: Preparation: 2008: N/A; 
Federal: Preparation: 2009: 0; 
Federal: Electronic filing: 2008: N/A; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: N/A; 
State: Preparation: 2009: $29.95; 
State: Electronic filing: 2008: N/A; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: N/A; 
Total package price[B]: 2009: $29.95. 

TaxCut: Basic + E-file; 
Federal: Preparation: 2008: $14.95; 
Federal: Preparation: 2009: $14.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $29.95; 
State: Preparation: 2009: $29.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $44.90; 
Total package price[B]: 2009: $44.90. 

TaxCut: Premium + E-file; 
Federal: Preparation: 2008: $19.95; 
Federal: Preparation: 2009: $39.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $29.95; 
State: Preparation: 2009: $29.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $49.90; 
Total package price[B]: 2009: $69.90. 

TaxCut: Premium + State + E-file; 
Federal: Preparation: 2008: $44.95; 
Federal: Preparation: 2009: N/A; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: N/A; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: N/A; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: N/A; 
Total package price[B]: 2008: $44.95; 
Total package price[B]: 2009: N/A. 

TaxCut: Signature; 
Federal: Preparation: 2008: $99.95; 
Federal: Preparation: 2009: $79.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $29.95; 
State: Preparation: 2009: $29.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $129.90; 
Total package price[B]: 2009: $109.90. 

TaxAct: Standard; 
Federal: Preparation: 2008: 0; 
Federal: Preparation: 2009: 0; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $13.95; 
State: Preparation: 2009: $13.95; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $13.95; 
Total package price[B]: 2009: $13.95. 

TaxAct: Deluxe; 
Federal: Preparation: 2008: $9.95; 
Federal: Preparation: 2009: $9.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: $7.00; 
State: Preparation: 2009: $7.00; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $16.95; 
Total package price[B]: 2009: $16.95. 

TaxAct: Ultimate; 
Federal: Preparation: 2008: $16.95; 
Federal: Preparation: 2009: $16.95; 
Federal: Electronic filing: 2008: 0; 
Federal: Electronic filing: 2009: 0; 
State: Preparation: 2008: 0; 
State: Preparation: 2009: 0; 
State: Electronic filing: 2008: 0; 
State: Electronic filing: 2009: 0; 
Total package price[B]: 2008: $16.95; 
Total package price[B]: 2009: $16.95. 

Source: GAO. 

N/A means not applicable because those packages were not offered at the 
time or this feature was not available with this package. 

[A] 2008 prices refer to products used to prepare and file 2007 tax 
returns and 2009 prices refer to products used to prepare and file 2008 
tax returns. 

[B] The total package price includes charges for preparing and filing 
one federal and one state return only. 

[End of table] 

The effect of these pricing changes on electronic filing will not begin 
to be known until the end of the present tax filing period and will be 
difficult to determine. On one hand, taxpayers who buy a tax software 
package that includes a bundle of services may be encouraged to use 
software and file electronically because there is no longer a separate 
charge for doing so. On the other hand, if the cost of such a package 
is significantly higher, it may discourage taxpayers' use of tax 
software since they may not be able to purchase a less expensive 
package that does not include electronic filing. 

[End of section] 

Appendix III: Advantages and Disadvantages of Alternative Tax 
Preparation and Filing Methods: 

Taxpayers can experience many advantages and disadvantages based on the 
various methods for preparing and filing federal tax returns. Taxpayers 
preparing and filing their returns electronically may receive 
advantages such as reduced time spent on preparing the return and 
receiving faster refunds. On the other hand, taxpayers who prepare 
their returns manually may experience disadvantages such as increased 
transcription errors and slower refunds. Table 3 shows details of the 
advantages and disadvantages of the different preparation and filing 
methods. 

Table 3: Advantages and Disadvantages of Alternative Tax Preparation 
and Filing Methods: 

Tax preparation and filing method: Preparation by hand/filing by mail; 
Advantages: 
* No preparation costs; 
* Low cost of submission (postage); 
* No third party involvement with tax return preparation or submission; 
* No computer access needed; 
Disadvantages: 
* Must rely on own knowledge; or forms, instructions, and taxpayer 
services provided by IRS; 
* Slower refunds; 
* Increased errors due to paper processing; 
* Increased incidence of lost documentation; 
* Other required income tax returns (if applicable) are an additional 
task. 

Tax preparation and filing method: Preparation using tax software or 
paid preparer/filing by mail (v-coders); 
Advantages: 
* Reduced time/tax liability due to software or preparer tax planning 
capability; 
* Easier preparation of other required income tax returns (if 
applicable); 
* Low cost of submission (postage); 
* Third party may not access tax return data during submission; 
* Math and omission error checks; 
Disadvantages: 
* Cost of tax software/preparer; 
* Computer access required for software users; 
* Slower refunds; 
* Increased errors due to paper processing; 
* Increased incidence of lost documentation; 
* Third party may have access to tax return data during preparation. 

Tax preparation and filing method: Preparation using tax software or 
paid preparer/file via an electronic filing company; 
Advantages: 
* Reduced time/tax liability due to software or preparer tax planning 
capability; 
* Easier preparation of other required income tax returns (if 
applicable); 
* Faster refunds; 
* Fewer errors due to not needing to process paper; 
* Less incidence of lost documentation; 
* Math and omission error checks; Disadvantages: 
* Computer and Internet access required for software users; 
* Cost for tax software/tax preparer; 
* Third party may have access to tax return data during preparation 
and/or submission. 

Source: GAO analysis. 

[End of table] 

[End of section] 

Appendix IV: Laws Applicable to Tax Service Companies: 

In the Internal Revenue Service Restructuring and Reform Act of 1998, 
Congress instructed the agency to establish a goal of having 80 percent 
of all individual income tax returns filed electronically by 2007. 
[Footnote 43] While the Internal Revenue Service (IRS) has no legal 
authority to generally oversee the operations of tax software 
companies, IRS does have the authority to prescribe the forms and 
regulations for the making of returns, including the information 
contained therein and whether forms must be filed electronically. 
[Footnote 44] Accordingly, IRS has an interest in ensuring that tax 
software providers comply with tax laws and security and privacy laws 
so that taxpayers have confidence in these services and file their tax 
returns electronically. 

Under section 6103 of the Internal Revenue Code (IRC), IRS is 
responsible for safeguarding taxpayer data while in IRS's control. 
Section 6103 nondisclosure requirements only apply to IRS and not to 
private entities that prepare and send tax data to IRS. However, 
private entities are subject to safeguarding and privacy rules with 
regard to taxpayer information and can be penalized for improper use 
and disclosure. 

The Gramm-Leach-Bliley (GLB) Act requires financial institutions to 
protect consumers' personal financial information held by these 
institutions--including return preparers, data processors, 
transmitters, affiliates, service providers, and others who are paid to 
provide services involving preparation and filing of tax 
returns.[Footnote 45] For companies in the tax business, the GLB Act 
delegated rulemaking and enforcement authority to the Federal Trade 
Commission (FTC).[Footnote 46] Complying with the GLB Act generally 
means complying with FTC's Financial Privacy and Safeguards Rules. The 
Financial Privacy Rule requires financial institutions to give their 
customers privacy notices that explain the financial institution's 
information collection and sharing practices; the Safeguards Rule 
requires financial institutions to have a security plan to protect the 
confidentiality and integrity of personal consumer information. 
[Footnote 47] 

Additionally, paid tax return preparers are subject to both civil and 
criminal penalties for unauthorized disclosure or use of a taxpayer's 
confidential information. Tax return preparers include persons who 
develop tax software that is used to prepare or file a tax return, as 
well as any authorized IRS electronic filing provider.[Footnote 48] Tax 
return preparers who knowingly or recklessly disclose or use tax return 
information for a purpose other than preparing a tax return are guilty 
of a misdemeanor with a maximum penalty of up to 1 year's imprisonment 
or a fine of not more than $1,000, or both.[Footnote 49] Any 
unauthorized disclosure or use by a tax return preparer not acting in 
bad faith still subjects that preparer to a civil penalty of $250 for 
each disclosure, not to exceed $10,000 for the year.[Footnote 50] A 
summary of the federal laws protecting taxpayer information are listed 
in table 4. 

Table 4: Federal Laws Protecting Taxpayer Information: 

Law: IRC § 6103; 
Law's applicability: Officers and employees of the United States, or 
officers or employees of any state and local agencies receiving 
information from IRS for state or local law enforcement or social 
welfare purposes, and other persons lawfully receiving taxpayer 
information from IRS; 
Summary: Prohibits the disclosure of tax returns and return information 
by IRS employees except in specifically enumerated circumstances. Where 
disclosure is permitted, section 6103 generally imposes strict 
safeguarding requirements and requires IRS to monitor and enforce 
compliance with those requirements. 

Law: Gramm-Leach-Bliley Act: The Safeguards Rule (16 C.F.R. Part 314); 
Law's applicability: Return preparers, data processors, transmitters, 
affiliates, service providers, and others who are paid to provide 
services involving preparation and filing of tax returns; 
Summary: Entities must ensure the security and confidentiality of 
taxpayer records and information. Entities must develop, implement, and 
maintain a written information security program that contains 
administrative, physical, and technical safeguards that are 
appropriate. 

Law: Gramm-Leach-Bliley Act: The Privacy Rule (16 C.F.R. Part 313); 
Law's applicability: Return preparers, data processors, transmitters, 
affiliates, service providers, and others who are paid to provide 
services involving preparation and filing of tax returns; 
Summary: Entities must give their customers privacy notices that 
explain the entities' information collection and sharing practices. 
Customers have the right to limit some sharing of their information. 
Entities that receive customer information from another entity may be 
limited in their ability to use that information. 

Law: IRC § 7216; 
Law's applicability: Persons engaged in the business of preparing or 
assisting in the preparation of tax returns; or providing auxiliary 
services in connection with the preparation of tax returns, including a 
person who develops software that is used to prepare or file a tax 
return and any authorized IRS electronic filing provider; any persons 
compensated for preparing, or assisting in preparing, a tax return for 
any other person; or individuals who, as part of their duties of 
employment, perform services that assist in the preparation of, or 
assist in providing auxiliary services in connection with the 
preparation of, a tax return; 
Summary: Imposes criminal penalties on any persons engaged in the 
business of preparing or providing services in connection with the 
preparation of tax returns who knowingly or recklessly make 
unauthorized disclosures or use of information furnished to them in 
connection with the preparation of a tax return. Those in violation are 
guilty of a misdemeanor with a maximum penalty of up to 1 year's 
imprisonment or a fine of not more than $1,000, or both. 

Law: IRC § 6713; 
Law's applicability: Persons engaged in the business of preparing or 
providing services in connection with the preparation of tax returns or 
any person who prepares any tax return for any other person for 
compensation; 
Summary: Imposes monetary penalties of up to $250 for each disclosure, 
not to exceed $10,000 for the year, on the unauthorized disclosures or 
uses of taxpayer information by any person engaged in the business of 
preparing or providing services in connection with the preparation of 
tax returns. 

Source: GAO. 

[End of table] 

[End of section] 

Appendix V: Tax Software Industry Groups and Advisory Councils: 

In an effort to provide more effective tax administration, Internal 
Revenue Service (IRS) disseminates information and obtains technical 
perspectives and advice through industry and advisory councils. As 
shown in table 5, membership in many of these groups, with whom we 
consulted, is balanced to include representatives from tax 
practitioners and preparers, transmitters of electronic returns, tax 
software developers, large and small businesses, employers and payroll 
service providers, individual taxpayers, financial industry, academic, 
trusts and estates, tax exempt organizations, and state and local 
governments. 

Table 5: Descriptions of Industry Groups and Advisory Councils: 

Name: Council for Electronic Revenue Communication Advancement (CERCA); 
Type of group or council: Industry; 
Description: board members/major players: A nonprofit trade association 
representing a broad cross-section of the electronic tax filing, IRS 
systems modernization, and state electronic revenue communities. CERCA 
works with IRS Electronic Tax Administration officials to provide 
stakeholder input into IRS decision making. The following companies are 
on CERCA's board: 
Automatic Data Processing (ADP); 
Commerce Clearinghouse (CCH); 
Chase Tax Related Products; 
Computer Sciences Corporation; 
Drake Software; 
FileYourTaxes.com; 
H&R Block; 
IBM; 
Intuit; 
Jackson Hewitt; 
Republic Bank & Trust; 
River City Bank; 
Santa Barbara Bank & Trust. 

Name: Electronic Tax Administration and Advisory Committee (ETAAC); 
Type of group or council: Advisory Committee; 
Description: board members/major players: Supports the goal that 
paperless filing should be the preferred and most convenient method of 
filing tax and information returns. ETAAC members convey the public's 
perception of IRS electronic tax administration activities; offer 
observations about current or proposed policies, programs, and 
procedures; and suggest improvements. ETAAC members provide an annual 
report to Congress on IRS's progress in meeting the Internal Revenue 
Service Restructuring and Reform Act of 1998 (RRA 98) goals for 
electronic filing of tax returns. The following companies are on ETAAC: 
ADP; 
Bank of America; 
Balance Consulting, LLC; 
Burdick Paving; 
California's Franchise Tax Board; 
Drake Software; 
H&R Block; 
Howard Hughes Medical Institute; 
Intuit; 
Marshall & Associates; 
New York State's Taxation & Finance; 
World Bank. 

Name: Federation of Tax Administrators (FTA); 
Type of group or council: Advisory Committee; 
Description: board members/major players: The FTA was organized to 
improve the quality of state tax administration by providing services 
to state tax authorities and administrators. These services include 
research and information exchange, training, and intergovernmental and 
interstate coordination. The federation also represents the interests 
of state tax administrators before federal policymakers where 
appropriate and includes representatives from the 50 states, the 
District of Columbia, Puerto Rico, and New York City. 

Name: Free File Alliance, LLC (FFA); 
Type of group or council: Industry; 
Description: board members/major players: The FFA is a free federal tax 
preparation and electronic filing program for eligible taxpayers 
developed through a public-private partnership between IRS and FFA, a 
group of private sector tax software companies. These companies are: 
1040Now; 
123 Easy Tax Filing, LLC; 
2nd Story Software; 
#1 Discount Tax Return; 
Average1040.com; 
CCH Tax & Accounting; 
EFILE Tax Returns, Inc. 
ezTaxReturn; 
Fileyourtaxes.com; 
FreeTaxReturns.com; 
H&R Block; 
Intuit; 
iSecure Tax Corporation; 
Liberty Tax; 
Online-taxes, Inc. 
Smokey Software, Inc./CitizenTax; 
Tax Centers of America/Online Tax Pros, Inc. 
Taxhawk, Inc. 
TaxSimple; 
TaxSlayer. 

Name: IRS Oversight Board; 
Type of group or council: Advisory Committee; 
Description: board members/major players: Created by RRA 98; and 
charged to oversee IRS in its administration, management, conduct, 
direction, and supervision of the execution and application of the 
internal revenue laws and to provide experience, independence, and 
stability to IRS so that it may move forward in a cogent, focused 
direction. IRS Oversight Board provides an annual report to Congress. 
The Oversight Board is an independent body with nine members including 
the Secretary of Treasury and the Commissioner of Internal Revenue, 
along with seven others who are appointed by the President of the 
United States and confirmed by the Senate for 5-year terms. Currently 
there are two vacancies and board members are from: 
American University; 
Council on Competitiveness; 
Retired Corporate Tax Counsel; 
Enterprise Rent-A-Car; 
University of Montana School of Law. 

Name: National Association of Computerized Tax Processors (NACTP); 
Type of group or council: Industry; 
Description: board members/major players: A nonprofit association that 
represents tax processing software and hardware developers, electronic 
filing processors, tax form publishers, and tax processing service 
bureaus. The association promotes standards in tax processing and works 
closely with IRS and state governments to promote efficient and 
effective tax filing. Board members are from: 
CCH; 
Creative Solutions; 
Drake Software; 
H&R Block; 
H&R Block Digital Tax Solutions; 
Nelco; 
Orrtax Software; 
Universal Tax. 

Source: GAO. 

[A] As of December 2008, Average1040.com discontinued their membership 
with FFA. 

[End of table] 

[End of section] 

Appendix VI: Proposed Security and Privacy Requirements: 

For 2009, the Internal Revenue Service (IRS) has developed six new 
optional security and privacy standards which are intended to better 
protect taxpayer information collected, processed, and stored by online 
authorized electronic filing transmitters, as shown in table 6. These 
new standards are based on industry best practices and are intended to 
supplement the Gramm-Leach-Bliley Act and the implementing rules and 
regulations promulgated by the Federal Trade Commission. 

Table 6: Proposed Security and Privacy Requirements for Authorized 
Electronic Filing Transmitters: 

1. Providers must possess current and valid Secure Socket Layer (SSL) 
certificates that use strong validation and specific SSL versions and 
types of encryption.[A] 

2. External network vulnerability scan run by an independent certified 
third-party vendor weekly in accordance with the Payment Card Industry 
Data Security Standards. 

3. Information privacy and safeguard policies will be written 
consistent with the applicable government and industry guidelines and 
include "we maintain physical, electronic and procedural safeguards 
that comply with applicable law and deferral standards." This 
compliance shall be certified by a privacy seal vendor acceptable to 
IRS. 

4. Web site-challenge-response test (e.g., Completely Automated Public 
Turing Test To Tell Computers and Humans Apart [CAPTCHA]) shall be 
implemented.[B] 

5. Public domain name shall be registered with a U.S. registrar 
accredited by Internet Corporation for Assigned Names and Numbers and 
must be locked and not private.[C] 

6. Security incidents must be reported to IRS as soon as possible via 
encrypted e-mails but not later than 1 hour after confirmation of the 
incident. If the provider's Web site is the proximate cause of the 
incident, the provider shall cease collecting taxpayer information 
immediately via the compromised Web site. 

Source: GAO analysis of IRS data. 

[A] A Secure Socket Layer (SSL) certificate establishes a private 
communication channel enabling encryption of the data during 
transmission. Encryption scrambles the data, essentially creating an 
envelope for message privacy. Each SSL Certificate consists of a public 
key and a private key. The public key is used to encrypt information 
and the private key is used to decipher it. When a Web browser points 
to a secured domain, a SSL handshake authenticates the server (Web 
site) and the client (Web browser). An encryption method is established 
with a unique session key and secure transmission can begin. 

[B] The Completely Automated Public Turing Test To Tell Computers and 
Humans Apart, named after computer scientist Alan Turing, is a set of 
tests designed to differentiate a human from a computer prior to being 
allowed to submit Web content. It is used to reduce malicious automated 
Web submissions. 

[C] Locking a domain name provides protection from unauthorized third 
parties who might try to misdirect name servers or transfer the domain 
without permission. According to the National Institute of Standards 
and Technology, allowing private entries to exist in an external domain 
name server only serves to provide a target list for a remote attacker. 

[End of table] 

[End of section] 

Appendix VII: Comments from the Department of Treasury: 

Department Of The Treasury: 
Deputy Commissioner: 
Internal Revenue Service: 
Washington, D.C. 20224: 

February 19, 2009: 

Mr. James R. White: 
Director, Tax Issues: 
U.S. Government Accountability Office: 
441 G Street N.W. 
Washington, D.C. 20548: 

Dear Mr. White: 

I am writing in response to the draft Government Accountability Office 
(GAO) audit report entitled "Tax Administration: Many Taxpayers Rely on 
Tax Software and IRS Needs to Assess Associated Risks (GAO-09-297)". I 
reviewed the report and think it accurately captures the challenge we 
face in establishing the appropriate role for the IRS in relationship 
to the tax software industry. The report accurately reflects the 
difficulty in assessing the quality of tax software, why some taxpayers 
decide to use tax software and the impact on electronic filing. Our 
approach to tax software is evolving and your report provides helpful 
insights and recommendations with which we generally agree. 

The Wage and Investment Division, Electronic Tax Administration (ETA) 
manages high level relationships that have been identified as important 
to the continued growth and success of electronic filing. One of the 
relationships ETA manages is with the software developers' community. 
The IRS meets annually with developers to exchange ideas and 
information regarding issues pertaining to electronic tax 
administration, preparation and transmission. We also conduct annual 
pre-filing season conferences with the software community to ensure 
they have information necessary for smooth filing season 
implementation. 

As noted in your report, commercial tax software is a critical part of 
the tax administration system, used by tens of millions of taxpayers, 
and a potential tool for increasing electronic filing. Also stated in 
your report, the IRS is devoting resources to oversight of the software 
industry, does conduct some testing, has developed a National Account 
Manager position to communicate with the software industry, and tracks 
performance. Starting this year, we will begin to implement new 
security and privacy requirements and monitor compliance. 

Responses to your specific recommendations are enclosed. If you have 
any questions, or would like to discuss this response in more detail, 
please contact David R. Williams, Director, Electronic Tax 
Administration and Refundable Credits, Wage and Investment Division, at 
(202) 622-7990. 

Sincerely, 

Signed by: 

Linda E. Stiff: 

Enclosure: 

[End of letter] 

Enclosure: 

Recommendation: 

Require tax software companies, as soon as practical, to include a 
software identification number that specifically identifies the 
software package used to prepare tax returns, which can be used in IRS 
research efforts. 

Comment: 

Procedures are currently in place for the Individual Electronic Filing 
program to require that a Software Identification Number be present on 
all e-file returns. If not present, the return will reject with Error 
Reject code 0493. Software identification numbers consist of eight 
digits, with the first two representing the tax year. The number is 
assigned to all tax packages during Participants Acceptance Testing 
System (PATS) testing to identify the different versions of software 
products. We will add requirements to Publication 1167 (General Rules 
and Specifications for Substitute Forms and Schedules) to require paper 
substitute forms created by e-file software to include the Software 
Identification Number. We will request this change for the 2010 filing 
season by the end of the current fiscal year. 

Recommendation: 

Ensure that, as part of the second phase of IRS's Advancing E-file 
Study, surveys ask taxpayers the effect of tax software pricing changes 
and the opportunity to file for free using online tax forms on IRS's 
Web site on their decision to either file or not file tax returns 
electronically. 

Comment: 

We agree with this recommendation and are currently seeking to better 
understand factors that affect taxpayers' behavior towards electronic 
filing, including pricing. Because of the elimination of separate e-
Filing fees for many tax software users as well as the availability of 
a fillable forms utility on IRS.gov, we hope to learn a great deal 
about taxpayer behavior and preferences. However, the Advancing E-file 
Study taxpayer survey has already been finalized and is in progress. 
Also, it is too early to survey taxpayers regarding tax software 
pricing changes and the opportunity to file for free using online tax 
forms since these changes only went into effect on January 16th of this 
year .We also agree with you that this recommendation is difficult to 
implement because it is challenging to isolate the specific factors 
that cause a taxpayer to eventually choose to e-file. As part of the 
Advancing E-file Study Phase 2, we are working with the MITRE 
Corporation in trying to address this challenge by conducting conjoint 
analysis of factors driving taxpayers' e-file decisions and the 
analysis will include monetary disincentive associated with filing 
method as a choice factor. This analysis should be completed by 
September 30, 2009. 

Recommendation: 

To the extent possible, study the effect of the 2009 pricing changes 
and the opportunity to file for free using online tax forms on IRS's 
Web site on taxpayers' use of tax software and electronic filing rates. 

Comment: 

We agree with the recommendation and will study the impact of cost on 
migration between filing methods. The study will be completed by 
December 31, 2009. 

Recommendation: 

Determine if tax software companies that are authorized electronic 
filing providers which participate in online filing are adhering to 
advisory security and privacy standards for the 2009 filing season. 

Comment: 

We agree with the recommendation. As we evaluate whether to make these 
advisory standards official policy, we will determine the impact of the 
advisory standards on provider behavior and incorporate those findings 
in our decision-making. Throughout the 2009 filing season we will 
sample and observe online providers websites to determine if they have 
adopted the advisory rules. 

Recommendation: 

Develop and implement a plan for effectively monitoring compliance with 
recommended security and privacy standards for the 2010 filing season. 

Comment: 

We agree with the recommendation. As stated in our comments to the 
prior recommendation above, we will monitor and assess self-compliance 
with the security advisories we issued in 2008, seek public comment on 
making these standards mandatory, and based on all findings, if we 
decide to make these advisory standards official policy, we will 
publish the new rules, develop a monitoring and enforcement plan, and 
identify resources to carry out monitoring and enforcement activities. 
A decision on making the advisory mandatory will be made by September 
30, 2009. 

Recommendation: 

Assess the extent to which the reliance on tax software creates 
significant risks to tax administration, focusing on tax return 
accuracy, the security and privacy of taxpayer information, and the 
reliability of electronic filing. 

Comment: 
We agree with the recommendation in principle, but we also agree with 
you that this is very difficult to accomplish. Implementing a quality 
assurance function to test all tax software for accuracy is a very 
expensive and significant task, and it will be important to determine 
the scope and boundaries of what is tested. Software is subject to user 
errors that are difficult to eliminate altogether. Testing software on 
a large scale does not take into account how software may be abused by 
a taxpayer. As such, we need .to determine the scope of what can be 
effectively tested, including computer code with glitches, validating 
compliance with any security rules in place, identifying and 
investigating, and monitoring reliability of transmissions. However, 
testing and certifying accuracy will pose a significant challenge 
because of the many scenarios that are present due to a complex tax 
code. Therefore, IRS's current approach of identifying cases of non-
compliance by actual groups of users is effective because it does not 
deal with hypothetical cases and identifies both real weaknesses in 
software and user behavior. The Government Accountability Office (GAO) 
cited successful examples of this approach in the report entitled 
IRS/Earned Income Tax Credit (EITC) Software Developers Working Group 
Report, Potential Software Enhancements to improve the Accuracy of Tax 
Returns Claiming Earned Income Tax Credit and Help Paid Preparers Meet 
Their EITC Due Diligence Requirements (July 31, 2008), involving EITC 
issues and foreign bank accounts. However, it may be possible to do 
more and we will look into ways of identifying additional areas of non-
compliance in real settings to assess the extent to which reliance on 
tax software may contribute to such non-compliance. 

Our plans for implementing and monitoring security and privacy 
standards are set out in our response to the two recommendations 
immediately above. 

With regard to reliability, the extensive redundancy provided by many 
providers and the long history and experience of continuous service 
suggests that investing resources in assessing this factor is not 
warranted at this time. 

By February 2010, we will consult with Chief Counsel and develop a 
document summarizing whether and to what extent IRS is authorized to 
involve itself in the software industry's development of tax 
preparation software, what actions IRS could take to drive software 
companies to make changes and under what circumstances, what sanctions 
IRS could impose on software companies that refuse to make requested 
changes, and what additional authority IRS would need to do all of the 
above. Based on this information IRS will determine its subsequent 
course of action. 

[End of section] 

Appendix VIII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

James R. White, (202) 512-9110, whitej@gao.gov: 

Gregory C. Wilshusen, (202) 512-6244, wilshuseng@gao.gov: 

Acknowledgments: 

In addition to the contacts named above, Joanna Stamatiades, Assistant 
Director; Amy Bowser; Debra Conner; Vanessa Dillard; Michele Fejfar; 
Jyoti Gupta; Jeffrey Knott; Ed Nannenhorn; Madhav Panwar; Joseph Price; 
and Robyn Trotter made key contributions to this report. 

[End of section] 

Footnotes: 

[1] GAO, Tax Preparers: Oregon's Regulatory Regime May Lead to Improved 
Federal Tax Return Accuracy and Provides a Possible Model For National 
Regulation, [hyperlink, http://www.gao.gov/products/GAO-08-781] 
(Washington, D.C.: Aug. 15, 2008); Paid Tax Return Preparers: In a 
Limited Study, Chain Preparers Made Serious Errors, [hyperlink, 
http://www.gao.gov/products/GAO-06-563T] (Washington, D.C.: Apr. 4, 
2006); and Tax Administration: Most Taxpayers Believe They Benefit from 
Paid Tax Preparers, but Oversight for IRS Is a Challenge, [hyperlink, 
http://www.gao.gov/products/GAO-04-70] (Washington, D.C.: Oct. 31, 
2003). 

[2] We limited our data analysis to the top three software companies 
because they account for 88 percent of all returns filed electronically 
by individuals and accepted by IRS. Because we limited our data 
analysis to these companies, we were unable to provide pricing 
information for all tax software products from which taxpayers may 
choose. 

[3] We selected these countries based on examples that IRS provided on 
electronic filing disruptions. 

[4] Paid tax return preparers include enrolled agents, who are approved 
by IRS once they pass an examination on tax matters or demonstrate 
specific expertise based on past IRS employment experience; and 
unenrolled preparers, who include self-employed individuals and people 
employed by commercial tax preparation chains. Other paid preparers 
include those individuals who hold professional certifications such as 
certified public accountants and attorneys. 

[5] Intuit is a multibillion dollar company with about $3 billion in 
annual net revenue. A significant portion of the company's revenue is 
from its tax software segment for consumers as well as small 
businesses. Along with TurboTax, Intuit also offers two professional 
tax preparer software packages, Lacerte and ProSeries. H&R Block, Inc. 
provides income tax return preparation and related services and 
products via a nationwide network of approximately 13,000 company-owned 
and franchised offices and through the online and retail versions of 
TaxCut. H&R Block, Inc. generated annual revenues of $4.4 billion in 
fiscal year 2008. TaxAct is made by 2nd Story Software, a privately 
held development and marketing company specializing in tax preparation 
software and Web-based service; thus, revenue information is not 
publicly available. 

[6] Taxpayers can purchase tax software at retail locations, online, or 
via a downloadable program. "Retail" indicates packaged tax software 
products purchased at a retail store. "Online" indicates tax software 
programs that individuals use directly on a tax software company's Web 
site when preparing and filing their return. "Downloadable" indicates a 
tax software program primarily available on a tax software company's 
Web site that individuals can purchase and then download directly to 
their computer to use later in preparing and filing their return. 

[7] In 2002, IRS entered into an agreement with the Free File Alliance, 
LLC (FFA). As part of the agreement, IRS agreed not to compete with FFA 
members who would provide free, online tax return preparation and 
filing services to taxpayers on FFA's Web site. In 2005, IRS agreed 
that FFA products annually would cover 70 percent of taxpayers based on 
adjusted gross income. For 2009, the 70 percent equates to taxpayers 
with an adjusted gross income of $56,000 or less with the exception of 
one new FFA product that will be available for free to all taxpayers. 
Individual companies may limit their offering to specific states and 
impose other eligibility requirements. FFA companies can only charge 
for preparing and filing state returns and cannot sell any other 
services. 

[8] Bar coding is another form of filing returns whereby a return is 
printed with a two-dimensional bar code that can be scanned into a tax 
agency's system. 

[9] IRS's cost data are limited to labor costs and do not include 
overhead such as rent, storage, or equipment costs. 

[10] IRS estimates that it takes between 7-20 days to process paper 
returns, compared to 2-3 days for electronically filed returns. 

[11] GAO, Tax Administration: 2007 Filing Season Continues Trend of 
Improvement, but Opportunities to Reduce Costs and Increase Tax 
Compliance Should be Evaluated, [hyperlink, 
http://www.gao.gov/products/GAO-08-38] (Washington, D.C.: Nov. 15, 
2007). 

[12] IRS officials said that if all data from tax returns were 
transcribed and posted, the Automated Underreporter Program--one of its 
main enforcement programs--could eliminate human screeners who 
currently review return information that has not been transcribed or 
posted. IRS estimated that if the screeners could be reallocated to 
performing audits, they could bring in an additional $175 million 
annually. 

[13] Advancing E-file Study, Phase 1, MITRE Corporation (Sept. 30, 
2008). 

[14] [hyperlink, http://www.gao.gov/products/GAO-08-38]; GAO, Tax 
Administration: Most Filing Season Services Continue to Improve, but 
Opportunities Exist for Additional Savings, [hyperlink, 
http://www.gao.gov/products/GAO-07-27] (Washington, D.C.: Nov. 15, 
2006). 

[15] Under section 6011(e), IRS generally cannot require electronic 
filing except in the case of persons required to file at least 250 
returns during the calendar year. 

[16] 26 U.S.C. §§ 6713 & 7216. 

[17] Pub. L. No. 106-102, Title V, 113 Stat. 1338, 1436 (Nov. 12, 
1999). Responsibility for ensuring compliance with the privacy and 
safeguarding rules under the Gramm-Leach-Bliley Act falls on the 
Federal Trade Commission, not IRS. 15 U.S.C. § 6805(a)(7). 

[18] The second phase of the study, expected to be completed during the 
summer of 2009, will estimate the effect of implementing each option on 
electronic filing including how much each option might cost. 

[19] IRS's annual Taxpayer Satisfaction Studies and its 2006 Oversight 
Board's Customer Service and Channel Preference Survey examined 
individuals' satisfaction with electronic filing products and explored 
reasons why some taxpayers do not electronically file. Russell 
Research, Findings from the 2006 Taxpayer Satisfaction Study for 1040 e-
file. A special report prepared at the request of the Internal Revenue 
Service (July 2006); IRS Oversight Board, Taxpayer Customer Service and 
Channel Preference Survey Special Report (November 2006). 

[20] IRS would have to approximate the price paid since actual prices 
may have been affected by company promotions, discounts, and/or 
rebates, which would not be reflected at the time. 

[21] We have previously recommended that IRS develop a plan to require 
an identification number for paid preparers to identify and track their 
performance for enforcement and research purposes. See GAO, Internal 
Revenue Service: Fiscal Year 2009 Budget Request and Interim 
Performance Results of IRS's 2008 Tax Filing Season, [hyperlink, 
http://www.gao.gov/products/GAO-08-567] (Washington, D.C.: Mar. 13, 
2008). 

[22] For research purposes, IRS could pull a sample of returns and 
transcribe the identifiers for those returns instead of transcribing 
the identifiers from all returns, which could prove costly for IRS. 

[23] IRS will not accept electronically filed returns unless they pass 
a computerized validation check that tests for obvious errors, such as 
name and Social Security number mismatches or missing or incomplete 
supplementary schedules. 

[24] IRS/Earned Income Tax Credit (EITC) Software Developers Working 
Group Report, Potential Software Enhancements to Improve the Accuracy 
of Tax Returns Claiming Earned Income Tax Credit and Help Paid 
Preparers Meet Their EITC Due Diligence Requirements (July 31, 2008). 

[25] GAO, Tax Gap: Actions that Could Improve Rental Real Estate Report 
Compliance, [hyperlink, http://www.gao.gov/products/GAO-08-956] 
(Washington, D.C.: Aug. 28, 2008). That report noted that half of all 
individual taxpayers who had rental real estate misreported their 
income for tax year 2001, resulting in an estimated $12.4 billion of 
net misreported income. 

[26] Other IRS authorized electronic filing providers include (1) 
Intermediate Service Providers (ISP) who receive tax information from 
Electronic Return Originators (ERO) or from taxpayers who file 
electronically, process the tax information, and either forward the 
information to a transmitter or send the information back to the EROs 
or taxpayers; and (2) transmitters who connect with IRS computers and 
transmit tax return data to IRS. EROs and ISPs may also apply to be 
transmitters and transmit return data themselves or they may contract 
with accepted third-party transmitters who will transmit the data for 
them. 

[27] Treasury Inspector General for Tax Administration (TIGTA), Better 
Screening and Monitoring of E-File Providers is Needed to Minimize the 
Risk of Unscrupulous Providers Participating in the E-File Program, 
Reference Number 2007-40-176 (Washington, D.C.: Sept. 19, 2007). 

[28] IRS Publication 3112 IRS e-file Application and Participation and 
IRS Revenue Procedure 2007-40 provide guidance for authorized 
electronic filers. 

[29] TIGTA identified violations during the 2006 filing season 
including misleading advertisements, questionable signatures on tax 
returns, and/or preparation of tax returns based on the last pay stub 
received rather than an employer-issued wage and income statement as 
required. 

[30] Payment Card Industry standards are security standards that 
include requirements for policies, procedures, network architecture, 
software design, and other critical protective measures. These 
comprehensive standards are intended to help organizations proactively 
protect customer account data. Penetration testing is security testing 
in which assessors mimic real-world attacks to identify methods for 
circumventing the security features of an application, system, or 
network. A vulnerability assessment is a formal description and 
evaluation of the vulnerabilities in an information system. While we 
mention these examples, there are other security and privacy 
requirements in the agreement with FFA including compliance with 
applicable Department of Treasury/IRS rules and limiting the use of 
identifying information. 

[31] Intuit has been operating and providing electronic filing services 
for over 10 years. 

[32] The Office of Management and Budget (OMB), Revisions to OMB 
Circular A-123, Management's Responsibility for Internal Control 
(Washington, D.C.: 2004); GAO, Internal Control Management and 
Evaluation Tool, [hyperlink, http://www.gao.gov/products/GAO-01-1008G] 
(Washington, D.C.: August 2001); and Standards for Internal Control in 
the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
November 1999). 

[33] Federal Information Security Management Act of 2002, Pub. L. No. 
107-347, 116 Stat. 2946 (Dec. 17, 2002). 

[34] For H&R Block, Inc. see Form 10-K, United States Securities and 
Exchange Commission (SEC), (Apr. 30, 2008) and for Intuit, Inc. see 
Form 10-K, United States SEC, (July 31, 2008). 

[35] International Organization for Standardization/International 
Electrotechnical Commission (ISO/IEC) 27002, Information Technology -- 
Security Techniques --Code of Practice for Information Security 
Management, establishes guidelines and general principles for 
initiating, implementing, maintaining, and improving information 
security management in an organization, and includes best practices of 
control objectives and controls for information security management. 

[36] For more specifics on the Canadian example, refer to [hyperlink, 
http://www.cra-arc.gc.ca/nwsrm/rlss/2007/m03/nr070306-eng.html] and for 
the Great Britain example, see [hyperlink, 
http://www.hmrc.gov.uk/online/sa.htm]. 

[37] The tax gap is the difference between the taxes that taxpayers pay 
voluntarily and on time and the amounts they should pay under the law. 
IRS periodically measures taxpayer compliance and the tax gap that 
results from misreporting. IRS most recently estimated the gross tax 
gap at around $345 billion for tax year 2001, before IRS's collection 
efforts. 

[38] [hyperlink, http://www.gao.gov/products/GAO-08-956]. 

[39] TIGTA, Opportunities Exist to Improve Tax Software Packages, 
Reference Number 2005-40-025 (Washington, D.C.: Jan. 12, 2005) and The 
Internal Revenue Service Provides Helpful Tax Law Assistance but Still 
Has Problems with Tax Return Preparation Assistance, Reference Number 
2007-40-164 (Washington, D.C.: Aug. 24, 2007). Testimony of Nina Olsen, 
National Taxpayer Advocate, before the Committee on Finance, United 
States Senate on Tax Return Preparation Options for Taxpayers (Apr. 4, 
2006). 

[40] We reported 2007 data, which are the most current and complete 
data available from IRS. 

[41] GAO did not conduct a market definition analysis of the tax 
software industry or review the industry from an antitrust perspective 
in this report. 

[42] [2] Marginal costs are the costs due solely to selling an 
additional software package--for example, the cost of downloading 
software and recording the sale. Fixed costs do not change as the 
number of users change--for example, the cost of updating tax software 
for the new tax year. 

[43] Pub. L. No. 105-206, § 2001, 112 Stat. 685, 723, (July 22, 1998). 
The IRS Oversight Board, in its 2007 annual report to Congress on 
electronic filing (dated February 2008), approved extending the 80 
percent electronic filing participation goal to 2012 because it was 
apparent that IRS could not meet the goal in 2007. 

[44] 26 U.S.C. § 6011. Under section 6011(e), IRS generally cannot 
require electronic filing except in the case of persons required to 
file at least 250 returns during the calendar year. 

[45] Pub. L. No. 106-102, Title V, 113 Stat. 1338, 1436 (Nov. 12, 
1999). 

[46] 15 U.S.C. § 6805(a)(7). 

[47] 16 C.F.R. Parts 313 & 314. 

[48] 26 C.F.R. § 301.7216-1(b)(2)(i)(B). 

[49] 26 U.S.C. § 7216. 

[50] 26 U.S.C. § 6713. 

[End of section] 

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