Some tax preparation firms had to rework their software offerings in order to participate in this year's Free File Alliance, the public-private partnership that allows certain taxpayers to file electronically for free.

No, the IRS-required modifications didn't have anything to do with tax form updates to reflect recently enacted legislation. Rather, the companies had to remove any references to and offerings of refund anticipation loans and other similar quick-cash products tied to taxpayers' expected refunds.

The IRS has banned such products from the free electronic filing program.

Early option, quick criticism
The Free File Alliance, a partnership between the IRS and about 20 private tax software companies, debuted in 2003 as a way to encourage more taxpayers to e-file. Since that first filing season, some participating firms had offered refund-related products that used a taxpayer's expected cash back as collateral for a same-day, interest-charging loan.

The loans drew immediate criticism from consumer groups. Such upselling during a tax-filing process accessible only through the IRS Web site could give the impression that the loans were sanctioned by the government, critics argued. Other taxpayers, consumer advocates said, might think that the loans were simply another step in the e-filing process.

In response to the complaints, the IRS subsequently clarified and strengthened required disclosure rules for such products offered by Free File Alliance companies. However, problems and opponents' complaints persisted.

While the move was welcomed, it apparently wasn't tough enough. Last year, a Senate Finance Committee staff analysis of Free File found that many participating companies use their free file Web pages to "market a whole array of other products and services to taxpayers." These add-ons, according to the Senate study, could end up costing taxpayers who came to the government site thinking they were getting a no-fee service.

The IRS then got some additional data of its own. Although the agency's own records show that only about 0.5 percent of taxpayers obtained add-on loans when using the program, a market research firm the IRS hired last summer to evaluate Free File found that about 6 percent of those purchasers bought the products unintentionally.

'Ancillary' products axed
"We heard many legitimate concerns about the marketing of ancillary products during the last filing season," IRS Commissioner Mark Everson said in a statement announcing the refund loan ban. "This is a constructive step."

"This is progress, that the IRS and the commercial companies in the Free File Alliance have agreed that that they will not be marketing refund anticipation loans and other similar products," says Jean Ann Fox of the Consumer Federation of America.

"But they still have their income limits on who can file and we continue to urge the IRS to make it possible for all taxpayers to file their return electronically without going though or paying a commercial entity," says Fox.