Does Filing Taxes Electronically Make Sense?

The push is on. By now, virtually everyone from the Internal Revenue Service to H & R Block to your local banker is probably urging you to file your tax return electronically.

"It's accurate," they crow. The IRS says it gets far fewer errors on tax returns that have been filed via computer than those filed by hand.

"It's convenient," they add. More than 40,000 tax preparers nationwide, including 1,284 in Los Angeles, are authorized to electronically send your return directly to the IRS.

And it's quick. If you file the high-tech way, the IRS says your refund will be speedy--generally coming back to you in three weeks or less.

There's just one more thing. It'll cost you.

The fact is, you cannot electronically file without the help of a person or company that has been approved by the IRS. The IRS says it does not regulate the amount of money these services charge to file your return via computer, but an agency spokesman said he believes that rates vary between $5 and $50.

It's hard to say who is offering that bargain $5 rate. When I called a dozen or so Southern California electronic filing services last week, the lowest rate I could find was $19 at a Pasadena H & R Block office. But that rate required you to have Block also prepare your return, which would add another $60 (roughly) to the cost. Other services charged between $25 and $100. (Tax preparers are not the only ones offering electronic filing, incidentally. The lowest rate in this informal survey was offered by Hansen's Hardware in Alhambra--$25.)

Consumers also should be aware that tax preparation chains do not charge the same amount in every office for the same service. The office of H & R Block in Mission Viejo says its fees start at $25 for those who also had H & R Block prepare their return--a service that costs from $60 to $400--and $40 for those who prepared their returns themselves. (The company's tax preparers say they charge more for those returns because they sometimes have to correct taxpayers' errors.)

However, if that return was filed at the H & R Block on Colorado Boulevard in Pasadena, it would have cost between $19 and $35, depending on whether or not the company also prepared the taxpayer's return.

The question of the hour: Is electronic filing worth the cost?

The answer, of course, will vary from consumer to consumer. But if you look purely at the cost versus the financial benefit of getting your money sooner, chances are, the answer is no.

Why?

Consider a taxpayer who expects a healthy $1,000 refund from the IRS. Filing electronically, the taxpayer would pay at least $25 for the service. In turn, the IRS says it will probably send the refund in three weeks instead of the usual six to 10.

In other words, for $25 the taxpayer gets the use of his or her money for an additional three to seven weeks. And, as the expression goes, "time is money." But, in this case, time isn't worth that much money.

You know that by determining what you could do if you had that $1,000 one month sooner. Right now, at best, you could bank it at an annual interest rate of 8%, which equates to a monthly 0.67%. If you got your refund a full month sooner by filing electronically, you would have earned $6.70 on the bank deposit--$1,000 times 0.67%. But since you spent $25 on the filing fee, you netted a loss of $18.30. Your refund would have to amount to about $4,000 before the $25 filing fee would make financial sense.

What if you were using the money to pay off a 19% credit card one month early? The benefit pencils out to $16, still $9 shy of the cost. But, if the quick refund saved you two months' interest on the card, it starts to make sense.

One more thing. Some companies are advertising an ancillary service to electronic filing. Probably the best known is H & R Block's "Rapid Refund" program.Essentially, Rapid Refund is a loan against your tax refund. The tax preparer will give you a check for your refund amount--minus fees--almost immediately so that you don't have to wait three weeks or more to get your check from the IRS. Block generally will charge you about $29 for this service, while Hansen's Hardware charges a princely $65.

The fee only gets you the use of your money for an additional two to three weeks. Simply put, this is insane. There is virtually no way to make this financially worthwhile. It is the equivalent of paying 100% to 200% in interest.

Nevertheless, tax experts maintain that the bulk of those who opt to file tax returns electronically also buy the refund loan. Why? Most services will allow you to have your return prepared, electronically filed and get the refund loan without every reaching into your pocketbook to pay. They just deduct the fees from your refund check. Don't be lured into a bad deal just because it's easy.

The only logical reason to pay such an exorbitant amount for such a limited benefit would be that you and your family could not afford to eat without that refund money to buy groceries. And, if that's the case, spending too much for tax services is the least of your worries.

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