File Taxes Online, on Their Dime
Federal tax authorities launched a long-awaited electronic filing initiative last week, which will allow some 78 million Americans to file their annual tax returns electronically and for free.
“Simply paying taxes is burden enough without the extra costs in time and professional help that too many Americans have endured until now,” said Mitchell E. Daniels Jr., director of the Office of Management and Budget. “The advent of free, fast filing for a substantial majority of taxpayers marks a great breakthrough.”
Seventeen companies, including well-known tax firms such as H&R; Block Inc., CCH Inc. and Intuit Inc., will participate in the public-private partnership, which allows taxpayers to click through the Internal Revenue Service Web site to find a preparer willing to help them e-file free.
There’s a big catch though: To use the free e-file service, taxpayers must have a computer with Internet access, a group that includes a little more than half of the U.S. households, Also, in most states a significant segment of the population, as determined by age and income, aren’t eligible. Even so, the IRS estimates that about 60% of taxpayers will be able to use the free e-filing services.
The partnership was part of an initiative that President Bush announced nearly a year ago to make electronic filing, lauded for both its speed and accuracy, available to more taxpayers. The initiative was spurred partly by a 1998 law that pressed the government to get at least 80% of taxpayers to file paperless returns by 2007.
Growth Concerns
Although electronic filing by both phone and computer now accounts for roughly one-third of the tax returns received by the IRS, federal officials were concerned that the growth in electronic filing would begin to slow unless the government was able to tap a larger segment of self-filers.
Only about 20% of those who file via computer prepare their own returns. The remaining 28 million computer-filed returns come from paid tax preparers That’s partly because individual taxpayers haven’t had direct access to the IRS, so even though they could prepare their returns, they needed a professional preparer to transmit them.
Some firms provided transmission services free but rarely advertised it, government officials said.
The IRS has toyed with the idea of providing software on its own Web site to allow direct filing for all taxpayers, but lawmakers didn’t want the government agency to compete with private industry. The compromise was to create the public-private partnership.
For preparers, the benefit of participating is that they get exposure and some reflected credibility by providing services to limited groups of taxpayers with the IRS stamp of approval. Moreover, although they provide free federal filing for those who meet their criteria, most will charge to prepare state returns. And anyone not meeting eligibility requirements, of course, would have to pay to use the private company’s filing software.
The government, meanwhile, requires that the coalition of companies provide free filing to at least 60% of Americans. Coalition partners also must follow the same rules relating to privacy and data security as the IRS, which means e-filing information cannot be shared with any other entity without a taxpayer’s express permission.
Who can e-file free? Each of the 17 providers has a different set of qualification standards. Most provide free services to lower-income filers -- anyone earning less than about $28,000 a year, but the program also is available to anyone younger than 21 or older than 44 and to some high-income filers. In addition, a few providers offer free services to every resident of particular states. For instance:
OnLine Taxes Inc. provides free e-filing for anyone younger than 21.
TaxBrain provides the service to those earning $12,000 or less and to those 50 or older.
FreeTaxUSA opens its site to those younger than 21 or older than 44.
FileYourTaxes.com offers free filing to all residents of Wisconsin, Michigan, Arizona and Georgia (but not California).
C&S; Technology provides free filing to all residents of Illinois and New York.
TaxAct.com, a Web site sponsored by 2nd Story Software Inc., offers free filing to those earning more than $100,000, no matter what state they live in.
There are other restrictions. Besides needing Internet access (government officials are working with churches and nonprofit groups to provide e-filing access to the unwired), taxpayers who don’t live in the six states where free e-filing is available to everyone will be left out if they’re middle-aged and middle income. There is no program for those between the ages of 21 and 45 with incomes between $33,000 and $100,000.
Taxpayer Eligibility
The IRS does not control who participates or the qualification standards set to participate in any particular provider’s program. But all participants must meet certain eligibility standards, including having software that conforms with IRS requirements and having third-party verification that the site meets IRS privacy and security standards.
To find out whether you qualify for the program, go to the IRS Web site at www.irs.gov and click on the free filing prompt. You’ll be given a choice of looking at the list of qualification standards or going to the “Free File Wizard.” The Wizard asks a few questions -- age, income and state of residence, for example -- to match the taxpayer with an appropriate service.
Those who click through to reach a tax filing service will be cautioned that they’re leaving the government’s site for a private company’s site.
One word of warning: Beware of product pitches. It is not necessary to buy anything to participate in the free e-filing initiative, but nothing prevents providers from marketing their products -- ranging from state tax preparation services to refund-anticipation loans.
California tax officials note that many of the state’s taxpayers also can file their state tax returns for free by going to the Franchise Tax Board site at www.ftb.ca.gov.
Times staff writer Kathy M. Kristof welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes. com. For past Personal Finance columns visit The Times’ Web site at www.latimes .com/perfin.
