Get Free Online Tax Filing--While It Lasts.
TurboTax and other major vendors offer free Web-based tax preparation and electronic filing to all via the IRS--but they aren't happy about it.
If you're looking for a great deal on Web-based tax software, start your search at the IRS's Free File Alliance Page
: You'll find offers from all major tax-software vendors for free online tax preparation and e-filing.
In almost all cases, no restrictions apply: All you need to do is link to the vendor of your choice from the IRS Web site. All the major vendors are listed, along with a brief description of what the company is offering (typically, it's their basic Web-based 1040 software). When you've made your choice, you simply click on the product name to leave the IRS Web site and then land on a special page where you can sign up for the Free File offer.
The savings on your federal return vary: Intuit, for example, is offering the basic version of TurboTax for the Web (plus e-filing) for free to those who arrive from the IRS's site; all others must pay $20. H&R Block's standard Web-based service is free when accessed via the Free File Alliance site, $30 when you go straight to H&R Block's Web site. TaxAct offers its basic Web-based software for free to all, but if you sign up via the FFA site you don't have to pay the $8 that other users are charged for e-filing.
There's also a Free File program for state returns, but most vendors still make those returns available only to some taxpayers; Intuit, for example, doesn't offer a free state return for California.
(PC World last month evaluated a number of these Web-based tax services. Find the review here
The E-File Imperative
So what's the catch? For newcomers especially, there is none. For those who've used tax software services in the past, however, the free-file offers have at least one significant drawback: You can't import a previous year's data file, which means you have to manually enter every last bit of information--a potentially time-consuming task, especially for people with lots of investments or assets to track.
The only other caveat is that Free File Alliance members can change their offers up to twice during the tax season--so if you're interested, you should probably enroll quickly just in case the vendors decide they've been too generous. The IRS says taxpayers filed 3.5 million returns through the Free File program last year--a little more than 5 percent of the total 61.5 million returns filed.
Why are these companies giving away a product they normally charge for? Intuit spokeswoman Julie Miller says competitive pressures prompted the company to offer TurboTax for the Web for free, but adds that this wasn't the way the Free File Alliance program was supposed to work.
The FFA was founded several years ago by a consortium of software companies who wanted to keep the government out of the tax-software business. At the time, the IRS was thinking of offering its own free tax-preparation software in order to encourage people to file their returns electronically. The IRS has set a goal of receiving 80 percent of all returns electronically by 2007.
Keeping Tax Software Private
But in October 2002, the FFA and the IRS reached an agreement in which the IRS pledged not to provide free tax software; in return, FFA members committed to collectively making free Web-based software available to at least 60 percent of the tax-paying population. Miller says a subsequent operating agreement "includes language that this program is really about bringing online tax services and e-file particularly to underserved and lower-income tax payers."
In the first year of the program, which covered returns for 2002, the FFA achieved the agreed-upon coverage through an assortment of member offers described by Intuit's Miller as philanthropic. The offers targeted taxpayers who might have been avoiding tax software because of the cost--veterans, seniors, young people, or people with annual gross income below a certain level.
Free Filing as Loss Leader
The following year, Miller says, some tax software companies decided to waive all restrictions, essentially using their FFA offer as a loss leader to attract new customers. So this year, Intuit and other major vendors followed suit.
"We took this strategy to level the playing field," Miller said, noting that Intuit particularly wanted to make TurboTax attractive to the 40 percent of Free File customers who are new to tax software. Intuit still makes money from many of these customers, who after filing their federal return for free wind up paying $25 to complete and file a state return, Miller says.
Finally, Intuit hopes that once these customers get started with TurboTax, they will return next year and pay the full price in order to import this year's data.
Although consumers benefit from this sort of competition, the tax software companies aren't happy. "Intuit is concerned that the program is not being used for the philanthropic purpose it was intended," Miller said.
IRS as Free-File Cop?
The question of whether the IRS is obligated to make sure the Free File program only serves disadvantaged taxpayers is where the vendors and the IRS appear to part ways.
"The IRS is running the program as laid out in the original agreement with the Free File Alliance," IRS spokesman Eric Smith said in a statement. "It is up to each of the individual members, not the IRS, to set the guidelines for their offerings."
The original FFA agreement expires next fall, so tax software vendors and the IRS have the next few months to revisit the program.