e-file bargains 2004

I got a valuable tip last week from a USA Today article. It noted that competition between tax preparers participating in the IRS' Free File partnership had finally driven Intuit (makers of Turbo Tax) to offer free federal e-filing to all filers.

This is an interesting development. I'm not certain as to why the government sponsors a Free File program. The article claims that the original mission was to help low-income taxpayers. Help them avoid tax preparation fees? Help them get refunds faster? Perhaps, but I suspect that the initiative mainly helps the government cut down on their manpower costs, since workers will have millions fewer paper returns to key in to computers. As "low-income" returns are often very simple returns to file on paper, the surest way to get those people to go electronic is to make it so there's no fees associated with switching over.

So how is it that I am able to file for free? Well, small outfits and newcomers to the tax preparation business saw the Free File program as a way to get their foot in the door and introduce their products to a wider audience. In the drive to get the greatest exposure, these companies "exceeded the mandate" and opened up free filing to more and more people. Eventually a couple small companies opened it up to everybody, regardless of tax status. This was intolerable to the giant Intuit, who along with H&R Block dominate the personal tax-software market. So Intuit followed suit, probably to protect their market share. Since I have been switching back and forth between Turbo Tax and Tax Cut the last few years, it seemed time for me to seize the opportunity to save a little money filing.

By the time I sat down to consider using Free File, H&R Block had jumped in with both feet as well. Since I used Tax Cut last year (and it worked reasonably well), I followed their link. Note that you must follow the link from the IRS website's Free File page in order to get the no-cost preparation and e-filing. You won't see this deal if you go to Intuit or H&R Block directly.

There are a couple downsides to this kind of filing, and they're mainly associated with the fact that you're running browser applets instead of a regular resident software application. For one thing, I only recommend doing your filing this way if you're confident in the reliability of your internet connection. I did both my federal and state returns over the course of three-plus hours, a stretch that few dialup connections would maintain straight-through in my experience. Another downside, at least with the online Tax Cut filing, is that in the end you do not wind up with a dot-T04 file like you would if you had the resident software package. Since I don't have that file, it means that if I want the convenience of being able to import 2004 information into next year's return, I'll have no choice but to use H&R Block's online filing. (You do get a full printable PDF of your returns though, for your records.) Lastly, probably owing to the fact I filed so early, I noticed a number of typos in H&R Block's web scripts, plus a few places where their error messages were misleading or confusing.

On the up side, all the federal and state preparation and e-filing that last year cost me $45 net (and additional hours of fiddling with rebate forms) cost me only twenty dollars (and less time) this year. There also was none of the usual software patching, where the release CD you would buy from the store has to be corrected with updates when you sit down to actually use it. And for the first time ever, a preparation software correctly queried for and handled my own peculiar combination of W-2s, capital gains, and Schedule C / Self-Employment information on the first walk-through. In years past, regardless of whether I used Intuit or Block, I always had to go back multiple times or even fiddle with the internal forms manually to get the return to come out correctly. So that's real progress from my perspective.

From H&R Block's perspective, they still have me as part of their market share, and they received twenty dollars of my money (state filing) without having to get one or more boxed software packages to me. No CDs, no booklets, no sharing revenues with Best Buy for retailing it all. Seems like a decent arrangement all around.