Putting tax-prep sites, software to the test

If you're sharpening your No. 2 pencil and looking with dread at a pile of paper tax forms, this is the year to see if your computer can simplify matters.

Online tax programs have become so refined and easy to use that paper-laden filers owe it to themselves to try them out risk-free. You usually don't pay a dime until you print out your return or file it electronically. And thanks to a new initiative by the Internal Revenue Service, many lower-income taxpayers won't even have to cough up the dime.

The idea: Letting the computer do the math reduces mistakes on your part - and knotty problems for the IRS. That's why the agency has teamed with 17 online tax services to create the Free File Alliance.

The alliance claims that 60 percent of taxpayers - some 78 million people - should be able to prepare and file their taxes electronically at no charge. (Some taxpayer advocates are troubled by aspects of the program. See story.)

The rest of the nation's taxpayers have the option of paying anywhere from $8 to $25 for an online service or buying any of the increasingly sophisticated tax software packages. The latter option usually costs more, but the data resides on your hard drive rather than on someone else's server, and, as a result, the programs run faster.

For this review, the Monitor tried out five online tax programs, two of which are also available in packaged software versions, to see how they stacked up against each other. The bottom line: You get what you pay for.

If you're familiar with the tax forms you need and don't require a lot of hand-holding, the online option works well. If you want more extensive help and tax planning for future years, the packaged software looks better.

One of the easiest ways to find an online tax program is to visit the IRS's website (www.irs.gov) and click on "Free File." The site lists links to the various offerings but it's easier to use the site's "Guide Me..." function. By asking simple questions about income and the complexity of your return, it quickly sniffs out appropriate programs.

Two popped up for me: TaxACT Online (www.taxact.com), which offered to prepare and electronically file my return for $7.95, and eSmartTax.com (www.esmarttax.com), which offered to do it free because I live in Illinois. Since free is awfully hard to pass up, I plunged into eSmartTax and found a competent and streamlined program. I had a clear idea which forms I needed, and found that the program moved through the process efficiently.

But a few glitches popped up: The state-tax refund form wouldn't allow me to enter my refund and the form for reporting losses from damaged or stolen property hadn't even been posted yet (even though other programs had it).

The program can handle relatively simple returns. But if you fit the criteria for free filing with more sophisticated programs (typically, an adjusted gross income below $30,000 or so), you'd be better served going elsewhere.

TaxACT, on the other hand, takes a loss-leader approach. It lures users with a standard version, where they can fill out a return online and print a paper version free of charge (or e-file it for $7.95). But the company stuffs the first and last parts of the program with hints and prods to upgrade to its $9.95 deluxe version. Get past these and a nifty, streamlined program takes you smoothly through the process.

The system was smart enough to catch me when I typed in inaccurate Social Security and Medicare withholding figures. Although the help is basic, TaxACT offers the experienced taxpayer an inexpensive way to file returns.

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