The pros and cons of e-filing your taxes

Does filing your taxes electronically increase the odds of an audit?

from the March 12, 2007 edition

Page 2 of 2

Page 1 | 2

Last year, 73.3 million of the 135.7 million tax returns processed were e-filed. You can also file for an extension electronically.

"TV loves to show people scrambling at the post office, running to get their forms sent before the tax deadline at midnight," Mr. Jones says. "Unless they're looking for a date or their 15 minutes of fame, I can't understand why they'd be there when you could be e-filing on your couch in your underwear."

The combination of adding direct deposit makes e-filing even better, he says. "You'll get your federal refund in a week and a half or less, and your state refund in two weeks or less."

A new wrinkle in the direct-deposit program this year lets taxpayers specify up to three accounts that their refunds can be sent to – like checking, savings, and retirement accounts. "This is great," Jones says. "It means one less thing to think about – and you can even make a painless IRA contribution this way."

Another great addition is Free File. Found on the IRS website (www.irs.gov), this free software is designed to help lower-income people feel comfortable filing their own taxes without hiring a professional tax preparer. This public/private partnership was developed by 24 providers, including the big three: H&R Block's TaxCut, Intuit's TurboTax, and 2nd Story Software's TaxACT. The service, launched in 2003, is open to most taxpayers making $52,000 or less. "This offers 70 percent of the nation's taxpayers – 95 million people – a way to e-file," says Ms. Mathis at the IRS.

This year, participating companies agreed to remove offers from their tax software that, for a fee, would advance taxpayers the amount they anticipate in a refund. "We wanted to be able to say, 'Free is truly free,' " says Bert DuMars, director of electronic tax administration for the IRS, in a telephone press conference. For some people, the ads for the loans "tainted Free File in some way."

"The income could have been capped at $100,000 for Free File," laments author Estill. "But it was the lobbying by tax-pro behemoths that prevailed on Congress to put the limit at $52,000, complaining that if Free File took in too many folks, it would cut into their business."

The largest growth in e-filing is among those who prepared their own returns, says the IRS's Mathis. Some 20.3 million such taxpayers used e-file last year, a 19 percent increase over 2005.

The ability to use software and e-file free of charge pleases some taxpayers. "I don't think that e-filing would any more or less trigger a red flag," says Joseph Puma, an IT director for Sandler Capital Management in New York. Mr. Puma has already filed his 2006 taxes using the online version of TurboTax. "The software shows if you've made errors so you can correct them – and it corrects others for you." He adds that the TurboTax's protections guarantee – that calculations are accurate – makes him feel secure enough that he isn't concerned about audits.

1 | Page 2