In search of the incredibly easy 1040

It may be just the beginning of February, but tax-preparation companies are already battling for your business. It's no wonder. Tax-prep is a multibillion-dollar industry and growing.

The reason? On average, it takes filers 13.5 hours - nearly two working days - to pull together their records, decipher tax-law changes, fill out Form 1040, and send it in, according to the Internal Revenue Service.

So each year, millions of taxpayers forgo pencil and paper and the hassle of doing their taxes themselves and turn to software, a tax- preparation company, or an accountant to do the math for them. Increasingly, filers are even bypassing the post office and filing their forms electronically.

This year, close to half of individual taxpayers could end up going the electronic route, according to some estimates. The question is: Which of the many time-saving tax offerings should you choose?

"It's all about the taxpayer's comfort level," says Chrys Sullivan, director of software products for e-solutions at H&R Block. "Which method is right for you could depend on the complexity of your personal financial situation."

In fact, for the second year of a unique industry/IRS partnership to promote e-filing, H&R Block will once again offer free federal online tax preparation and e-filing to taxpayers whose adjusted gross income is $34,000 or less. This offer is available to qualifying taxpayers with access to the IRS website (www.irs.gov). More than a dozen software companies are expected to make similar offerings through "Free File," which is the centerpiece of the IRS effort to wean taxpayers from paper returns.

"Last year, 53 million people - or about 40 percent of all returns - were filed electronically," says IRS spokesman Bruce Friedland. "About 2 percent came through Free File. Those numbers represent a 12.9 percent increase over 2002 and we expect that number to continue to grow."

If you don't meet that income threshold, but are still interested in using tax software to help you complete your taxes, there are a number of options. The most popular software program remains Intuit's TurboTax. "If you want to be accurate and complete and also want to save a lot of time, then tax-prep software is the answer," says Fred Grant, a senior tax analyst at Intuit TurboTax.

Now in its 20th tax season, TurboTax (www.turbotax.com) has about 71 percent of the market for tax-prep software. Prices start at $9.95 for an online version and go up to $100, depending on the level of sophistication. A new version must be purchased annually.

Rival H&R Block (www.hrblock.com), best known for its 10,000 walk-in offices, is also in the tax-software game. Last year 1.8 million users filed their returns with its TaxCut program. H&R Block charges $14.95 for basic federal tax-preparation software but another $24.95 for software allowing users to prepare and file state returns.

Once you've decided what you need from a tax-prep package and that your computer can handle the software, shop around. Don't waste potential savings by overpaying upfront. Look not only at the software's base price, but also at any costs for options and upgrades.

Whether you're doing it yourself or hiring a preparer, e-filing is an increasingly popular option and is recommended by both the IRS and many accountants.

"By filing your return electronically, you're going to get your refund much faster - two weeks by e-filing versus six weeks by mail," says Jackie Perlman, a senior tax research analyst at H&R Block. "Perhaps more important though, is that if you make a mistake on your return, you will get a message from the IRS with 24 hours after filing. This saves you the time and hassle of having to file an amended return."

According to the IRS, the most common taxpayer mistakes are incorrect or missing Social Security numbers, mistakes computing the earned-income tax credit, incorrect tax calculations, child-tax-credit errors, and submitting an incorrect refund amount. Tax-prep software catches most of these errors immediately.

Typically, about 80 million taxpayers use preparers and 50 million others do it themselves. But many of the latter are expected to use preparers this year because of a flurry of tax-law changes. Thanks to those changes, individual taxpayers will generally find their 2003 tax bills are lower.

These changes include lower income-tax rates and a higher standard deduction for joint filers and qualified widow(er)s. Tax rates on capital gains and qualified dividends are lower. In addition, there are increases in the child tax credit, child-care credit, Lifetime Learning Credit, Health Coverage Tax Credit, and Adoption Credit.

"A visit to your accountant may make a lot of sense this year," says Michael Corvelli, a certified public accountant with Braxton & Moncure, in Alexandria, Va. "A CPA knows the intricacies of the tax-law changes and that could mean more money in your pocket versus a software product. In addition, there are still limitations on filing electronically. Not all forms can be filed that way."

Fees for personal service vary depending on the complexity of your return. The average H&R Block fee for basic tax preparation is about $130. But keep in mind that even if you hire a tax preparer, you are ultimately responsible for the accuracy of your 1040.

"Accountants and preparers will generally only back up the arithmetic of the tax forms," says H&R Block's Sean Wheeler. "But it's up to a client to provide accurate and complete income and expense information."