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The Honolulu Advertiser
Posted on: Thursday, February 16, 2006

AKAMAI MONEY
Free tax software has limits

By Greg Wiles
Advertiser Columnist

Q. I'd like to do my taxes using a computer and file them over the Internet. Are there any free programs that are available?

A. You are in luck if your adjusted gross income is under $50,000. The Internal Revenue Service wants to expand use of electronic filing and is promoting use of free online tax preparation by listing the Web addresses of free tax software on its site.

But be forewarned, the 20 free programs might not offer as many bells and whistles as those you buy, and like all tax software, have limitations when unusual situations apply and can produce inaccurate returns if users don't interpret questions correctly.

The IRS estimates that about 70 percent of individual taxpayers should qualify under the income requirements for the program known as "Free File". At least one tax practitioner said people might try the offering if they don't have complicated returns.

"If all you have is a 1040, a couple of W-2s and some itemized deductions, then go for it," said Ted Talbot, a Kane'ohe-based Certified Public Accountant. But "the other side of that is that you get what you pay for."

Talbot said he has not used free online tax preparation software, though he has had clients return to him after they've tried to do their own taxes using software they've purchased. "It consumes a lot of time to sit down and go through all this," he said.

A growing number of people are using software packages to do their own taxes on home computers, though. According to a recent survey by CCH CompleteTax, a tax and accounting information provider, only 16 percent of taxpayers planned to use the paper-and-pencil approach to filing.

The most (46 percent) go to tax preparers, while 38 percent said they'd be going online or using packaged software.

Some of the offering of free online tax preparation and filing is being driven by the Internal Revenue Service, which is trying to meet a congressional mandate for having 80 percent of returns filed electronically by 2007. It's joined with a group of software makers that offers services and requires the companies involved to meet its standards for security and privacy.

It doesn't, though, endorse any of the products offered by companies involved in the program. Among the providers are TurboTax and H&R Block's Taxcut, the two most popular software packages.

People should access the Free File services through the IRS site since some providers, such as TurboTax, don't include links to the free offering on its main Web site. People who go directly to sites may find themselves paying for services. The Free File site is available at www.irs.gov/efile/article/0,,id=118986,00.html.

The IRS also says people should click on the "more details" link by each of the offering descriptions on the Free File site to learn about fees the companies may offer. This is located near the bottom of each of the more details page in a section titled "Fee-based Offer Information."

You should be able to complete and file your return for free without purchasing the additional products or services, the IRS said.

There is an incentive for people who can't afford a good CPA or software package to try Free File. The IRS has said tax returns filed electronically are processed more quickly and refunds can be sent in half the time it takes to get one with a paper return.

Hawai'i has similar good things to say about electronic filing, noting it has to hire fewer seasonal workers to help process the returns compared to paper ones. It is promoting e-filing of returns, either by tax preparers or through services linked to off-the-shelf software. It also has a site where people can fill out forms at www.ehawaiigov.org/efile/.

Once at the site, you'll be asked to create an account and can start work on the state's N-13 form. If you go this route be sure to have done your return on paper beforehand because the site doesn't do the computations for you.

Last year 52 percent of all individual U.S. returns, or about 68.5 million, were filed electronically. Out of the 603,200 individual federal returns from Hawai'i, 245,000, or about 41 percent, were filed electronically, the IRS estimates.

Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or gwiles@honoluluadvertiser.com