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The Honolulu Advertiser
Posted on: Sunday, January 21, 2007

Most taxpayers pass on IRS' Free File

By Brian Tumulty
Gannett News Service

EXPECT DELAYS FOR DEDUCTIONS

Taxpayers who want to claim a deduction for state sales taxes or college tuition on the federal income tax return are among those whose returns will not be processed by the IRS until after Feb. 3.

The reason: Congress did not act until December to renew certain tax deductions that expired last year.

Bert DuMars, the IRS director of Electronic Tax Administration, said Tuesday the agency’s computers won’t be reprogrammed to accept recently renewed deductions until after that date.

In the meantime, electronic returns claiming those deductions will be rejected and tax returns sent by mail will wait until that date for processing.

The tax write-offs that won’t be processed until after Feb. 3

Include:

• A deduction for up to $4,000 for college tuition and other qualified expenses.

• Up to $250 in unreimbursed classroom expenses for teachers who purchase their own supplies.

• State and local sales taxes for taxpayers who do not claim a deduction for paying a state income tax. Several states — including Florida, Nevada, South Dakota and Washington — do not have an income tax, while Tennessee’s income tax hits only a tiny fraction of high-income taxpayers.

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Internal Revenue Service

www.IRS.gov

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WASHINGTON — Only 4 million of the 95 million taxpayers eligible to use the IRS Free File Web site are expected to use it this year in large part because the majority of taxpayers opt instead to pay a tax preparer to complete their returns.

"A lot of people, they've used their own tax preparer or CPA for years and years and they have no intention of switching to Free File or any other type of an online service or buying software," Bert DuMars, the IRS director of Electronic Tax Administration, said Tuesday. "Last year, 61.4 percent of all taxpayers used a preparer or CPA or enrolled agent."

Free File is available this year to taxpayers with an adjusted gross income of up to $52,000. The income limit changes yearly under a contract between the Free File Alliance and the IRS to cover 70 percent of tax filers.

The reason for excluding the other 30 percent: Vendors want to sell their software to upperincome taxpayers.

About 73 million tax returns were filed electronically last year by individuals who purchased software or by paid preparers. And the number is expected to jump to 80 million this year.

In order to gain access to Free File, Internet users must use the www.IRS.gov Web site.

This is the fifth year the IRS is offering Free File through a partnership with software vendors that have agreed, unlike last year, to provide users with an option to avoid marketing pitches for other paid products such as expensive refund anticipation loans. Also new this year: The IRS has established a Spanish language home page for taxpayers who opt to use one of two Spanish language Free File vendors. Spanish language tax returns were available on Free File last year but were not promoted by the IRS.

And all of the Free File vendors will allow taxpayers to claim a telephone excise tax refund that is being offered this year.

Jean Ann Fox of the Consumer Federation of America applauded the IRS for removing the marketing pitches, noting that the agency was under pressure to do so after objections were registered last year by consumer groups and the Senate Finance Committee.

The IRS said only 3 percent to 6 percent of Free File users purchased services from the software vendors and overall only 0.5 percent opted for the controversial refund anticipation loans. Under a refund anticipation loan, a taxpayer pays hefty fees to get his or her refund in a day or two instead of waiting the approximately two to three weeks it takes the IRS to process an electronic return. Those fees are in addition to the cost of tax preparation.