File Your Taxes Electronically for Free

The Internal Revenue Service today kicked off its 2007 Free File program, through which mid- and lower-income taxpayers can file their return free of charge using private-sector Web-based services.

Some 17 sites, ranging from offerings by tax software giants TurboTax and H&R Block to less prominent services such as CitizenTax.com and Average1040.com, are participating in this year's program at launch. A few more may eventually follow, Bert DuMars, director of the IRS's Electronic Tax Administration, told a news conference.

And 70 percent of taxpayers, or anyone with an adjusted gross income (AGI) of $52,000 or less, will be able to prepare and file their taxes electronically for free through the Free File program. However, this doesn't mean that all taxpayers eligible for the program can file through any of the participating tax prep services: Each one sets its own requirements.

Age, Income, State Restrictions

For example, TurboTax's Free File service, called TurboTax Freedom Edition, will provide free service only if you have an AGI of $27,000 or less, or you are eligible to receive the Earned Income Credit, or you are Active Duty Military with a military W-2 and your AGI is less than $52,000.

CompleteTax sets an AGI limit of $29,000; TaxEngine.com draws the line at $30,000--but also offers free e-filing service for some state returns. EZTaxReturn.com requires that you be between 17 and 51 years old; H&R Block's TaxCut FreeFile and CitizenTax.com set an age limit of 50, and Liberty Tax Online wants you to be no older than 70.

A number of sites require that you live in one of a list of states. The Free File program does not cover filing of state returns, and while some tax sites do offer state tax prep and filing services for free, others charge for it.

Some sites offer free filing for extension requests, and others offer free filing for the Form 1040EZ-T to request the one-time Telephone Excise Tax Refund available this year without filing a regular federal tax return. Two companies offer Free File service in Spanish, and the IRS hopes to increase participation among Spanish-speaking taxpayers through a new Spanish-language Free File landing page.

"I would shop around," DuMars said. "You can get a really good deal this year."

Few Users

Historically, relatively few of those eligible for the Free File program have taken advantage of it. Last year, when the AGI threshold was $50,000, 93 million taxpayers were eligible but only 3.9 million used it. This year, 95 million taxpayers (out of an expected 136 million who will file federal returns) will be eligible for Free File.

DuMars attributes the low participation rate to "lack of awareness." He said the IRS is competing against the well-funded PR machines of the same commercial tax prep services who participate in the Free File program.

How to Get Started

To help sort through the offers and restrictions, the IRS's Free File site has a "Guide Me To A Company!" wizard--a small form in which you enter your age, your spouse's age, your estimated 2006 AGI, your state of residence, information on your Earned Income Credit eligibility, and whether you received military pay. When you submit the form, you get back a list of Free File participants whose requirements you meet.

Even if you don't use the wizard and simply browse through the list of participating companies and their eligibility requirements, you can only access the free services through the IRS's Free File site. You can't simply go straight to the commercial tax prep site.

No Refund Advance Loans

One thing you won't find through Free File services this year are offers for so-called refund anticipation loans, in which tax prep services partner with financial institutions to immediately give customers the amount of any expected refund in a successfully filed electronic return--minus a hefty interest fee. DuMars said the IRS negotiated the elimination of these offers following complaints by consumer groups and Congress.

"If you're getting a refund, you should get the full amount of the refund," DuMars said. "If you just wait, 14 to 20 days max, you're going to get your maximum amount and you won't have to pay money."

Now in its fifth year, the Free File program is part of a government effort to encourage people to prepare and file their taxes electronically. E-filing saves the IRS money; DuMars says the error rate in returns filed electronically is 1 percent, compared to 20 percent in returns filed on paper.

However even people who use commercial tax software sometimes file on paper because tax prep software companies charge additional fees to file returns electronically. Faced with the prospect of competing against free government-developed online tax prep and filing, the tax software industry reached an agreement with the IRS to collectively offer free service to 70 percent of taxpayers.