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Doing your taxes can be less frustrating, less time-consuming and less costly if you're prepared.

Free-filing program still available through Oct. 16
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Miller says that last year, only 2 percent of filers who previously paid to use TurboTax opted instead to file for free with the software at the IRS site. That may be in part because if you use TurboTax at the Alliance site, you cannot transfer previous year tax data to the file-for-free return. That option is available to taxpayers who buy the TurboTax software for their personal computers or use the program at the company's Web site.

Many, says Miller, find it worth the product's price to have the data continuity year after year.

Some free-for-all filing still available
Another tax preparation and filing program, TaxACT, also is a part of the Free File Alliance again this year. In addition to participating in the official government effort, the software's maker, 2nd Story Software, has made free filing available to all taxpayers, regardless of income.

The catch: In order to file for free, higher-income taxpayers must go directly to TaxACT's Web site, not the IRS Free File page. Once at TaxACT, they can use the company's Web-based program or download it to their own computer

Also, the free filing is via TaxACT's standard version, which doesn't include state tax material also needed by most U.S. filers. Upgraded versions must be purchased to access that and other options.

"Two years ago, we were the first to offer free for everyone," says Lance Dunn, president of 2nd Story Software. "This year, the rules have changed and we won't be able to make that offer [at the IRS site] anymore."

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Dunn acknowledges that his company is a relative newcomer in the tax software world and TaxACT's more-inclusive free file offer is a way to establish a relationship with the taxpayer.

Last year, via the official Alliance site, the company was able to establish customer relationships with 1.5 million free filers.

Concerns about add-ons
As both TurboTax and TaxACT representatives noted, more tax software options are available to all taxpayers for a price.

It's this add-on potential that concerns consumer advocates. In previous years, they've voiced concerns that taxpayers are sitting ducks for the marketing of other tax-related and not-for-free products, ranging from state return forms to audit insurance policies to refund anticipation loans, or RALs.

"There's a whole strata of the economy aimed at the working poor when they have this [tax refund] cash in hand once a year," says Jean Ann Fox of the Consumer Federation of America. "Anti-poverty programs are meant to lift the working poor out of poverty, but some RAL lenders and others, like car dealers who offer to do taxes and use the refund as a down payment, are lined up to get that money.

"There are a lot of hands out, a lot of competition for this antipoverty money."

Free File Alliance Executive Director Tim Hugo noted in an IRS statement that under the new agreement, which lasts for four years, the program has taken steps to address these concerns:

  • Alliance members who offer refund anticipation loans must disclose fees and interest rates upfront and must make clear that RALs are loans, not tax refunds. Taxpayers also must consent to receive additional information about ancillary financial products.
  • Alliance member Web sites must display whether state online tax preparation and filing services are available and, if so, spell out the associated fees.

Fox says she is pleased to see the IRS and participating companies take some of the consumer issues into account.

"The first year they had Free File, you had to sign up first with a company to determine whether you'd get extra charges; for example, what it would cost you if you also file a state tax return," says Fox. "That changed subsequently where the companies have to lay out what they offer for free and what you would have to pay for."

Free-file consumer beware
Fox says consumers still need to pay close attention to every option when filing electronically.

"Whereas it's a felony for a tax prep company to give your personal tax information to a third party, as long as you've given consent, they can do it legally," says Fox. "Make sure you knowingly give that consent.

"As you click your way into these things, you have to agree to their privacy policy, so you need to pay attention to what you're clicking on."

CFA and other groups remain concerned that the government-tax industry partnership is seen by many taxpayers as an implicit endorsement by the U.S. government of the companies and all the services they market.

Sen. Charles Grassley, R-Iowa, sees the same pitfalls. On April 14, the Senate Finance Committee Chairman sent a letter to the IRS urging the agency to "rein in the commercial offers and charges for basic services that besiege taxpayers using the IRS' only option for electronic tax filing."

And although IRS Commissioner Mark Everson told Congress in early April that the agency would examine the Free File program after the filing season ended, an IRS spokesman told a tax publication on April 30 that there would be no renegotiation of the four-year contract that was signed last October with 20 Alliance partners.

Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas, and blogs each day on tax topics at Don't Mess with Taxes.

-- Updated: May 1, 2006
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