Doing your taxes in cyberspace with Web-based options

Advocates of online tax return preparation, however, say the process if safe -- as long as the filer chooses a reputable site that uses accepted Web-security features. And, proponents of the process argue, online preparation actually safeguards taxpayer information by keeping a back-up copy of returns stored off-site.

"We retain the data for customers for a long time so if their computer crashes they don't lose their tax return information," says Atilla Taluy, president of FileYourTaxes.com of Oxnard, Calif.

Ease is appealing
While security concerns do scare off some potential users, millions of filers obviously have no qualms. For them, online ease outweighs the worries.

Like their software-using brethren, Web preparation taxpayers note that the system means not having to wade through and translate tax jargon. The computer tax programs, whether on a Web site or installed on your computer, interview you as much as a CPA. And online upgrades are automatic, whereas the PC software user must reload the new tax rules on his or her computer each filing season.

Online taxpayers also get to try a site before they plunk down money for the service. Unlike buying a software program sight unseen, most of the online tax preparation sites don't charge you until you hit the "send to the IRS" button. That lets you play around with the site all you want.

One thing is the same online as with the purchased software system. Because you file electronically, you'll get your refund sooner than if you mailed in a paper 1040.

Do your homework
These advantages are luring new converts each year. If you're considering online preparation, it pays to be particular when choosing a Web-based system.

Rosenberg recommends going with established vendors, companies that have been providing online services or tax preparation for a "decade or two."

You'll also want to go with companies large enough to have the deep pockets needed to provide computer security and bug-free tax prep software. She recommends File Safe, H&R Block, Intuit's TurboTax, and TaxACT. These sites may be biggies, but they are by no means the only online tax prep providers. Dennis Schmidt, a professor of accounting at the University of Northern Iowa, maintains a Web page that lists links to various online tax preparation sites.

Also evaluate your abilities, says FileYourTaxes.com's Taluy. He says his site does a good job, but it's designed for people who have prepared their tax returns before, whether with software or pen and paper.

"If people don't know what they're doing, we urge them to go to a professional," Taluy says. "You need to have a certain level of competence before you can do-it-yourself."

Remember: the amount of taxpayer expertise required varies with each Web site.

You'll definitely want to know what security measures your prospective vendor offers. Reputable sites for electronic filing are registered with the IRS, Taluy notes.

Also look for sites that have been authorized by Web security organizations, such as VeriSign or TRUSTe. Sites with good security will announce that they use SSL (secure socket layer) protocols or that they use encryption. This means data is scrambled so hackers can't read it.

Try before you "buy"
Although most online tax prep sites work on the same interview principle used by commercial software, there can be differences. For example, H&R Block touts that it takes fewer screens to go through, and therefore less time to complete a tax return on its Web site vs. using Intuit's Quicken TurboTax for the Web. Block points to the numbers: 75 for its Web program vs. 154 Intuit screens for a typical two-salary, two-children household.

But Scott Gulbransen, manager of corporate communication for TurboTax, says the figures don't mean the same thing to all taxpayers. "A few years ago we decided to use fewer screens, but customers complained because we had to put more information on each screen and they felt overwhelmed with information," he says. "So we added in more screens."

The bottom line: Find a site with which you're comfortable.

And find out what guarantees the site makes if there's a mistake on your return. "In our case, if we were to make a mistake, we could actually compensate both the interest and penalties that derived from our mistake," Taluy says.

Is the price is right?
Using an online site also won't bust your piggy bank. Most sites charge around $20 for basic preparation and filing, generally comparable to, and sometimes cheaper than, the similar computer software.

And now, thanks to a partnership between the IRS and commercial tax sites and software companies, many taxpayers may find they now can file online for free. Last year, almost 3 million taxpayers took advantage of the option. Though still far short of the estimated 78 million taxpayers the IRS predicted would be able to use the service, the agency says this initial foray into expanded online filing "has surpassed expectations." Some consumer advocates, however, question whether the process might lead to aggressive marketing of other financial products to free filers, as well as pose privacy concerns.

If you aren't eligible for free e-filing but still want to do your return online, it pays to shop around. Actual charges depend on what service you use and what options you pick. In some cases, upgrades could push your tax prep and filing to near $100 -- and that's on top of anything you might owe the IRS.

Also beware of hidden charges, Rosenberg warns. For example, find out before you commit whether there are additional charges for filing your return, in addition to helping you prepare it.

One of Rosenberg's friends went to a major online preparation site. The friend used some options and when she clicked to pay, she found out her bill was $200, not the $17.95 that she originally had been quoted.

Is online right for you and your return? Ultimately only you can answer that question. It all depends on what makes you most comfortable, how much expertise you have, and what your individual tax situation may be. A taxpayer with a very complicated tax return may be better off with some personal hand holding instead of a Web-based solution.

Ironically, even if you decide that online tax prep isn't for you, your return may still be Web prepared if you use an outside preparer. Many smaller accounting firms go online to "rent" the software on a site rather than buy it outright.

Jenny C. McCune is a contributing editor based in Montana.