Taxpayers can now file their 2007 federal income tax returns electronically.

Although changes to IRS forms affected by new alternative minimum tax laws mean that some taxpayers can’t send in their returns until mid-February, the annual e-filing season for the majority of taxpayers was made available by the IRS starting Jan. 11. The date also marked the availability of the Free File program.  Watch “Free tax help”

Free File is a partnership between the IRS and private tax software manufacturers. This year, 19 companies are expected to participate, including such major players as TurboTax (Intuit), TaxCut (H&R Block) and TaxACT (2nd Story Software). A full list of the approved providers can be found on the IRS Web site.

The program debuted in 2003 as a way to encourage more taxpayers to e-file. The program has had its ups and downs. Since its debut five years ago, more than 18 million returns have been prepared and e-filed through the program. But participation has dropped in recent years in part, say consumer advocates, because the program limits participation based on income.  Watch: “Filing taxes – software vs. accountant”

Income limits remain

For the 2008 filing season, taxpayers with an adjusted gross income, or AGI, of $54,000 or less in 2007 can go to Free File and find a provider to e-file their federal tax returns for free. That income threshold is $2,000 higher than last year and the IRS says 70 percent of all taxpayers, or around 97 million individuals, can make use of the free program this year.

While taxpayers who earned more than $54,000 might grumble about the income cap, IRS and Free File members insist that the eligibility limit is a way of getting the program back to its original goal: to make e-filing available to lower-income taxpayers.

“The Free File Alliance is an innovative one-of-a-kind partnership with the IRS that offers free federal tax services to millions of low and moderate-income Americans,” said Tim Hugo, executive director of the Free File Alliance consortium of software providers. “We have worked hard to strengthen Free File every year and incorporate user-friendly consumer protections, including critical privacy protections, into the program.”

In announcing this year’s program, Hugo and IRS officials cited independent satisfaction surveys in which taxpayers have given the program high marks. According to Russell Research, 98 percent said they would recommend Free File to a friend or family member and 95 percent said they would be repeat users of the program.

Some delay, few changes

While there will be some delay, both with general e-filing and within the Free File program, because the IRS has not yet cleared a handful of AMT-related forms for processing, there shouldn’t be any surprises for taxpayers who’ve used electronic filing before.

The key to Free File, says the IRS, is to access the program through the IRS’ official Web site. Otherwise, the e-file provider might charge a fee for electronically filing your return. Using the Free File IRS page also will ensure that taxpayers are using the real Internet site and not a possible scam site.  Watch: “Refund anticipation loans”

Companies are still allowed to charge extra if taxpayers want to e-file state returns along with their federal forms. Last year some Free File participants did offer certain filers free combined state-federal e-filing service. If you must file a state return, be sure to double-check the various services to make sure you choose a provider that offers a similar cost-saving option again this year.

And this year, two software providers will offer Spanish-language Free File programs.

Still ‘consumer safe’

“It should feel pretty much like it did last year,” Intuit spokeswoman Julie Miller says of Free File 2008. “There have been some changes to reinforce the philanthropic nature of the program and to make it more of a consumer-safe zone.”

The consumer protection component cited by Miller is the continued moratorium on the marketing of refund anticipation loans, or RALs, by Free File companies. Last year, Free File participators agreed not to market these often costly, short-term loans.

The continued Free File restriction is no surprise, especially in light of a recent IRS announcement that it is considering new rules on the marketing of RALs and “certain other products” in connection with all 1040 preparation, not just that done via the free filing site.

The IRS can’t ban such high-fee/high-interest refund-related products, but it can toughen agency rules and increase penalties for violators. In that regard, the agency is considering prohibiting tax return preparers from “(obtaining) a taxpayer’s consent to disclose or use tax return information for the purpose of soliciting taxpayers to purchase such products.”

Freelance writer Kay Bell writes Bankrate’s tax stories from her Austin, Texas, home. She also writes two tax blogs, Bankrate’s Eye on the IRS, and Don’t Mess With Taxes.

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