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Bankrate's 2010 Tax Guide
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Tax credit claims could limit Free File

2010 tweaks

Over the last two decades, the IRS has resolved most e-filing issues that have cropped up during Free File. Each year, though, the agency makes a few adjustments to the program.

Since most taxpayers also must file state returns, companies that offer this option are providing links to that service this year. This means, says Williams, that taxpayers will be able to complete both federal and state filings at the same time, without charge.

The IRS also has tightened consumer safeguards. "We've included a new opt-in feature, which means Free File users must consent to getting additional information by being asked to opt in for any future marketing messages from a software manufacturer," says Williams. "If you say 'no,' that's the end of it. It gives consumers more control over what's marketed to them and more control over their tax return information."

Free File for all

In addition to the traditional Free File program for filers who made less than $57,000 in 2009, the IRS is again offering Free File Fillable Forms for anyone to use, regardless of income. But the process does have some limitations.

Unlike the traditional Free File programs, there is no interview-based filing system, the assistance method that's typically associated with tax software. While the forms will do the math automatically, you must know what information needs to go on the forms' various lines.

Once you've completed the forms at your computer, you then press e-file and the tax documents will be sent electronically to the IRS at no charge.

However, if you also need to file a state return, you are on your own. Free File Fillable Forms does not include state forms or state e-filing.

Free File's future

Last year the Free File program experienced a dramatic drop in usage, going from almost 5 million taxpayers clicking through the site in 2008 to around 3 million in 2009.

"We had concerns about the Free File program because of the decline, so we looked more closely at the numbers," says Williams. "We found that users who dropped out of Free File went on to use other free tax preparation, filing products."

In fact, says Williams, Free File is benefiting taxpayers who don't use or are not eligible for the program. "The existence of free file has pushed the tax software industry to offer more free products of their own," he says. "Companies that have paid products are now using more free programs. So those taxpayers who stopped using Free File are still e-filing, but have moved to free products offered outside the Free File program."

And that's not a problem for the IRS. All types of e-filing are good, regardless of which electronic route is used by taxpayers.

The actual processing of returns is quicker and it's easier for the agency to handle large numbers of returns when they come in electronically. It also costs Uncle Sam 20 cents per return to deal with an e-filed 1040 instead of the $2.50 per each filing that has to be manually processed.

So as long as more people e-file somehow, Uncle Sam will be happy.

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