Washington — It's easier this year to file your taxes electronically -- and probably for free.
To reduce the time and expense of handling paper tax returns, the Internal Revenue Service is making its biggest push yet to prod taxpayers into going digital this year. The agency says most Americans are eligible to file their taxes electronically -- that is, digitally transmit their returns to IRS.
Taxpayers who go the digital route -- usually their returns are prepared electronically as well -- spend less time doing their taxes, reduce form errors and get refunds twice as fast as those who file paper returns, IRS says.
The agency is offering tax preparation companies an enormous incentive to boost electronic filing: preferential listing on an IRS Web page that directs taxpayers to free, IRS-approved online tax preparation and electronic filing services.
"We think this is a great opportunity for everybody," says Tom Linafelt of H&R Block's online tax services division. "Taxpayers get the advantage of free e-filing, the IRS is going to get the advantage of increasing the percentage of e-filers, and we'll benefit from the exposure."
About 47 million -- slightly more than a third -- of last year's 131 million tax returns were filed electronically. The number of paperless returns has been increasing over the years, but IRS wants to pick up the pace. Congress has set a goal of having 80 percent of tax returns filed electronically by 2007.
A new agreement between IRS and a consortium of tax preparation companies known as the Free File Alliance requires each participating company to offer free online tax preparation and electronic filing to at least 10 percent of U.S. taxpayers, or 13 million people. All told, free e-filing will be available for about 78 million taxpayers.
To encourage even more electronic filing, IRS is giving the companies preferential promotion on its Web site -- the more taxpayers a company offers free electronic services, the higher its listing on the site.
Each company sets its own conditions for free services. Intuit, for example, is offering free online tax preparation to people with adjusted gross incomes of $27,000 or less. H&R Block has not yet set its qualifications, but last year the tax prep giant offered free online services to first-time taxpayers. Tax Brain, another online service, is providing free tax preparation and e-filing to taxpayers age 50 and older.
For the tax preparation industry the agreement with IRS is a relief because it stipulates that the agency won't offer its own free electronic tax services as part of its effort to increase paperless filing.
"Not having the IRS as a competitor is a huge issue for us," said Jason Mahler, vice president and general counsel for the Computer & Communications Industry Association. "We gave up something to ensure that will not be the case. We think it's win-win for everyone."
How can taxpayers take advantage of the push for paperless tax returns?
Visit the http://www.irs.gov or http://www.firstgov.gov Web pages that provide links to free online tax services. Follow the links to an offer that seems right for you. Keep in mind that although tax preparation and electronic filing may be free, there may be a range of other services -- like personal professional tax advice -- available only for a fee.
The consortium's free tax preparation is Web-based -- that is, a taxpayer prepares his or her return online through a company's Web server. The free offer doesn't include boxed software like Intuit's TurboTax and Block's Tax Cut, sold in office supply and computer stores at tax time -- though those vendors may offer rebates and free electronic filing as purchase incentives.
Taxpayers worrying about the security of Web-based tax returns shouldn't, says IRS. Services approved by IRS must have security and privacy certifications and disclose those safeguards to consumers.