By Seth Sutel The Associated Press
Q: I've heard I can prepare and file my taxes electronically, all for free. How do I do that?
A: The IRS is once again joining forces with makers of tax preparation software to allow millions of taxpayers to prepare and file their tax returns electronically at no charge, but there are some changes this year.
The "Free File" program started out four years ago as the IRS was seeking to encourage more taxpayers to file their returns electronically. It not only cuts down on paperwork but also reduces the likelihood of errors when software is used to check the returns.
The program is a collaboration between the IRS and a group of companies including Intuit Inc. maker of the popular TurboTax software, and H&R Block Inc.
When the program started out, it was intended to make tax preparation software available to those "who use it the least but could benefit from it the most" -- lower income taxpayers and those who might qualify for the earned income tax credit, said Julie Miller, a spokeswoman for Intuit.
However, competition among the tax software companies to lure in customers mounted over the years, leading to what Ms. Miller described as a "free-for-all" last year, with many companies making the free filing offer available to anyone, rather than focusing on the lower-income taxpayers who needed it most.
"It was a marketing channel for companies to acquire new customers [and] to market additional services," Ms. Miller said. "It had definitely strayed from its original philanthropic intent."
Last fall, the IRS and the software companies signed a new, four-year deal that sets new ground rules for the Free File program.
The offer will be available to the lowest-earning 70 percent
of all taxpayers, said Bert DuMars, the director of electronic tax administration with the IRS. This year, that means those who have an adjusted gross income of $50,000 or less. If you earn more, you can still file your taxes electronically; you'll just have to buy the software.
The Free File program specifically applies to federal tax returns. Several of the vendors also will do your state returns, but a fee may apply.
"Last year it kind of ran away a little bit," Mr. DuMars acknowledged.
With several vendors opening up their offers of free filing to everyone, some companies were upset that they were losing out on potential business, he said.
In 2005 more than 5.1 million people took advantage of the free filing program, up nearly 50 percent from the year before and representing nearly 4 percent of all taxpayers. But for vendors who might otherwise charge $20 to $30 per return, the free-to-all comers approach also meant a lost revenue opportunity.
So what's in it for the software companies now? Mr. DuMars says the vendors hope that by introducing younger taxpayers to their software for free, they can establish loyalty that will continue once they become older and earn incomes above the Free File limits, requiring them to pay each year they use it.
To find out more about the program, go to the IRS Web site (www.irs.gov ) and click on the link near the top of the page, "Check Out Free File." You'll find out how to participate, whether you're eligible and a list of vendors offering the service.
Despite the new limits, Mr. DuMars said the Free File program already was getting lots of takers -- about 1 million returns already, about on pace with the same time last year.