LOS ANGELES – In 2005, more than 65 million tax returns were filed electronically — more than half of all tax returns filed, according to IRS's year-end statistics with 70% of all electronically filed returns coming from tax professionals. And 2.5 million more people prepared their own electronically filed tax returns during 2005.
You can save yourself a lot of frustration by using the right tax-software or online-fling program. But which one do you choose?
Buying tax software in a box provides you with several advantages that you don't get with most online software:
You can use that software forever. Just hold onto the box. You can do tax returns for everyone in your family for the price of one software package. Just don't get greedy and do it for pay. That's one of the no-no's in your agreement. The box usually also includes the forms and calculations for amended returns. If you print out and mail your tax return, your personal tax data is not in any corporate database, just waiting to get hacked. It will only be in IRS's database once staff keys it in. If you coded your bookkeeping or accounting correctly, some tax software may read your bookkeeping summaries — and you'll have very little to enter. The programs will generally import your data from last year's software.
There are some disadvantages to using taxes in a box:
You won't have an online copy if you need it quickly and you're not at home. You'll usually have to pay extra if you want to file electronically. You may not be able to get an instant refund, if you need it. You may not be able to read the backed-up software file several years from now. No matter how easy they try to make it — the instructions are confusing.
The National Association for Tax Professionals (NATP) polled its members about some of the problems they'd fixed when people had done their own tax returns — and this one was a doozey!
Under "costs of the loan" a Cincinnati taxpayer had entered the full loan amount instead of the interest, which was incorrect. When the preparer questioned the man about the incorrect entry, he said that the software had asked a question, he had answered and that's what the software did with the answer.
Clearly, it's easy to misunderstand. But if you're set on doing it for yourself, here are the top software choices:
Intuit's TurboTax. (Mac or Windows) Imports from Quicken, QuickBooks & Microsoft Money. The Deluxe and Premier versions come with one state free — and include the ItsDeductible software. You may use it on multiple computers. It will prepare estimated tax vouchers too. According to Scott Gulbransen, senior manager, corporate communications, the biggest seller is the deluxe version, costing $39.95. TurboTax's Business software will let you prepare your own corporate (1120), estate or trust (1041) and partnership (1065) tax returns.
H&R Block's TaxCut. (Windows) Imports from TaxCut, TurboTax Quicken, QuickBooks, Microsoft Money and H&R Block DeductionPro. Deluxe and premium versions include one state. TaxCut State does not support part-year resident or nonresident tax forms for over a dozen states. But, they do offer prior-year software, if you need to catch up for several years. With a rebate coupon, you can get a free copy of Microsoft Money and a discount on their DeductionPro. Tax Cut's deluxe edition is a good value at $29.99.
2nd Story Software's TaxAct. (Windows) You can download it for free. The deluxe version including one state is only $19.95. Electronic filing of the Federal return is included. State adds $7.95 — for a total price of $27.90 — the lowest in the group. It doesn't claim to import data from anyone's bookkeeping system.
In general, you get a great deal of flexibility when you buy the software — and all of the deluxe versions and above come with interesting tax libraries and educational information.
What about filing online?
Security is a big issue if you use on online filing program. If you're afraid of filing online, you may as well know a big secret: Your tax professionals are filing online — and nothing bad has happened to any of their clients. So far.
The very largest online filers have invested heavily in protecting your privacy and their databases. When asked how they would handle a security breach that affects you, here's what the top online suppliers had to say:
TurboTax's Gulbransen says his company has never had an incident in over 22 years. But in speaking of compensation due to its errors, Gulbransen said that TurboTax would pay 100% of the penalties and interest. Free technical support is available via phone, chat, online or e-mail. All support is by enrolled agents or CPAs.
For tax advice, TurboTax has added a live phone service connecting you with an enrolled agent or CPA who has at least 5 years experience with both tax preparation and TurboTax for only $29.95. TurboTax will filed amended 1040X's. But it didn't comment on state amended returns. When it comes to storage, you can access your returns until October of the following year.
TurboTax encourages you to save your own return as a PDF file. It keeps your electronic returns for 5 years, as required by IRS — but doesn't provide them to you. H&R Block Online has you sign an agreement holding it harmless from all liability. The company will reimburse you for the penalties and interest for any errors they make on your tax return.
And H&R Block guarantees to help you respond to IRS notices for free. They'll even go with you to the audit to explain how your tax return was prepared. Customer support is available via e-mail or by phone — or you get your questions answered by an H&R Block professional for $19.95.
Debra Gray, product manager of CCH's CompleteTax said in the unlikely event of a security breach customers would be compensated any amount they have paid. Customer service is available via e-mail or a message center. You can get technical help via live Internet chat support for $4.95 for two questions. Support is provided by trained professionals who explain the screens and use of the program. They are not tax professionals and don't offer tax advice.
CompleteTax does not have the capacity to file amended returns in the event of an error — theirs or yours. CCH CompleteTax retains current and prior-year return information. With a paid return the taxpayer is able to print a PDF copy of the current-year return. The fee for printing a prior year return PDF copy is $9.95.
TaxBrain has never had a breach, said Craig Petz, vice president of sales & marketing. He said TaxBrain guarantees that you will be covered 100% for any funds improperly removed from your accounts while the service is handling your transactions. This includes funds removed from your accounts as a result of online theft of your account numbers or password. Technical support is available by telephone, online chat or web mail. They can and will file amended returns but don't have the capability to amend state returns. Free storage of your tax returns is for one year. You may pay extra for five years of storage. If you were a prior year customer, TaxBrain will roll over your tax data completely from your last year's return.
All the online services have early-bird pricing. So if you're going to file online, do it soonest. But, if you're really not ready don't rush. You don't want to get it wrong just to save $10 to $50. The cost to fix it will be much higher.
Shop carefully. Be sure to add in the cost of your state filing, printing your return and electronic filing when you compare prices. Always print a hard copy of your tax return and put it away for safekeeping, in addition to any electronic, PDF or other files you might create.
Beware of anyone pushing quick refund services. You don't need them. They are expensive. If you file electronically, you'll get your money within two weeks to 20 days. If you mail in your tax return, expect to wait three to 6 weeks, depending on when you file.
And if you really want to have fun? Use all the online services to see how their system helps you and explains what you need to know. All of them will let you enter your data for free. They will only charge you if you actually file the tax return. And don't hesitate to call them to see if their customer service meets your needs.
Do your research this year. Then, once you find a service you like, keep using it. They tend to retain the same character from year to year. And besides, if you establish a relationship, you'll get better service — and discounts for being a returning customer.
Copyright (c) 2006 MarketWatch, Inc.