Can Software Make April 17 Less Taxing?

In this world, Ben Franklin observed, nothing is certain but death and taxes. With any luck, death is a ways off—but the April 17 tax deadline is just around the corner.

Many of the 145 million Americans who file returns either hire an accountant or use a trained tax preparer at a walk-in service like H&R Block or Jackson Hewitt. The average fee for a tax professional runs around $205 for an itemized federal and state return; for those who don’t itemize, it’s $115.

To save money, others try the do-it-yourself approach, which results in no dollars leaving your wallet but has its own set of costs: time, uncertainty and, most likely, plenty of angst over the complexities of the tax code.

But a growing number of taxpayers—about 39 million last year—are turning to computer-based tax preparation products and services, many of which promise a bigger refund, delivered sooner and with fewer headaches and less cost than a professionally prepared return.

“In general, we believe that tax preparation software is a great thing that benefits most taxpayers,” says David Williams, director of electronic tax administration for the Internal Revenue Service, which operates its own free e-file program. “The tax code is complicated and intimidates a lot of folks. And it’s hard for them to know what the latest tax breaks are and what forms they need. If you don’t want to use a paid preparer, tax software takes the mystery out of filing and improves your chances of getting tax breaks.”

Easy to use

Three programs—TurboTax, TaxACT and H&R Block at Home —dominate the field. Even for technophobes, the software is easy to use: Put a disc you purchased at a store into your computer’s CD drive or download the program directly from a company website. Once it’s installed on your computer, the software typically uses an “interview” process that takes you through a series of questions to calculate deductions and credits.

“Tax software is designed to walk you through your return, step by step, with no tax jargon,” says Julie Miller of TurboTax, the first such product (introduced 25 years ago) and still the most popular, with an 80 percent market share. “Our product starts by asking if you had any life changes in the past year, as do 70 percent of people. Did you retire? Did you buy or sell a home? Did you send a child to college?”

Based on your answers, the software takes over, asking follow-up questions that Miller says best gauge eligibility for about 350 possible deductions (the IRS’ Williams concurs). All the while, TurboTax uses your answers to keep a running tally of your calculated refund, which averages about $2,400 per U.S. taxpayer.

There are no data to suggest that you’ll get more deductions by using tax software instead of filing with the help of an accountant, says Williams, but he has little doubt about the programs’ accuracy. “The IRS works with all major software companies to ensure their products reflect the latest tax laws,” he says. “And when people file by hand, they end up making calculation and other errors. Tax software is especially designed to correct for those.”

Even many tax preparers use software products, albeit professional versions not for sale at the local office supply store.

Next: Caveats and costs. >>

One size may not fit all

Commercially available software isn’t right for everyone, warns John Ams of the National Society of Accountants, a Washington-based trade association. “These products are best for people who have a plain vanilla tax return,” he says.

Software programs may not go into sufficient detail for returns that deal with complications—for example, trusts, inheritances, income from partnerships, home business deductions that have “gray areas,” or life changes like marriage and divorce.

“When you are answering yes or no to questions,” says Ams, “the answer could depend on many factors. And because software makers participate in a liaison group with the IRS, the products have the IRS’ view and tend to err on the side of being too conservative.”

There’s no denying, however, that using tax software programs is less expensive than hiring a tax professional. Prices for TurboTax, TaxACT or TaxCut start at around $17 for a federal return with itemized deductions and top out at about $199 for the most sophisticated version, designed for corporations, partnerships and multimember LLCs. (Some financial institutions, like Bank of America, offer discounts for customers. Check your bank’s website.)

The costs

Yet some taxpayers don’t need to go shopping or even spend money. For uncomplicated federal returns, the Big Three manufacturers offer free versions of their programs on their websites.

“Our free version is designed to meet the needs of the 95 percent of the population that do their own federal returns—supporting long forms with Schedules C, D and E,” says Leigh Aragon of TaxACT. “Once you file your federal form for free, it’s easy to import that information onto state returns.”

However, the software websites charge $13.95 and up to file state returns online; rates increase for more complex forms. (A handful of lesser-known companies, such as TaxSlayer.com, offer online federal and state filings starting at around $10.) Another add-on: Expect to pay up to $30 for such services as being able to ask your own questions or having your tax return reviewed before filing.

Still, with a tough economy, that free e-file is a marketing incentive among the highly competitive software manufacturers. A few years ago, e-filing fees ran between $10 and $15.

Even the IRS has expanded its free e-file offerings. Taxpayers with an adjusted gross income of $57,000 or less (about 70 percent of filers, according to the IRS) can use the Free File service, available in English and Spanish. It links to commercial software websites (taxpayers can choose which company they want) and thus offers the interview process to determine deductions and credits. State returns are available through the websites at an additional charge.

If you don’t qualify for that service, the IRS has put many of its forms online, and all taxpayers—no matter their income—can fill in the blanks without putting pen to paper and then e-file at no charge. There are no question-and-answer prompts, though, and no state forms are available.

Whether done with store-bought software, online versions or Uncle Sam’s offerings, e-filing is secure and it provides a quicker refund, says Williams.

“When you file electronically, you can get your refund in as little as eight days; when you mail your return, it takes four to six weeks,” he says. “That’s because once we get a paper return, we need to make sure the information is correct and then hand-type it into our system. That takes time, and there’s human error to correct.”

Sid Kirchheimer, who writes frequently on consumer affairs, is the author of Scam-Proof Your Life (AARP Books/Sterling).