Tax season and free filing

It’s tax season again and I find myself shelling out another $20+ to get the tax software. Don’t you sometimes wonder why can’t the IRS provide a free and convenient filing facility for everyone, without adding on various limitations for free filing or asking the filer to use an outside vendor?

Here’s one article I read recently on the state of e-filing

We live in an age when everything is going electronic – credit-card bills, court filings, rent payments, even applications for Social Security benefits. We rent movies over the Internet and send e-mail from our cell phones.

Yet the federal government can’t seem to offer us an easy, online way to calculate and pay our income taxes.

The feds realize their position is somewhat ridiculous. Faced with a congressional mandate to cut processing costs by reducing the number of paper tax returns, the agency has worked with tax software providers to create Free File, which theoretically offers free federal online tax preparation and online filing to the 95 million taxpayers whose adjusted gross income didn’t exceed $54,000 in 2007.

I say “theoretically” because the IRS and the 19 participating companies in the Free File Alliance have structured the program to make it as difficult as possible to actually use it. Last year, just 3.9 million eligible taxpayers participated.

Free File is essentially a portal with links to special programs created by the 19 companies. But unless you already know about it, Free File is hard to find. It’s available only through the official IRS Web site, www.irs.gov. Participating companies can’t link to their own Free File offerings from their main sites. (To their credit, TurboTax and TaxACT offer free returns to a wide range of filers on their own sites.)

Why the crazy rules? Three years ago, some of the participating companies decided to offer free federal returns to everyone, without any income limits whatsoever. (Free File vendors typically make money from selling state returns and other extra services.) The literal free-for-all was great for taxpayers but costly to vendors. So they negotiated with the IRS to make sure such unbridled competition would never happen again

On a related note, I find it even more ridiculous that I have to pay additional to e-file using the tax software. You mean I have to pay additional money, so that an external vendor has all my sensitive information and the IRS has an easier time processing my return (as opposed to manual paper processing) and then take out cash from my bank faster?

Sorry, no thanks. I will rather send in my return through the good old USPS near the middle of April.

PS. I was made aware after preparing for this post that TaxAct appears to offer free federal filing for all. So it seems that I can file my federal taxes for free at TaxAct and file my CA state taxes for free at CalFile. The downside is that I would need to re-enter my information twice. As I have already bought the tax software, I might revisit this issue next year.

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