Online Tax Prep: Is It Cheap and Safe?

March 20, 2012 -- Online tax tools--many offering free advice--can make filing your return this year a breeze. More good news: The IRS is giving you two extra days to file, until April 17. Beware, though: People who file online should heed two cautions:

First, the price you'll pay to file for online tax prep programs may be higher than the one that's advertised.

Second, after you have filed, be sure to take precautions to protect yourself against identity theft.

All the major online tax-help providers, including household names TurboTax and H&R Block, offer comparable services at comparable advertised prices. Each website gives you the option of buying tax software and then downloading it (so you can file a printed return); or of using the website to do your return entirely online.

For example TurboTax, for a basic federal return, quotes a price of $29.95 to download and $19.95 to file online.

If you choose to the latter option, most sites don't bill you until the very end of the filing process, after you've entered your data and completed your return. But between start and finish, added fees can accrue. Some sites, for example, try to up-sell you additional services and features--audit protection, say, or fraud protection--without always making clear that you'll be charged extra for them at checkout.

Filing state taxes also costs you more--sometimes much more--a fact easy to overlook on some sites. TurboTax's promoted price for state taxes is $36.95 -- that's $7 more than the federal return.

More complicated returns--ones involving, say, itemized deductions or personal businesses--may incur higher fees. (We should point out that 1040EZ filers can use TurboTax for free, though that doesn't include state returns.)

Sneaky? Not at all. Anybody who reads the websites carefully at the outset understands that he or she can wind up paying more than the promoted price. Still, if you file online, you aren't told the total cost until you've done all the work and entered all your data, which makes you something of a hostage to the process.

Enter new, flat-fee providers such as TaxSlayer and OnePriceTaxes.

OnePriceTaxes, as its name implies, charges a single flat fee, regardless of whether the filer's return is simple or complex. Total cost is disclosed up-front, and there are no hidden fees. There's no extra charged for the efiling of state taxes.

On OnePrice, a federal or state return costs $9.95. A federal and state return, combined, cost $14.95.

Two North Carolina entrepreneurs, Robbie Edwards and Jason Cale, co-founded OnePriceTaxes five years ago. "The two giants," says Edwards, referring to TurboTax and H&R Block, "spend a lot on marketing. They charge a lot of money for those big names. But we deliver the same service, and we go through the same testing process by the IRS." Their target customer, he says, is somebody price-sensitive, to whom the difference between $15 and $100 means a lot—a young person right out of college, perhaps.

That doesn't describe Todd Earnhardt, 49, who, until last year, had used TurboTax. A self-described "computer guy" he's been using some form of tax software since 1996.

TurboTax, he says, kept getting more expensive. "The deal breaker was how much more it cost to file the state return. The fee for the federal return seemed reasonable. But the price seemed to double when you did your state return."

Earnhardt did a side-by-side comparison between TurboTax and OnePriceTaxes: "I wanted to make sure they were doing the math right." He liked what he found, and he definitely preferred the $15 price. If he'd done his taxes with TurboTax Deluxe this year, he thinks, he'd have spent $29.95 and "maybe another $35" for his North Carolina filing.

Not only has he already filed, he's gotten a refund big enough to cover "a new set of golf clubs."

If, like Earnhardt, you efile, take a few precautions to make sure you don't leave your data vulnerable to identity thieves.

If you'd filed the old fashioned way, on paper, you'd of course want to shred tax documents you no longer need. Do the same with your electronic documents.

For Apple users, says security consultant Securosis, that's easy: Macs come with what amounts to a built-in shredder, "Secure Empty Trash," listed in the Finder menu. By selecting it, you overwrite your data, making recovery of it by thieves all but impossible.

PC users can delete a document and then empty their recycle bin. For greater security, they can buy document-shredding software, such as Erasure or File Shredder, that overwrite their data.

Any tax documents you want to retain should be stored, says the Identity Theft Resource Center, on a password-protected USB thumb drive or external hard drive. Drop these in a safe deposit box or put them in your home safe.

If you're satisfied with the safety precautions of storage companies like Carbonite, you can store your tax documents in "the cloud" -- the company's secured servers. Or you can leave them on your desktop as password-protected PDF files. Click the "save as PDF" option on your computer, then, from the drop-down menu of "security options," select the one that lets you add a password.

PC owners running Windows 7 can use the "BitLocker" feature to encrypt an individual file or an entire drive.

When the day comes that you finally dispose of your computer, the Privacy Rights Clearinghouse in San Diego recommends you use special products called disk wiping utilities or disk erasers to wipe your hard drive clean.