Electronic tax filing gains popularity

WASHINGTON -- Electronic filing of self-prepared federal income tax returns has jumped 20% this year.

And the Internal Revenue Service thinks the trend will continue through the April 15 filing deadline.

A major factor is September's decision by the makers of the two most popular tax preparation software kits to no longer charge an extra $12.95 fee for each tax return that's filed electronically.

Given the choice of paying $12.95 or buying a stamp to mail a printout of the tax return prepared on a computer, many Americans opted to use the U.S. Postal Service.

David Williams, director of electronic tax administration for the IRS, says there's another reason for the popularity of paper-free tax returns.

"People are just more comfortable with doing things online," Williams said. "People are more comfortable with online banking and other things."

Last year, 55% to 60% of all federal tax returns were filed electronically. Congress wants that to reach 80%. Williams predicts it will be a little more than 60% this year.

The conversion has financial benefits for the federal government. It costs the IRS an average of $2.87 to process each paper return, compared with 35 cents for an electronic return.

And electronic returns have benefits for taxpayers as well:

• Tax software corrects simple math mistakes.

• It advises people of tax deductions and tax credits they may not be aware of.

• Refunds can be sent out in as little as eight days if a taxpayer chooses to use direct deposit.

• Payments by taxpayers who owe money can be electronically delayed until April 15 even if the return is filed early.

Paid tax preparers filed about two-thirds of electronic returns.

Among people who do their own taxes on a computer, about 5 million used a special website last year that the IRS and a group of 20 tax preparation software companies sponsored called the Free File Alliance.

Free File is available again this year to people earning less than $56,000. It is offered under an agreement the IRS struck with software vendors to make their products available free to 70% of tax filers.

Tim Hugo, executive director of the Free File Alliance, says usage of his organization's website is down more than 10% so far this year. He attributes the drop to people who have switched to tax software they can install on their computer and, in many cases, obtain free from software companies that are trying to gain brand loyalty or sell other financial products.

"I think the competition between the products we offer and many of the other products is great for the consumer," Hugo said. "Especially in this economic climate."