Free tax E-filing may not be so easy

The Internal Revenue Service's new free e-filing program is giving some Americans yet another reason to hate tax season.

Less than a month old, the alliance between the IRS and private tax preparation firms that was designed to encourage more Americans to file their tax returns online is drawing some sour reviews.

Among the gripes: Some taxpayers said they have been charged for services they thought were free. Others said they ran into technical problems and gave up trying to file their return after hours of trying. Still others complain that they had to buy additional services to get the free tax-filing service.

Computer programmer Rance Naffziger of Tucson got so frustrated while trying to file his return electronically last month that he ended up filing a paper return by mail.

"I know electronic filing is supposed to be the wave of the future, but I figure I can wait another year," he said. "I'm happy knowing that the paper copy I sent in stands a decent chance of being read by a government official and having them get back to me."

IRS officials acknowledge there have been problems with the fledgling service, but say the complaints account for a tiny fraction of e-filing volume and are largely attributable to growing pains. "This is obviously new for all of us," said Terry Lutes, director of electronic tax administration for the IRS. "It is a learning experience for us and a learning experience for some of the companies."

The free e-filing initiative is part of an IRS program that's been in the works for more than a year. The agency, which had once contemplated providing free electronic filing direct to the public, agreed late last year to offer the service through a partnership with several private firms.

The IRS' partners range from brand names such as H&R Block Inc., Intuit Inc. and CCH Inc. to relative unknowns such as ESmartTax and FreeTaxReturn.com. The partners agreed to offer free e-filing to at least 60% of the nation's taxpayers in return for the marketing boost involved in being an IRS affiliate.

Consumer groups were suspicious of the plan, saying that tax firms were likely to use it as a way to market other, for-fee services.

But complaints from consumers have focused on other issues, including software glitches and getting charged for services they thought were free.

Some taxpayers may have been charged for what they thought was a free service because the 17 firms involved in the program are allowed to change their qualification standards on short notice. For example, some offered free e-filing only to taxpayers earning less than a set threshold or to those above or below a certain age, while others offered free e-filing only to residents of specific states. But a few firms already have changed their criteria, knocking out eligibility for those age 45 or over or New York residents, for instance.

The result: A taxpayer who started a return but didn't complete it immediately could find a site's free offer was rescinded before the tax return was filed. That appears to have forced some taxpayers to cancel the process and start over, or pay a fee for a service they thought would be free.

"The companies' offerings are changing," Lutes said. "We were uncomfortable with this initially but realize that these companies are not charities. We had to give them some wiggle room."

Stephen Ryan, general counsel for a group representing the e-filing firms, said the tax preparation firms in the partnership agreed to provide refunds in these situations.

In other cases, the fee could have been triggered by taxpayer errors. If taxpayers start the process at one of the tax firms' Web sites -- rather than the IRS Web site at www.irs.gov -- they may be charged for the service.

Naffziger of Tucson suspects that's why FileYourTaxes.com, which says it offers free e-filing to all Arizona residents, was about to charge him $36.50 for filing his return. When he tried to edit his return or delete it so he could start over, the site wouldn't let him fix or delete his information.

"When I selected the prompt saying edit an existing return, it just refreshed the screen," he said. "It wouldn't let me go back in there."

Naffziger sent the site an e-mail asking how he could make the system accept his changes. When he got no response, he gave up.

Stan Kistner, a Florida retiree, had a different problem with FreeTaxUSA. When he entered data from his 1099 forms, which report income from dividends and interest, it showed up on the electronic tax form but not on the summary page that included all the data that would be filed with the IRS.

"Being the honest taxpayer I am, I want to pay what's owed," Kistner said. When he couldn't reach the site's technical support staff, he also gave up.

Thomas Lain of Fort Worth said that after spending more than an hour filling out forms on TaxBrain's site, he was asked to enter a "discount code" so he wouldn't be charged for the service. He went to the firm's chat room to ask how to get the code. The site specialist referred Lain back to the IRS.

"After about 20 minutes of looking at the IRS site, I gave up on finding the code," he said. "So I went back to the TaxBrain site and removed all the information I had stored."

TaxBrain did send the code a day later, but it was too late, Lain said. He'd sent in a paper return.

Officials at several of the tax services said the computer glitches probably are caused by unanticipated volume. The system has been deluged since the IRS launched the program, and much of the activity comes from first-time users, noted C.C. Chen, president of ESmartTax, which is based in Milpitas, Calif.

Though the focus of the program was to get more first-time filers, it also lends itself to more errors and complaints because these taxpayers aren't familiar with some of the vagaries of electronic filing, Chen said.

Overburdened sites may not have been able to respond as quickly to consumer questions as they would normally, said John Vora, president of Tax Simple in New Jersey. Vora said his site got 1,600 hits in the first hour the program was available.

In the first two weeks, 300,000 taxpayers free-filed through the IRS program. "You cannot design for that kind of an onslaught," Vora said. Even sites that had ramped up found their staffs and servers overloaded.

It was another kind of hitch, though, that stymied taxpayer Marie Kopec of Tucson. She was unable to get the free federal filing at FileYourTaxes.com without paying $17.50 to file her state tax return -- and linking fee services with free services is forbidden under the IRS agreement.

FileYourTaxes.com Vice President Timur Taluy said Kopec must have erred. If she selected the state filing -- clearly marked as a fee service -- and failed to change her mind before the federal and state returns were coupled near the end of the process, she would be charged, he said.

Kopec acknowledged that she chose the state return option at first, but said she wasn't given a chance to change her mind.

She considered paying the state return fee but wanted to pay by check. That required an additional $10 payment, and her return wouldn't be filed until the check cleared.

If she wanted to contact the site to ask a question, that too could trigger a fee.

Kopec logged off the site. "I'm going to mail my return," she said.

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