How can I file an electronic tax return for free?

John W. Schoen Senior Producer • Profile • E-mail

With just over a month left to file his tax return, John in Chicago is steamed that he has to pay to file electronically. Turns out there's a little-used service that may let him-- and you -- e-file for free.

Free filing
If the IRS wants me to e-file, why do they insist that I have to go through a third party? I realize that this creates jobs, but it cost me money.
John U., Chicago, Ill.

It doesn’t have to. A little-used program offered by the IRS and tax prep software makers lets most Americans prepare and send in their returns electronically – for free.

The program, called Free File, was set up three years ago in a deal the IRS struck with companies that make tax preparation software. In return for not competing with them by developing its own tax preparation package, the IRS required tax software makers to provide a free version of their services to 70 percent of all taxpayers, according to an IRS spokeswoman. Because higher income taxpayers have more complicated returns, those with adjusted gross incomes in the top 30 percent aren't eligible. This year, the cutoff is about $50,000.

Aside from getting your return processed faster, filing electronically makes it much more likely your return will be error free. The IRS figures the error rate on electronic returns is about 1 percent, compared to an error rate for paper returns of more like 20 percent. The most common errors are failure to sign the return, math errors and incorrect Social Security number. (E-filing eliminates the last error because the IRS will promptly kick back an e-filed return with the wrong Social Security number.)

To use Free File, you’ll have to choose among the 20 providers that participate in the program. You enter your information into the preparer's Web site and then send the competed return electronically to the IRS. Each of these tax prep sites offers their own ways of guiding your through the process.

Free File is not completely free: you’ll have to pay a fee to prepare your state return, for example. And be prepared to get pitched a variety of paid services, including what are called refund anticipation loans – where the tax preparer offers to give you an “instant refund” – which is really just a way to charge you interest on a loan against the refund you’ll get in a few weeks anyway. (You don't have to sign up for any of the paid services to use the free site.)

So far, the three-year-old program is not widely used – possibly because the tax preparation companies would rather promote their paid software. Last year, only 5.1 million of the more than 92 million taxpayers who were eligible to for Free File - or about six percent - used the service. The rest of the 68 million people who filed electronically – just over half of all returns - paid a fee.

The IRS has looked at the idea of letting anyone file directly from any PC, without using one of its designated intermediaries, but the security problems are just too daunting. By restricting e-filing to a relatively small number tax preparers, the system can rely on secure, encrypted lines. If the system were open to anyone on the Internet, you could probably find a savvy 13-year-old who could set you up with a nice refund every year for the rest of your life.

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