Money doesn't actually talk. We do.

The Basics on Free Tax-Filing Software

A few years ago the Internal Revenue Service struck a deal with the Free File Alliance, a group of tax software companies. The Alliance, which includes Intuit (maker of Turbo Tax), H&R Block and EZTax Return, agreed to provide free federal income-tax preparation software to the majority of American households.

If your household had $54,000 or less of income in 2007 (the number changes each year), then you can prepare and file your taxes online for free using tools that Alliance members provide. The only place you can this access the software is on the IRS website (here).

The Back-story 
Why would these companies offer the software free to people who might otherwise pay for it? Well, the IRS has publicly ruminated about the possibility of creating its own electronic tax-preparation software. Alliance members probably hope that offering their own freebies will keep the government from meddling in the billion-dollar industry.

This may well be enough to keep the IRS at bay. After all, if more Americans file their taxes electronically, the IRS will save boatloads of money in processing costs.

Meanwhile, Free File companies gain the opportunity to build customer loyalty with taxpayers who may eventually pay for more advance versions of their software. Plus, the agreement only requires Alliance members to offer federal tax software for free; many charge high rates for providing the tools to do the state returns.

The Dirt
The Free File Alliance has a few enemies. Some argue that the government should provide all taxpayers with free tax software. But we all know that almost nothing is free in this world. If the IRS developed software for taxpayers to use at no charge, then we would probably pay for it through taxes. And do we really want the organization that collects our taxes calculating how much we owe? That just doesn’t seem right (though Californians might disagree.)

Only a tiny portion of eligible taxpayers take advantage of the Free File program currently. Approximately 3.9 million taxpayers used the Free File program in 2007, though about 95 million are eligible, according to the Free File Alliance’s website. (The IRS, not the Alliance, is in charge of marketing.)

The IRS reports that most users are satisfied with the service. It surveyed Free Filers in 2006 and found that 97% would recommend the program to a friend. But its published study does not analyze each individual company. A quick visit to the 19 participating companies’ websites suggests that the quality of their services varies widely. Unfortunately, the IRS does little to simplify the selection process for users.

Coming Due Diligence
Enter FiLife. Over the next few weeks, we’re going to review each company’s Free File software and let you know which Free File companies are providing quality tax software for free. The goal is to get as many of us less-wealthy FiLife readers filing our taxes quickly, easily and at no cost.

Sound like a pipe dream? Well the IRS says it’s possible. We’ll see…

–Kristen Sullivan

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