E-Filing Made EZ
By Marilyn Pribus

Every year, it's the same old thing. You give your spouse the most sorrowful look you can muster, grab a No. 2 pencil and the biggest eraser you can find, and sit down at the dining room table, where you spend the next several hours filling out pages and pages of tax forms.

Thankfully, computers are making this age-old tax ritual a lot less painful. Tax software programs have automated some time-consuming tasks and eliminated many common errors.

Electronic filing (e-filing) also has helped streamline the process. These computer-to-computer tax returns are completely paperless. You don't even have to mail your W-2s or 1099-Rs to the Internal Revenue Service (irs).

In fact, filing a paper tax return is going the way of the buggy whip. The number of e-filed returns continues to grow, and the irs hopes that by 2007, 80 percent of all returns will be e-filed. Of the 128 million individual returns received by the irs for tax year 2000, nearly one-third (more than 40 million) were e-filed. Although tax professionals prepared many of these returns, more than 6.8 million e-filed returns were self-prepared - a 36 percent increase from the previous year.

I e-filed two returns in 2000, one for my husband and me and another for my elderly mother. E-filing our federal and state returns was as easy as sending an e-mail, and I'm no computer techie. I use my six-year-old pc in the most basic ways (for e-mail, word processing, and an occasional foray onto the Internet).

Using tax software

An increasing number of people are choosing to fill out and e-file their own tax returns because computer software programs have made it easy for them to do so. Personal income tax software has been around for about 20 years, and each year, it gets more user-friendly. These days, you can purchase tax software on a cd-rom or buy it and download it via the Internet. You also can complete your tax return on the Internet.

Many good tax software programs exist, but the two leading programs used by do-it-yourselfers are Kiplinger's TaxCut, from Block Financial Corp., and Quicken's TurboTax, from Intuit Inc. No matter the program, you will find several advantages to using tax software.

One of the biggest conveniences is that most programs allow you to import information from your previous year's computer-prepared tax return. The program then will add a year to your age and fill in some standard forms, such as Schedule B (Interest and Ordinary Dividends), with the names of the financial institutions you reported last year. Other programs even allow you to import information from a personal financial program like Microsoft Money.

Some software programs ask questions, interpret replies, and fill in the appropriate forms and schedules. For example, if you indicate you're self-employed, the program will select Schedule C (Profit or Loss from Business) for sole proprietorship or calculate whether a percentage of Social Security income is taxable and then complete the form. You also can enter the information directly, if you choose.

Many of these programs carry over items from previous years, such as home-office deductions or unused capital losses. Others import tax information via a secure Internet connection from selected financial institutions, such as Vanguard and Fidelity, and some payroll-processing companies. However, you first must establish an online account with each institution.

Software programs catch many of the common mistakes made by those who file manually. For example, tax programs won't accept numbers entered on the wrong line or form and even can catch simple math errors.

Using tax software can save you money. In fact, you may decide you no longer need the help of a tax professional because many programs contain a "Help" section with detailed answers to specific tax questions.

You also can do your state taxes by downloading the appropriate forms from a software manufacturer's Web site. I had never downloaded material from the Internet before, but I had no trouble downloading and installing the proper state tax form. Then, with a couple of mouse clicks, the software acquired the relevant information from my completed federal return, and my state tax return was done and ready to be e-filed. (New Hampshire, Tennessee, and Florida still require that you print and mail in your tax return.)

Another useful feature "audits" your tax return and pinpoints errors and omissions, such as forgetting to fill in your Social Security number.

Finally, software programs keep up with the latest tax-law changes. The program automatically will download these changes via the Internet and check your tax return before declaring it complete.

If you get stuck, don't worry. The manufacturer's Web site usually contains solutions to common problems. Often, free phone support is available, although the call may not be toll-free. You may be asked to pay for the phone support you receive by credit card. Still, phone support can be invaluable, particularly if you encounter a problem shortly before the deadline.

Benefits of e-filing

Tax professionals have been able to e-file since 1986. Only recently have the irs and third-party contractors, such as h&r Block and Intuit Inc., set up systems that allow individual taxpayers to e-file. Security and privacy are ensured because e-filing is performed using military-grade, 128-bit encrypted transmissions.

"The millions [of taxpayers] who now complete a paper income tax form should consider electronic filing," says Patricia Howarth, who oversees the irs's outreach program for individuals who e-file their returns. "It reduces their chances of making an error, and it can significantly speed up the time it takes to get a refund."

According to Howarth, those who e-file receive their tax refunds sooner than those who file and receive their tax refunds by mail, which usually takes approximately six weeks. Last year, my mother's refund was deposited directly into her checking account just seven days after I e-filed her return.

E-filing also helps the government save money. Think of the mountain of paperwork that would have been generated if 40 million people hadn't e-filed their returns in tax year 2000. Add to that the number of employee hours saved because those returns didn't need to be converted (possibly with errors) from a paper format to a digital-storage format.

Another benefit: When you e-file your tax return, it automatically generates a legal postmark that lets you, the irs, or your state tax agency know your return has been accepted. The tax software then prompts you to print a statement (Form 9325: Acknowledgement and General Information for Taxpayers Who File Returns Electronically) for your records. This means you don't have to stand in line at the post office to send your return by certified mail/return receipt requested.

Taxpayers who owe money also can pay via the Internet. Last year, I requested the irs debit our checking account on a specific date, and the process went smoothly.

"For those taxpayers who have a balance due on April 15, there are several electronic payment options available, including direct debit and credit cards," adds Howarth.

Finally - and this may sound strange because I don't even play solitaire on the computer - filling out and filing your taxes electronically is almost fun. It's enormously satisfying to receive the message, "congratulations! The taxing authority accepted this tax return."

I used to wear out erasers - and my patience - back when I did my tax returns by hand. For example, if I amended a single number on Form 8829, I had to change two other schedules and 11 lines on Form 1040. Now, my tax software performs the math flawlessly, no matter how many times I recalculate.

Online tax preparation

You also can prepare your return online by visiting Web sites like h&r Block or Quicken's TurboTax for the Web (both accessible via troa's links page, www.troa.org/magazine/links .asp). Online tax preparation has its advantages. You don't need to purchase, download, or install software, and you can access your return from any computer with Internet access. You even can access previously prepared online tax returns, which are stored electronically in accordance with irs regulations.

Preparing your taxes on the Internet allows you to try before you buy. With Quicken's TurboTax for the Web, for example, you don't have to pay until you print or e-file your return. In fact, if you fall into certain low-income categories, there is no fee.

Financial institutions, such as Fidelity, offer Quicken's TurboTax for the Web free of charge and cover e-filing costs for customers with holdings above a certain dollar amount. Some employers also offer this benefit.

What is the cost?

Tax software packages range in price from approximately $20 (with a mail-in rebate) to $60. Some software packages include business tax forms, additional software, free state income tax form downloads, or free e-filing. However, "free" often involves sending in a mail-in rebate.

If you're shopping for tax software, watch for sales. Most tax software programs are released in mid-December and are compared and reviewed in magazines and newspapers within a few weeks. You also can find information about these products on the Web.

Most software manufacturers' Web sites contain information about programs, pricing, computer specifications, and installation problems, as well as faqs (frequently asked questions) and information on how to obtain technical support. Be sure to visit these Web sites via troa's links page, www.troa.org/magazine/links.asp.