Next step in high-tech tax prep

The April 17 tax deadline lies eight weeks away.

By that time, some 127 million personal income-tax returns are expected to reach the IRS.

To get the job done, most Americans will plow through paper forms, turn to their computers, or hand over shoeboxes of receipts to a tax preparer.

But a small and growing crowd is heading to the Internet.

Forrester Research estimates more than 1 million taxpayers will prepare and file online this year - more than twice as many as in 1999. Some industry officials think that total could quadruple.

In its first month, Intuit's TurboTax for the Web already has processed 405,000 completed federal returns, a 69 percent jump over all the federal returns it prepared online last year.

"The Internet is the future," says Roger Ochs, president of H.D. Vest Financial Services in Irving, Texas. "The do-it-yourselfers will use online tax preparation in lieu of boxed [tax-software] packages. It's also going to replace pencil and paper."

Such claims may seem a little lofty. Roughly half of Americans fill out their own tax forms. And of that total, fewer than 1 in 10 use a computer to do it. Last year, 5.6 million people bought tax software, according to PC Data, and the numbers grow about 30 percent a year.

But with tax activity exploding on the Web, online programs soon could overtake software packages and begin posing a serious challenge to the paper return. "The numbers just keep skyrocketing," says Pat Crorkin, assistant vice president of e-commerce at H&R Block. "In the next two to three years, the total volume in those markets will likely exceed the [packaged] software market."

This perceived demand has led more companies to offer online tax preparation services. Last year, for example, H&R Block only offered a Web program for the simplified 1040 EZ return; this year, its full program sits online. EZ filers can use the program free; others pay only $10. (Unfortunately, technical problems have forced the company to take the site down twice this month.)

Meanwhile, the company's main rival, Intuit, is expanding its Internet reach. It has signed up some 400 company Web sites to offer links to its online TurboTax program - more than 10 times last year's total. And it is making the program available at no charge to more customers. Last year, people earning under $20,000 a year could use online TurboTax for free. This year, those low-income taxpayers and anyone else using the EZ form can use the program without charge.

H.D. Vest, the newcomer to Internet tax prep, has gone a step further. Its online tax program is free to everyone. The company hopes to attract 1 million customers to its Web site and generate more business for other H.D. Vest services.

In the future, many financial-services companies may follow suit and subsidize online tax preparation, tax experts suggest. Already, Vanguard and Fidelity mutual funds along with ETrade online brokerage are offering the online TurboTax program free to their customers.

Not so fast, other software-company officials argue. "Price is one factor; it's not the only factor," says Elizabeth Dougherty, product manager for Intuit's TurboTax on the Web. "People want to make sure that it's fast. They want to make sure it's easy to use and it's reliable."

Then there are privacy concerns. Preparing taxes online means storing data on someone else's computer. Online companies say they've gone to great lengths to protect those files from snoopers. (On the three online programs reviewed for this article, customers can choose not to have their data used for marketing purposes.)

Whether taxpayers prepare their returns on the Web, on their own home computers, or through a professional tax preparer, they can file them electronically.

The IRS likes electronic returns because they are cheaper to handle, don't run up printing and postage costs, and are generally more accurate. "It won't be too long before we're going to see some real substantial volume coming over the Web," says Bob Barr, assistant commissioner for electronic tax administration at the Internal Revenue Service (IRS). One in 5 paper returns contains an error, he adds, while less than 1 out of every 200 electronic returns does.

The White House is pushing Congress to offer a $10 credit to any taxpayer who files electronic returns. Last year, nearly 30 million Americans filed that way. This year, the IRS estimates the total will reach 33.6 million - about 1 in 4 individual returns the IRS will receive this year. Congress's target is that 4 out of 5 Americans will file their tax forms electronically by 2007.

(c) Copyright 2000. The Christian Science Publishing Society