Free File Survival Guide

Prepare and file your own returns on the Internet

By Kaye A. Thomas
Posted January 23, 2008
Updated February 20, 2008

Free online return preparation and electronic filing is available for everyone, but not through the IRS Free File program.

Most taxpayers are eligible to prepare and file their federal income tax returns online free of charge using the so-called Free File program administered by the IRS. Here are some tips on using the program.

Update

My opinion: The Free File program administered by the IRS imposes arbitrary limitations and has other awkward features. You can avoid these limitations by going directly to TaxACT.com, where free online return preparation and electronic filing is available for everyone. I don't see any particular reason to use Free File when a high quality alternative is available free to everyone.

Overview

To use the Free File program, you have to go to a special page on the IRS website (see "magic door" below). You'll be taken to a list of companies offering the service, each with its own set of restrictions. Click on the link for the one you select and you'll exit to a website provided by the software company. That website take you through the process of preparing your tax return and filing it electronically.

The experience should be similar to using tax software you buy in a store. You'll answer a series of questions about your income, deductions and other information needed to prepare your tax return. When the program has all the required information it does the tax calculation and provides instructions on how to move forward with filing your return. Generally this process is most suitable for people with relatively simple tax returns. Note that people filing certain forms, listed here, won't be able to file electronically until February 11.

The income limit

The Free File program isn't available if your 2007 adjusted gross income is over $54,000. (Adjusted gross income is what's left after subtracting certain items, such as IRA contributions, but before taking personal exemptions, itemized deductions or the standard deduction.) Apparently the limit is the same for singles as for married couples, so if you're married filing jointly, and you and your spouse both earn $40,000, you won't qualify for this program.

Some companies impose their own limit below $54,000. And companies impose other limitations on who can file free of charge, such as only people below age 50. Because of an industry-imposed limitation (the kind that should be illegal under the antitrust laws), no company is allowed to provide services through the Free File program for people with income above $54,000.

Warning: A study of the Free File program found that some of the companies allow you to get through the entire process of preparing your return online before letting you know that you don't qualify for free filing. They're obviously hoping that by the time you've done that much work you'll be willing to pay a fee to file the return rather than start over.

The magic door

Instead of using the Free File program, you can go directly to a website of one of the companies that participate in the program and go through the process of preparing and filing your return. If you do that, you will have to pay a fee, even if you meet all the requirements for free filing when using that company's services through the Free File program. (TaxACT.com is an exception: they make free filing available to everyone on their website.)

My opinion: It's dishonest for companies to charge for these returns. It's like charging different prices in a store depending on what door a person used to enter. But that's the situation, so be sure to go through the magic door if you want to file without paying a fee.

Magic door: Free File Home

Random access

If I counted correctly, there are 19 companies offering tax return preparation and electronic filing through the Free File program. The IRS doesn't list these companies alphabetically or in any other logical fashion. As a way to make the program fair for all the companies participating (and confusing for taxpayers) the companies are listed in random order. The list gets reshuffled every time you return to the page.

Choosing a company

Each company makes up its own eligibility requirements, and the variety is bewildering. For example, some require you to be younger than a certain age, others require you to be older than a certain age. Some will prepare and file your state income tax return free of charge as well, but others will offer to file your state return for a fee and still others may not be able to prepare and file your state return at all.

To determine your eligibility, you can scan the entire list until you find one that works for you, or you can fill out a form on the IRS website called "Guide Me to a Company" to get a list of companies that offer a free filing service for someone your age, in your state, with your income. Note that if you say you want to prepare and file your state return online, the list will include companies that provide this service even if they require a fee for this service, not just the ones that offer free state filing.

A study of the Free File program published in June 2007 found errors in the programs of some of the companies. The people conducting the study didn't check these programs comprehensively, but they ran some common scenarios. They found that 25% of the programs denied the earned income credit to some individuals who are entitled to claim the credit. And 45% of the programs did not have adequate interview questions to determine if taxpayers could claim a dependency exemption. The report didn't identify the companies that had these problems, but the chances of running into these issues may be smaller if you choose one of the more popular, better established companies. The following companies come to mind, although the list should not be considered an endorsement of their offerings or a criticism of the ones not listed:

Free TaxACT: Free federal online tax preparation and e-file if your adjusted gross income is $54,000 or less and you are age 19 through 54 years old. Extensions e-filed for free. (As noted above, by going directly to the TaxACT website you can file online free of charge without being subject to the limitations described here.)
H&R Block's TaxCut Free File: Free federal online tax preparation and e-file if your adjusted gross income is $54,000 or less and you are age 50 or under.
TurboTax® Freedom Edition: Free tax return preparation and e-file if your adjusted gross income is $30,000 or less or you will claim earned income tax credit, or you are active duty military with an AGI of $54,000 or less.

Note that unless you're active duty military or claiming the earned income tax credit, the income limit for market leader TurboTax is a stingy $30,000.

My opinion: Since when does our government condone age discrimination? How can the IRS justify participation in a program that charges seniors for a service offered free to younger taxpayers?

Refund anticipation loans and other services

In years past, companies participating in the Free File program were criticized for using the program to push products and services, including expensive refund anticipation loans (RALs). Participating companies have agreed not to offer these products to Free File participants, although they may still offer to file state income tax returns for a fee.

Regardless of whether you use the Free File program, you should never fall for a pitch to take a refund anticipation loan. The fees are outrageously high, and IRS processing of refunds for returns filed electronically can be as fast as 10 days, at least if you provide them with bank account information for direct deposit.