Frank Y., a Consumer Reports Money Adviser reader from Terre Haute, Ind., has been discovering some of the same things I've been finding in my research on the IRS Free File site. The IRS says that anyone with 2007 adjusted gross income of $54,000 or less is eligible for Free File, a program that lets you prepare and file your federal returns online free via 19 participating companies. Even with the income limit, Free File is designed to serve 70 percent of American taxpayers. (To take advantage of free federal filing, you must go through IRS Free File.)
As Frank found, in reality the system can be restrictive, and is often confounding.
Problem #1: "Each Free File participant [company] decides who to allow to file for free. Their rules are quite different as well as quite confusing."
True. While some companies hew to that $54,000 rule, not all do. Market leader TurboTax, for instance, says you have to 1) have an adjusted gross income (AGI) of $30,000, 2) qualify for the Earned Income Tax Credit (with an AGI of up to $39,783), or 3) be an active member of the military. Only military folks can have AGIs of up to $54,000 and still do Free File using TurboTax. CompleteTax requires folks to have an AGI of $32,000 or less, period.
Competitors have other limiting criteria in addition to an AGI of $54,000. TaxCut, eSmart Tax, and OnLine Taxes say you must be age 50 or younger. Conversely, TaxSlayer's target users include taxpayers age 65 or older. (The company also serves folks age 25 and younger, and several other very specific populations.) Scads of Free File companies only serve residents of certain states.
The easiest way to wade through the clutter of qualifiers to find a company you can use is through the IRS's interactive worksheet. Plug in your income and personal characteristics, and up pops a list of companies that can do the job.
Still, I have to ask: Wouldn't it be easier and more fair to taxpayers to let everyone use the service of his or her choice?
Problem #2: "It's only in the fine print that you learn what the programs can handle."
Frank mentions the TurboTax Web site, which he says only indicates in the fine print: "Complex tax situations not covered: Investments, Rental Properties." "When you click on the (small) link for information about coverage," he notes, "you get a list of the forms that are covered and the forms that are not covered—with absolutely NO explanation as to what situation each form covers. ... In order to know whether you can use the Free File system you have to understand the purposes of all of the IRS forms, which one does not know unless one has already filled out the tax forms (or is a CPA)."
Good point, though TurboTax is hardly alone there. For example, at 123Easytaxfiling, we found a list of 11 "limitations and unsupported items," including decedent returns, portions of Schedule A related to certain charitable contributions, and sections of the 1040 dealing with some retirement and health insurance deductions for the self-employed. FreeTaxUSA doesn't support 19 IRS Forms, including Form 8839 for the Adoption Credit, and Form 4684, for casualty losses. Average1040 lists the forms it does cover, and leaves you to guess what it's left out.
I can't blame the companies entirely. In some cases, their Free File editions are meant for simpler returns; they make their money from upgrades for more complex cases. But that lack of completeness is another annoyance for taxpayers. It's just one more thing you have to check out carefully before taking the plunge. And as Frank says, most folks don't know what they need just by looking at the form number or title.
Problem #3: "In order to know whether you are eligible to file for free you have to know your AGI - which of course is computed as you figure your taxes."
Yeah, this one always flummoxes me. You could go through the entire program—at least an hour for even the simplest returns—and discover you're ineligible. What a pain!
Frank finishes up his e-mail with some pointed words, which will resonate with anyone who doesn't make a living in tax preparation:
"The tax code will never be simplified until every elected official is required to complete his/her own tax return plus those of all immediate family members—all without ANY assistance from any other person and with a video camera recording the whole experience so that it can be posted on the Web for the education and entertainment of the taxpayers who have to deal with the mess created by these officials. Every time I look at attempts to simplify taxes and make things easier for low-income people I see that the exact opposite has again happened. ... When you add to this the confusion caused by inaccurate statements and misleading information provided by both the IRS and the Free File companies, it is enough to make one long for the good old days when the only thing people could complain about was the top tax rate of 93%."
Inaccurate? Not really. Misleading? Possibly. Confusing? Absolutely.
Thanks, Frank, for expressing so well that seasonal frustration felt by Free Filers, and everyone else.
—Tobie Stanger