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Tax Topic: Free File - not necessarily free, nor easy

The IRS Free file initiative was designed to help low income taxpayers efile their tax returns. But, if you are using Free File, read the fine print before you start work on your tax return. Free file can be confusing and many hidden fees can apply. Your privacy and security may also be at risk.

Free File Tax Caution #1:

Watch out for Cross Marketing Programs

Read the Privacy policies. Often freefile companies are offering "free" file to eFile taxes only to get your personal information and sell it to others, or use it themselves to sell you other products. This is a common tactic of the Freefile eFile companies. This tactic may skirt the protections of the Internal Revenue Code, 26 U.S.C. section 7216. If you are interested in the privacy and security of your personal taxpayer information, read the privacy policy carefully.

Free File Tax Caution #2:

Watch out for hidden fees when preparing your tax return.

If you are thinking of using "Free File" watch out for Cross Marketing Programs. It is important to read the privacy policies. Often companies are offering Free File in exchange for your personal information which can be sold to others, or Free File companies themselves may try to sell their other products. This is a common tactic of the Free File companies. So, if you are interested in the privacy and security of your personal taxpayer information, read the privacy policy carefully.

The American Bar Association offers the following additional advice: "Watch out for any 'hidden fees' in preparing your return. ... Even though some qualify to have their federal return electronically filed for free, other services offered by the commercial filers may not be free. Hidden costs are everywhere, so users need to be alert and aware. Some companies participating in Free File may offer to 'professionally review' tax returns after they are filed, or they may offer an online interactive feature to answer your questions, all for a price." Check to make sure what, if any, costs would be charged if you have questions about your tax return once it is filed. Make sure to understand if the company will charge to help you fix any problems you might later have with your tax return, if they even offer this service. Call the Taxpayer Advocate's office at 877-777-4778.

Free File Tax Caution #3:

Beware of pitches for costly refund anticipation loans.

If you Free File and arrange for direct deposit of your refund into a bank account, the IRS says you should have your money generally within ten days. The IRS does not charge any fees to do this and you receive your FULL refund amount. Nevertheless, participating companies in the Free File program offer refund anticipation loans (RALs). If you agree to an RAL, you will receive the dollar amount due you by the IRS as soon as you file your tax return. You should understand that RALs are NOT REFUNDS. RALs are loans with interest. RALs always include interest, usually very high, and many times an additional fee will be added. An RAL reduces the amount of your REFUND by the amount of the fees and interest charges. The longer it takes you to pay back your RAL the more it will cost you. Think carefully before you agree to an RAL. You are liable for the RAL (loan) even if your refund from the IRS is disallowed in whole or in part. This is because an RAL is a separate loan from a lender. It is not your refund.

The IRS does not encourage or endorse the use of RALs offered by commercial providers.

Free File Tax Caution #4:

Freefile is Not the easy way to prepare and file taxes; often confusing

There is no single way to determine who qualifies for Free File so you will need to do some homework. In order to qualify, you also must meet one or more eligibility conditions, including:

Filing tax form 1040 EZ;
Claiming the Earned Income Tax Credit; or
Qualifying as a low income taxpayer.

Still, the process can be confusing. Seventeen companies are participating in the Free File alliance, and each has its own criteria for determining who can eFile for free. For example, one company offers free e-filing for those with an adjusted gross income of $30,000 or less. Another offers the service to someone with an adjusted gross income of $100,000 or above. Still other companies offer free services to anyone 50 or older, taxpayers on active military duty, or residents of specific states.

Tax Tip: A Safer, Easier Way to File Your Taxes is to use Low-Cost E-File Companies

Reputable companies like Taxhead.com charge a small fee to efile your tax return, but honor and respect your privacy. According to their Privacy Policy your information will never be sold, disclosed, or used for cross marketing. Taxhead.com tax software is free to use. Use it to help prepare your tax return. Then for a small fee, with no hidden charges, you can eFile your federal income tax return. No other tax software and eFile company can get you a tax refund faster, without charging you for a costly RAL (anticipated refund loan).

You have important rights as a taxpayer.

If you are uncertain of your rights, contact:

the National Taxpayer Advocate at 1-877-777-4778, or on the web at http://www.irs.gov/advocate/index.html
your Local Bar Association, on the web at http://www.abanet.org/barserv/stlobar.html
your local Low Income Taxpayer Clinic, or Legal Aide Society office. The IRS provides a list of Low Income Taxpayer Clinics at http://www.irs.gov/pub/irs-utl/litc_nrp_2-3-03.pdf

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