Confusion over "free" electronic tax filing may result in fees for low-income Iowans

In Iowa, seven software vendors that offer free federal filing for people who make $58,000 or less

Erin Jordan
Published: March 6 2014 | 4:23 pm - Updated: 1 April 2014 | 9:15 am in

Confusion over how to file “free” tax returns has caused concerns that low-income Iowans are being required to pay unnecessary fees.

State and federal government save millions of dollars a year with electronic tax filing as compared to paper filing. They outsource e-filing to private companies that stand to gain hundreds of thousands of dollars from Iowans filing state returns.

The savvy e-filer who makes $58,000 or less can still get free federal and state tax returns by logging into the right portal. Choose the wrong path and you could end up with a state fee of $25 or more – a financial burden to low-income filers.

“It does concern me that we encourage e-filing, but people are running into these fees,” said Sen. Joe Bolkcom, D-Iowa City.  “A lot of modest households are getting dinged $8 to $25 to file these returns.”

Jake Hurley, 34, of Cedar Rapids, didn’t mind paying $7.95 to file his state tax return online. But then Online Taxes at OLT.com tried to charge him $24 for direct deposit.

Hurley logged into a live chat hosted by OLT and a customer service representative reviewed his online return. OLT told Hurley the charges resulted from a glitch in the system and they removed all the fees.

“When I went from the IRS site to the vendor, they weren’t seeing me as being able to file for free,” Hurley said.

Jennie Jaeger, of Worthington, was soured to the system when a software company wouldn’t refund a $20 filing fee after she was forced to cancel her 16-year-old son’s online return because she was told first-time filers must file by paper.

“To me, it would be simpler if they had one provider,” Jaeger said. “Why can’t the IRS have a system so we can go directly through them?”

The IRS Restructuring and Reform Act of 1998 encouraged IRS to cooperate with private industry to increase e-filing, Spokesman Christopher A. Miller said. The IRS saves more than $3 on each tax federal tax return filed electronically over paper. The Office of Management and Budget also instructed the government not to compete with the private sector, Miller said.

The IRS started offering electronic Free File in 2003 and nearly 40 million people have used the program since. Last year, nearly 26,400 Iowans used Free File, which allows filers to file free federal tax returns through 14 private vendors.

However, most of these vendors charge for state tax returns, with fees of $7.95 to $24.95  listed on company websites as of Thursday.

Twenty-one states, including Iowa, have their own agreements with tax software companies. The Iowa Department of Revenue’s “free file” program provides links to seven software vendors that offer free federal filing for people who make $58,000 or less and free state filing for those who meet income thresholds and other criteria.

More than 1.3 million Iowans filed electronic state returns in 2012, which resulted in $2.3 million in savings for the state.

Filers who go directly to the provider’s website may face a different fee from those connected with IRS free file.

“It can be confusing, but it’s because the federal government is doing its own free file and the state is doing its own thing,” said Jessi Dolmage, a spokeswoman for 2nd Story Software, a Cedar Rapids company that provides TaxACT software.

TaxACT provides free state tax returns through the state and federal portals for people whose federal Adjusted Gross Income is $52,000 or less and are between the ages of 18 and 57. Filers who go directly to TaxACT.com will pay $17.99 for a state return, Dolmage said.

The partnerships with IRS.gov and Iowa.gov are good for business, she said.

“We’re getting the eyeballs of taxpayers who might not have heard of us,” she said. “It’s a good thing for all tax software companies.”

Bolkcom doesn’t doubt this. But he wonders whether Iowa should consider developing its own tax software that filers could use for free. Bolkcom said he plans to talk with the Iowa Revenue Department about the cost of such a program.

***

The IRS and Iowa Department of Revenue have partnerships with these companies to provide electronic tax filing. These vendors provide free federal e-filing for incomes $58,000 or less, but charge different rates for filing state tax returns. Information in this chart came from the company websites, as well as IRS.gov and Iowa.gov.

Software companyFee for state return (through IRS.gov)Fee for state return (through Iowa.gov)
1040now$17.95Free if federal adjusted gross income (AGI) is $32,000 or less
eSmart Tax$19.95 Not part of alliance
TurboTaxFree if AGI $30,000 or less or $58,000 or less and active military or reservist; or, eligible for the Earned Income Tax Credit regardless of incomeFree if AGI $30,000 or less or $58,000 or less and active military or reservist; or, eligible for the Earned Income Tax Credit regardless of income
Free Tax USA$12.95 Not part of alliance
ezTaxReturn$19.95 Not part of alliance
1040.com$19.95 Not part of alliance
H&R BlockFree if AGI $58,000 or less and 52 or youngerFree if AGI $58,000 or less and 52 or younger
Free1040TaxReturn$19.95 and up Not part of alliance
FileYourTaxes$24.50 Not part of alliance
EFileTaxReturns$24.95 Not part of alliance
TaxACTFree if AGI $52,000 or less and age between 18-57Free if AGI $52,000 or less and age between 18-57
Online Taxes at OLTFree if AGI between $13,000-$58,000Free if AGI between $13,000-$58,000
TaxSimple$24.95 Not part of alliance
TaxSlayer$12.95Free if AGI less than $30,000
Liberty Tax Service DIY TaxNot offered through IRS free fileFree

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