Tax Time!

If you've waited this long, consider filing your taxes online. It can be fast and easy--and your refund shows up in a flash. Here's how to decide.

Anne Kandra

PC World Contributing Editor Anne Kandra writes the monthly Consumer Watch column.

I don't mean to nag, but the clock's ticking.

If you're one of the millions of taxpayers who've put off your annual slog through the mind-numbing universe of 1040s, 1099s, W-2s, and 4868s, it's time to sharpen your pencil, brew a pot of coffee, and make sure your local post office is open late on April 15.

Or maybe you can skip the U.S. mail. For tax year 2003, more Americans than ever--upwards of 37 million so far, according to the IRS--are ditching pencil, paper, and postmarks and filing their tax returns electronically. In fact, many taxpayers are completing the entire process, start to finish, from their own home computer. Look Ma, no professional tax preparer.

You could be one of them--maybe. Although the Internal Revenue Service estimates that more than 96 percent of all tax returns are eligible for e-filing, there are a few exceptions. If you currently live outside of the United States, earned income from a state in which you don't currently live, or fit a few other relatively unusual criteria, you may not qualify to e-file for 2003. But if you do, there are good reasons to consider electronic filing.

Why E-File?

Filing your tax return online makes a lot of sense, and not just because you get to skip the midnight queue at the post office (and maybe save a tree).

E-filing reduces the chance of mistakes showing up on your return, both on your end and the IRS's. Many basic errors--such as miscalculations or missing information--are likely to be caught at the gate by Uncle Sam's computers and bounced back to you for fixing within hours of hitting the Send button. And once your information does find its way into the inner sanctums of the IRS, it doesn't have to be keyed in by a bleary-eyed clerk who, for all you know, is three minutes and one return away from retirement.

Another plus: If you live in one of 37 participating states, you may be able to file your federal and state tax returns simultaneously, saving time and avoiding the hassle of keeping track of two separate transactions.

Best of all, if you're entitled to a refund, filing electronically means you'll get it faster, usually within two weeks--even sooner if you choose to have the cash deposited directly into your bank account. After filing electronically, you can also check the status of your refund directly on the IRS's Web site at any time. On the flip side, if you owe taxes, you can have the payment withdrawn electronically from your account or charged to your credit card on the day it's due, and not a minute earlier.

And because the IRS wants to encourage taxpayers to file online--after all, every e-filed return means less paperwork to do--it's offering a variety of services to make the process easy. Or if not easy, at least less arduous than sifting through piles of paper forms with catchy names like Form 1120-IC-DISC, Schedule K.

While the IRS doesn't endorse any particular tax service, it does provide a list of companies it calls E-File Partners, which offer various tax preparation and e-filing services. This can be a good place to start comparing tax products.

Find the Right E-Filing Option

Unless you hire a tax professional to do your dirty work and then electronically file your return on your behalf, you have two options for preparing an electronic return.

You can use software loaded onto your computer (bought at a retail store or downloaded from a Web site) such as H&R Block's TaxCut or Intuit's TurboTax, which let you prepare the return on your computer and then file it via the Internet when you're done. If you're considering tax software, read PC World's "Guide to Desktop Tax Software" to learn more.

Or you could use a Web-only service such as CompleteTax.com or TaxBrain.com, which store your work in progress on its site. In addition, both H&R Block and Intuit offer Web-only versions of their software. For more information on these and other top tax-preparation sites, read "Compare Tax Sites," which accompanies this article.

In general, there's not much difference between how you use a Web-only service versus software that sits on your hard drive. Both take you through a step-by-step interview, plugging your answers into the appropriate lines on your tax forms as you go. And both transfer your completed returns to the IRS in the proper format, although they may charge an extra fee for this (generally between $5 and $15 per return).

Buying tax software, though, tends to cost a little more than using Web services. And most of these applications, as well as the Web-only services, offer tiered levels of service and pricing, depending on your specific tax needs.

If you're on the fence about whether to go with a Web-only service or a software package, keep a few things in mind:

How speedy is your connection? Consider the speed of your Web connection. If you've got a dial-up service, you'll probably find using installed software more efficient than waiting around for Web pages to load every time you ask or answer a question. Also, procrastinators should keep in mind that they will likely have lots of company in mid-April, when overtaxed servers could make Web responses sluggish.

Do you need to import data? If you use Intuit's Quicken or some other financial application to track your finances, you might want to choose software that can easily import your data. Many software packages do this, but not all Web-only services do. That said, most applications--whether Web-only or installed--seamlessly import relevant data from previous years if you've used that site or program before.

Do you need easy access? Web services can be convenient for users who travel a lot or who use more than one computer. Got a little free time at the airport? You can work on your taxes at an Internet kiosk.

Want an online backup? Web services act as a safety net in case your hard drive crashes, or your kid spills juice on your keyboard, or.... Well, you get the picture.

The Security Question

Of course, all other criteria might be moot if your sole consideration is whether someone can steal your data and, in turn, your identity. If you lie awake at night fretting about unscrupulous employees and database heists, you might rest easier knowing your financial data is snug and safe on your own hard drive.

When you use any tax service, you're entrusting it with your most sensitive financial information. Every Web-based tax service should provide a detailed security statement on its site; make sure it provides a fully encrypted environment. Always look for the closed lock symbol (or an s following the http in the Web address) in your browser window when you're working online.

Whatever format you choose, keep in mind that each tax site and program is different. Some are better suited to a certain type of taxpayer. For example, TurboTax is more robust and comprehensive than others; it might be the best choice if your taxes are on the complicated side. But EZ filers should do fine with 2nd Story Software's free TaxAct Standard or Web-based TaxAct Online.

So read the reviews, but don't take too long. Because in the end it doesn't matter how your file your taxes, only when you file them: The calendar waits for no one.