Desire a Quick Federal Tax Refund? Think E-File

Remar Sutton, DCU StreetWise National Spokesperson

Expecting a refund on your 2007 federal income tax return? Want it quickly? Then e-filing your return is a smart choice. Get it even faster by having your refund deposited directly in your credit union checking or savings account. You may even qualify for free e-filing. How does e-filing work? This month's review profiles e-filing.

Advantages of E-Filing

There are various reasons to chose to file your taxes electronically. Here are a few:

Receive your refund faster. With direct deposit, your refund typically reaches your checking account in 10 to 14 days. If you want a check mailed to you, most refunds arrive within 3 weeks and usually sooner. Compare that with 6 to 8 weeks for a paper return.
No papers (or fewer papers) to send to the IRS. When using the Self Select Personal Identification Number (PIN) method to e-file there are no papers to mail to the IRS. If the PIN method isn't used, the taxpayer must send in Form 8453 U.S. Individual Income Tax Declaration for an IRS e-file Return.
Electronic acknowledgement that the IRS received the tax return.
More accurate returns. The IRS computers quickly check electronic returns for missing information or other errors.

E-Filing Options

Individual taxpayers have three e-file options: free Internet filing, using a computer, and using a tax professional.

Free Internet Filing

The IRS provides the Free File program in partnership with the Free File Alliance—a group of commercial tax software companies. Taxpayers with an adjusted gross income (AGI) of $54,000 or less in 2007 are eligible to use the Free File program.

The free online tax preparation and filing services are provided by commercial tax software companies. Their offerings must be accessed through the IRS website. Each company has their own criteria — for example it may not be available to residents of all states or it may be offered only for taxpayers under 50 — so read the descriptions carefully before starting. You may want to use the “Guide Me To A Company!” feature to help you choose.

If after you've started the process, the company you chose determines that you exceed their criteria, they must inform you of any fees they charge if you continue with them. You can return to the IRS site and choose another company.

Some of the companies offer preparation services for state income taxes, usually for a fee, but some are now free.

A welcome improvement to the Free File program in 2007 was that the companies may not market additional products and services—such as refund anticipation loans, mortgages, and insurance—to taxpayers using their Free File service. Additions to the program in 2008 include: available in Spanish; preparing the Earning Income Tax Credit (EITC) schedule, and filing for an extension of time to file.

Using Your Computer

Tax preparation software programs that run on your computer provide e-filing of federal and state income taxes. The most popular programs usually charge a fee of $15 - $18 dollars for each e-filing. (Popular tax preparation programs, for example, include TurboTax by Quicken, H&R Block's TaxCut, and TaxAct.)

Online tax preparation is also available from numerous sites including the companies that produce desktop versions. In these programs, the data for your return is saved on the company's computers. The e-filing fee is usually included in the price of the service. If you choose to use one of these services, make sure you read their privacy policy and terms of service very carefully.

Once you've e-filed your return using one of these programs, you'll receive a notification within 48 hours whether or not the return is accepted. It usually does not cost to resubmit your return after correcting any errors.

In 37 states and the District of Columbia, taxpayers can e-file their federal and state taxes simultaneously. Both returns are sent to the IRS and the IRS sends the state return on to the state.

Using a Tax Professional

Many people choose to have a professional prepare their taxes. Tax professionals can e-file your return for you. Ask your tax professional if they will e-file your return. The IRS provides a locator service for taxpayers to find an authorized IRS e-file provider in their area.

If you qualify for free file and have used a tax professional in the past, try free file. Most free file companies follow the prompting style tax preparers use in person. If you still need help preparing your return you can make an appointment with the IRS for help and if you qualify free file. Help is also available through Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE).

Payment Options when e-filing

Taxpayers who owe taxes can also e-file. You can choose from several electronic payment options. You can choose to e-file and pay at the same time by authorizing an electronic funds withdrawal from your bank account. Another choice is to pay by credit card. You can pay by credit card when you e-file, online, or by phone through a service provider. There is a convenience fee charged by the service provider. Taxpayers can also use the Electronic Federal Tax Payment System (EFTPS) which is a tax payment system provided free by the U.S. Department of Treasury. You can use EFTPS online or by phone. EFTPS automatically debits the bank or credit union account that you specify on the date you indicate. You must enroll in order to use EFTPS.

StreetWise Tip: Think twice before choosing a “refund anticipation loan.”

Every year, the ads for “quick tax refunds” are everywhere—“Get your refund in just two days or sooner” is a typical come-on. What's the problem? Such “quick refunds” from tax preparers are really loans. Why pay interest to borrow your own money? Particularly, when the loan provides the money only a week or 10 days sooner than e-filing with direct deposit. In 2005, the most recent year reported, nearly 9.6 million Americans took out refund anticipation loans and paid effective APRs ranging from 40% to 1,100%, according to the National Consumer Law Center and the Consumer Federation of America. That's over a billion dollars. The majority of borrowers (like the majority of American taxpayers) also qualified for free e-filing. Also remember, a loan is a debt—if the IRS should not pay the total refund you anticipate or should freeze your refund, you still must pay back the lender the sum you borrowed. For more details, see our updated Remar's Review "Quick Tax Refunds" What's Real? What's Really a Loan?

For more information

These articles from the IRS provide more information about E-Filing and Free File.

IRS e-file for Individual Taxpayers

Electronic Filing Options for Individuals

Individual e-file Checklist

Electronic Payment Options

Federal/State e-file for Taxpayers

Self-Select PIN Method for e-file

Free File: Step by Step Instructions

Free File: Frequently Asked Questions

Free Tax Return Preparation For You by Volunteers

e-file Using a Computer

Tips for Choosing a Tax Preparer

StreetWise Tip: If you need to call the IRS, their phone system has been improved. Even though your call starts with listening to a menu and then making a choice, after that you will usually get to talk with a person. Typically there will a short wait while your call is transitioned to the appropriate person.

So, what do you think?

If you find this review helpful, please pass the word to your friends. Also email me with any comments or suggestions.

Remar Sutton

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