The Tax Prep Battle Begins

It’s getting to be that time of year, and once again tax preparation icon H&R Block is teaming up with Microsoft in an effort to one-up the competition, especially competition from Intuit , whose TurboTax product dominates the software market for self-preparers.

There are lots of other players in the online tax game, though, and increasingly, the Internet is where the tax battle is played out.

Kansas City-based H&R Block and Redmond, Wash.-based Microsoft said today they are joining forces to offer a variety of financial resources via the the MSN Tax Center. Such deals are relatively common; Intuit has a similar deal a with Yahoo!

And the Internal Revenue Service itself is embracing the concept of Internet filing and has struck a deal with an alliance of tax preparers and software publishers (the Free File Alliance, which includes both H&R Block and Intuit) that it says will allow more than 60 percent of Americans to file their tax returns electronically without charge.

Why is the IRS making such a big effort on electronic filing?

“I think it’s a supply-side push if you will — it’s the IRS realizing they are just drowning in paperwork and doing what they can to cut down on it,” said Ross S. Rubin, senior analyst for global access and technology at eMarketer. “In addition, it makes it easier to provide an audit trail. Over time, getting the data in digital form allows the IRS to do a better job of pattern recognition, trying to find clues that might tip off an audit.”

The IRS has a goal of getting 80 percent of individual federal returns electronically by 2007, but it has a long way to go. The Free File program launched by the IRS provides links from the irs.gov site to 17 commercial tax preparers or software companies

This is the fourth year of the Microsoft/H&R Block collaboration and, as they put it, the Tax Center site “combines insightful commentary, analysis and powerful tools and services from CNBC on MSN Money together with the expertise of online tax preparation and filing from H&R Block…”

Consumers can use H&R Block’s online tax programs to prepare and file their taxes. Will you have to pay to file? The best way to find out is to use the “Free File Wizard,” a simple questionnaire on the IRS Web site. From there, taxpayers can link to any of the companies in the alliance.

“H&R Block is committed to providing a tax solution for all consumers — whether they prepare and file in our office, on their desktop or on the Web,” says David Byers, chief marketing officer for H&R Block. “By continuing this successful alliance with (Microsoft) we’re able to provide our wide range of filing solutions in a place where consumers already are managing their complete financial picture.”

Intuit, meanwhile, also a Free File Alliance partner, is donating its online product, TurboTax for the Web, for free to every taxpayer with an adjusted gross income under $27,000 as well as those who qualify for the federal Earned Income Tax Credit (EITC).

Block will offer free federal online tax preparation and e-filing to taxpayers whose adjusted gross income is $28,000 or less. It also has a deal with America Online.

And of course, there’s lots of other online competition, including TaxACT.com, TaxBrain.com, Yahoo’s Tax Center, CompleteTax , among others.

Interestingly, one consumer watchdog group says that when it comes to free tax filing services, there’s always a catch.

“Free File could be the loss leader for commercial tax preparers,” Jean Ann Fox of the Consumer Federation of America has been quoted as saying.

The group has issued a warning to taxpayers using the new IRS Free File program to avoid high-priced “refund anticipation loans” and other high-priced products that commercial tax preparers may pitch as part of the program. The group criticized the IRS for forming an alliance with commercial tax preparers without imposing adequate consumer protections.