Every year, John Landry fills out tax returns for his family using TurboTax software and zaps them electronically to the IRS before the April 15 deadline.
But when it comes to his state returns, the Maynard resident prints out the forms, takes them to the post office, and mails them to the Department of Revenue to avoid a fee of $19.99 per return.
“I shouldn’t have to pay to file my taxes,” said Landry, 65, who typically does returns for himself, his sister, his children, and other relatives. “Filing should be free.”
The electronic filing fees, charged by the makers of TurboTax and other tax software, are creating a stubborn roadblock in states’ efforts to move the income tax filing system entirely online and save millions of dollars in processing costs. The Internal Revenue Service estimates it costs $3.50 to process a paper form, compared with 15 cents for electronic versions.
In Massachusetts alone, 14 percent of taxpayers — more than 488,000 filers — mailed returns prepared on computers last year, either their own or their accountants’. If these taxpayers clicked “send” instead of “print,” the state could potentially save thousands of dollars in processing and shredding costs — and speed up refunds.
Adding insult to injury, many taxpayers, including Landry, mistakenly blamed Massachusetts and other states for imposing the filing fees. Beverly Finkelstein did.
“I didn’t realize it was TurboTax,” said Finkelstein, a retiree from Milford. “I’m glad to know it wasn’t the state, because I was very angry.”
But now she’s angry at TurboTax, noting she already paid $39.99 for the software at Costco. “Why would I pay an extra $20?” she asked.
The short answer: to increase the earnings of software makers. Rather than just charging more upfront, the companies have found it more lucrative to lure customers to their products with cheaper prices — and then ring up extra revenue through optional fees, much as airlines impose surcharges on top of ticket prices for everything from checked baggage to meals.
Intuit Inc., the Mountain View, Calif., maker of the most popular tax software, TurboTax, charges $19.99 per form to e-file state income taxes for the version of its software sold on CDs or that can be downloaded to customers’ computers. Rival H&R Block charges $19.95. And TaxAct wants $7.95. That’s in addition to the cost of the software, which typically costs up to $100 for individuals who want to file both a federal and state return.
Tax preparation software companies defend the fees, noting that customers can avoid them by printing out the returns and mailing them. They can also use online versions that include the e-filing fee in the overall price.
“Customers have a choice,” said TaxAct spokeswoman Jessi Dolmage.
Up until around 2008, most tax preparation companies also charged separate fees to file federal returns, but dropped them under pressure from the US government and competitors. But they continued to charge extra to file with the states — with the notable exception of New York.
New York passed a law two years ago requiring taxpayers who use computer software to file electronically and barring companies for charging extra for the service.
Massachusetts Revenue Department Commissioner Amy Pitter said she hopes to meet with the largest companies in the next few months to find out if they might eliminate the fee voluntarily. The agency is also studying New York’s statute to see if it makes sense to push for similar laws or regulations in Massachusetts.
“We’re going to keep pushing on it,” Pitter said. “It’s good if people don’t have to pay a filing fee, and it’s good for a lot of reasons.”
In addition, many states have either teamed up with software vendors to offer free versions of their programs to low- and moderate-income filers or developed their own free software. Massachusetts has done both.
Pitter is also trying to discourage people from filing traditional paper tax forms — another 6 percent of filers last year — by letting people know about the free software options and cutting back on the distribution of blank forms.
But many taxpayers are not aware of the free software or believe the paid versions are easier to use.
For instance, Massachusetts taxpayers can use most commercial tax software to prepare both their federal and state returns. But if they use the state’s free software, called WebFile for Income, they still have to find another program to prepare their federal taxes.
Some people, including nonresidents, are not eligible to use the Massachusetts software, even if they are required to file a tax return in the state. Just 3 percent of taxpayers used the state’s free program in 2012.Continued...