Preparing your taxes online can lead to mistakes and surprise charges

Photo (c) Nora Carol Photography - Getty Images

There are plenty of options out there for filers of all income levels

An increasing number of taxpayers are completing their tax returns themselves and turning to online software packages to do so. The appeal is faster speed and lower cost.

But a study by tax preparation company Jackson Hewitt suggests that some taxpayers are often presented with an unpleasant surprise. Among online tax filers, nearly 30% of respondents in the study reported that they paid more for online tax preparation services last year than they expected. 

The study further makes the case that many free or reduced-price filing options come with unexpected charges. The study found that once a filer starts the process, they find that the cost may steadily increase based on the complexity of the return or other factors, making the total price once completed higher than they originally anticipated.

It might be partly explained by the difference between a human tax preparer and a software package. Jackson Hewitt and competitor H&R Block built their businesses around human tax preparers, but both also offer an online do-it-yourself software option. And it’s not always unexpected costs that give consumers heartburn.

No way to change a mistake

Stephen, of Tuscaloosa, Ala., told us he switched to H&R Block’s software a few years ago with good results – until last year when the software told him he owed thousands of dollars.

“It was counting a Roth IRA as income, but I couldn't find any way to change it,” Stephen wrote in a ConsumerAffairs review. “The online site has gone too far at shielding you from forms so that I couldn't just check a box to check it.”

Patricia, of Springfield, Va., also hit a speed bump last year when preparing her tax return using Intuit TurboTax.

“The online service made errors in my federal tax return for 2020,” they wrote in a review. “My refund was withheld for two months and then when I received it, it was only $147, much smaller than the refund amount that Turbo Tax reported. I received a letter from the IRS a week later, stating that a miscalculation was made on my 1040SR which affected recovery rebate credit.”

Flat price

Jackson Hewitt says it eliminates surprise charges by offering a no-frills, $25 flat price for filing federal and state taxes, regardless of the tax return's complexity.

“Despite the rising cost of living due to inflationary pressures, we're committed to providing a flat price for all online filers," said Zachary Cohen, head of Digital Products at Jackson Hewitt.

Some taxpayers have another free but often-overlooked option. Internal Revenue Service (IRS) Free File is a partnership between the tax agency and several commercial tax preparation software companies.

By registering at Free File, taxpayers can use the same software they would otherwise pay to use to complete their returns. It’s available at no charge to taxpayers with adjusted gross incomes (AGI) of $73,000 or less. The IRS explains how it works here.

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