Is Low-Cost, Online Filing Worth the Risk?

Imagine getting ready to file your 2015 tax return, registering online with the e-filing software site TurboTax, only to discover that someone has already filed your taxes and is now awaiting your $5,000 refund.

That’s exactly what happened to thousands of Minnesota and Utah residents last week, whose private data -- Social Security numbers, family members’ names, employment histories, past tax records -- were used to file bogus tax returns via TurboTax, the inexpensive and popular online filing program owned by Intuit (NASDAQ:INTU).

Intuit temporarily shut down electronic filing of state tax returns before determining that its data bases had not been compromised. Intuit believes the information used by the bad guys to file the bogus returns was probably stolen via online scams targeting the victims through e-mail or social media, or by hacking the information from some other database.

Nevertheless, filers whose information was stolen now face potentially months of complicated paperwork hassles with the IRS in an effort to prove to the tax agency that they were, in fact, a victim of identity theft.

Raises Questions of Trust

The widespread incidence of fraud raises questions as to whether American consumers should trust low-cost, online tax filing programs to safely process information as sensitive, important and impactful to their lives as their tax returns.

The reality, according to Steven J. Weil, a tax expert and enrolled agent with RMS Accounting in Fort Lauderdale, Fla., is that a filer whose return comes under scrutiny for whatever reasons from the IRS wants to talk to the person -- the tax professional -- who filed their return.

“They’re not tax pros, they’re software companies,” Weil said of firms like Intuit that have pioneered do-it-yourself, online tax returns. “Most of our clients want to deal with the person who did their tax return.”

Filers registering with TurboTax, as is the case with many online registrations, whether you’re buying tickets to a concert or a pair of sneakers for your kids, agree before the actual transaction even begins that the online platform being used -- in this case TurboTax -- is not liable in the event of fraud.

For those who bother to read the fine print, TurboTax makes that clear as filers click through its registration process.

“Most of our clients want to deal with the person who did their tax return.”

- Steven J. Weil, enrolled agent with RMS Accounting in Florida,

Consequently, filers are on their own if identify thieves steal their personal data and use it to file bogus returns or if some other form of fraud occurs.

To be sure, incidence of fraud affecting unwitting tax filers remains pretty rare (most tax fraud is committed by filers who know exactly what they’re doing) and tax experts say low-cost, online filing software like TurboTax can help many consumers save time and money -- and, most importantly perhaps, hasten payment of their refunds.

For instance, single filers using a simple W-2 form provided by their employer who also receive their health care benefits from that employer and who aren’t active stock traders stand to benefit from using do-it-yourself tax return software.

Do-It-Yourself Filing is Cheaper

Many of these filers can file online for free using an IRS authorized program called Free File that allows taxpayers who earned less than $60,000 to file at no cost through TurboTax or H&R Block. For those who don’t qualify for free filing, the most popular ‘do-it-yourself’ tax filing platforms -- TurboTax, H&R Block and TaxAct -- generally run between $20 and $25 in fees for filing a state and federal return.

Hiring a tax professional will run considerably more. The IRS estimates that the average taxpayer will spend $270 to complete a federal form 1040 using a professional; that number rises to $420 with a business schedule like a Schedule E or C. But the cost of a professional tax preparer varies depending on the filer.

Filers can avoid honest mistakes by hiring a tax professional, Janice Hayman, a tax professional in New York City, said. For example, an independent contractor working with a larger contractor may mistakenly believe he is an employee of the larger business. But the 1099 miscellaneous form he receives in January from the IRS says otherwise -- that he’s self-employed, that his taxes haven’t been withheld and that he probably owes the IRS.

“They should be working with a tax professional,” Hayman said.

Various elements of the Affordable Care Act, President Obama’s wide-reaching health care reform legislation, have also kicked in in recent years, and subsidies provided to help Americans pay for health benefits mandated under the act often impact a person’s tax status.

Like it or not, these changes make hiring a tax professional that much more prudent.

Online tax filing is no different than other areas of society. Over time, larger and larger  numbers of people are turning to the Internet to file their taxes, including tax professionals. And that number is only going to continue to grow.

Hayman noted Congress has been slashing the IRS’ budget in recent years, forcing the agency to cut back on manpower and making it harder for IRS workers to handle the workload that arrives every year between January and April. Consequently, the IRS is increasingly mandating e-filing by professional tax preparers because it’s quicker and easier to process.

More Sensitive Information Online

But that also puts more sensitive information online and available to increasingly sophisticated hackers.

The key, according to tax experts, is for consumers and the companies providing an online platform for filers to heighten their security processes to ensure as much as possible that hackers can’t obtain the information needed to file bogus returns.

Christopher W. Kindlinger, a certified public accountant in Traverse City, Mich., observed that hackers and fraudsters can access any number of data bases, online and otherwise, to obtain sensitive financial information that can be used to file a bogus tax return.

“I think all of the precautions that are suggested for identity theft in general are the same ones to take when it comes to filing your income taxes,” he said.