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Costs of Free Online Tax Prep Tools

More taxpayers who prepare their own taxes are turning to internet resources versus software, but they should be aware of information-sharing nuances as they sign-up for the growing number of free online services.

A recent Wall Street Journal article took a look at the “free” of free online tax preparation services to identify whether there were any hidden costs.  The article reveals that while the online companies are attracting millions of do-it-yourself tax filers by offering free tax preparation tools, some service providers seek “to collect income and other data from its tax-prep users to make recommendations for credit cards and other financial products to them.”

Online tax software probeThe article confirms that when a customer follows through and buys the recommended products, that’s when the service provider makes money by being paid by a third party financial institution. This doesn’t cost the user upfront, but it’s a type of third party advertising that uses information sharing as its money-making tool.

Free online tax preparation service provider Credit Karma was interviewed in the article about the practice and the Company responded that this year it requires people to become Credit Karma “members” before they can use the free tax preparation services.  On the Company’s website members must provide their name, address, date of birth, mobile phone number and the last 4 digits of their Social Security Number.  Credit Karma says it does not charge third parties to advertise about their products or services, but rather uses a member’s information to suggest products and services that could help the member financially. The members are not charged, and Credit Karma is only paid if a member buys a product or service that it suggested.

Credit Karma members can select an “opt out” option to prevent the Company from using their tax return data, which includes their income and tax payments or refunds information, but not all customers are aware that their basic membership data may be shared.  One customer was quoted in the article saying that she had been approached by her credit-card company asking her to update her income after using Credit Karma’s free tax preparation service.  Credit Karma responded that the notice had nothing to do with her membership, but the customer deactivated her account anyway. Other providers say they also offer users ways to opt out of any information sharing.

Some of the other major online tax preparation service providers include Intuit, H&R Block, TaxAct and Blucora.  These companies may provide easy-to-use cost-free tax preparation tools via the internet, but when it comes to more complicated tax returns or state income tax returns, there are usually charges for the necessary forms and data calculation which are considered upgrades by the vendor.

It is also important for taxpayers with more complicated returns to know the questions and forms they need in order for the systems to share information and solutions, so there can be confusion and missed opportunities to claim tax credits and file the proper forms.

More taxpayers than ever before are turning to digital resources both online and through software to prepare and file their simple tax returns, but they should be mindful that even basic tax preparation services may have a complicated back-end effect on privacy and hidden advertising tactics.


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