Tax Preparation Heads for the Net; Web-Based Services Prove Popular, but Experts Wonder if They Have a Future

Harold Wilson is not what computer geeks would call a power user.He surfs the Internet with his WebTV, an inexpensive, television-based system that serious computer users deride as hopelessly low-tech.

But Wilson, 60, a retired postal employee in Sacramento, didsomething this year that many analysts thought only computer-savvy"early adopters" (those who rush to embrace the newest technology)would do: He prepared his taxes on the Internet, using a tax servicelocated about 325 miles away, with tax forms that popped up on his TVvia the Net.

"I enjoyed it," Wilson said. "With this system you can do ityourself and feel proud of yourself." You can also file your taxeswithout leaving your house, and if you instruct the IRS to deposityour refund check electronically, you can get your money more quicklythan if you did it the old-fashioned way. Wilson's refund was in hisbank account 10 days after he filed.Wilson was one of an estimated 500,000 taxpayers who tookadvantage of Web-based preparation services this tax season, anonline phenomenon barely two years old. That number, from ForresterResearch Inc. of Cambridge, Mass., is still just a tiny fraction ofthe 126 million tax returns the IRS expects for the 1998 tax year,but it is more than even optimistic analysts expected this soon.The process apparently worked reasonably smoothly, despite theusual Web-related hassles, such as slow computer response at times ofhigh Net traffic."What comments we have received from taxpayers have been almostuniversally positive about the services that are out there," said IRSspokesman Don Roberts.Analysts and industry leaders are sharply divided over whetherWeb-based tax preparation is the wave of the future or a businessdoomed to niche status by consumer concerns about privacy andirritation with sluggish Internet connections.Instead of using software that is purchased and installed on ahome computer, Wilson and others logged onto a commercial Internetsite and used programs installed on the company's computer servers toprepare their returns. Then they typed their information onto theirscreen.The Web-based programs do all necessary calculations, and in mostcases the preparers then "e-file" the returns directly to the IRS,though taxpayers can elect to print out their returns and file themby mail. In some cases, taxpayers who file electronically must sendin their W-2 forms, a form bearing their signature, and any paymentthey owe, but the IRS has made it possible to do all thatelectronically as well.Online tax preparation comes in dozens of flavors, from the sortof small operation that Wilson used -- a site calledFileYourTaxes.Com run by an Oxnard, Calif., tax preparer named AtillaM. Taluy -- to industry giant Intuit Inc., manufacturer of theTurboTax program and operator of WebTurboTax, which mimics itspopular software in an online format.Some sites offer nothing but a bare-bones tax program with noadvice, while others sell extensive personal attention from acertified public accountant. Prices for the low-end sites usuallyrun from $10 to $30 per return, while the CPA-assisted sites usuallycharge about $150.Chief among the Web-based preparers' advantages, according toproviders of the service, is convenience. Taxpayers "do not have tobuy anything, install anything, learn anything, and they don't haveto produce reams of paper," said Taluy.And for businesses such as Taluy's, the Web offers lower overheadcosts and a potential client base unlimited by geography. Taluymight never have snagged a customer in Sacramento without the Web.But analysts disagree over the future of the business.The New York City-based research firm Jupiter Communications Co.said that Web-based tax preparation faces "abysmally slow adoptionrates" that would lag far behind those for online shopping or stocktrading.The research firm said consumers are still hesitant to trust theWeb for such an important transaction.But Forrester Research predicts that Web-based tax preparationwill eclipse individual software packages by 2003 to become thedominant form of computer-assisted tax preparation.Forrester analyst James P. Puni shill said he used WebTurboTax tofile his return, and while Web speed was rarely an issue, he said hewas frustrated when he tried to get the company to answer questions.He also noted that Intuit suffered an outage of nearly 14 hours inits e-filing capabilities on April 13. (A company spokesman said thesite did not fail, but was taken out of service as part of a plan tomake backup copies of customer data.)Two of the industry's biggest firms are split over whetherconsumers will flock to the Web to do their taxes. Intuit is makinga serious effort to position itself as a dominant Internet taxpreparer, though the numbers are still tiny: Some 288,000 online taxreturns had been completed on WebTurboTax by early this month, butthat amount is dwarfed by the more than 4 million packages ofTurboTax software the company said it has sold this year.Kiplinger TaxCut, the chief software competitor to TurboTax, istaking the opposite tack, offering only free online preparation ofthe stripped-down 1040EZ form. The company says that's a deliberateresponse to consumer reluctance to file online."The biggest thing we run into is that people are very reluctantto start doing their taxes on somebody else's {computer} server,"said said Gene Goldenberg, vice president and publisher at BlockFinancial Corp., which produces the Kiplinger TaxCut software."The early adopters are excited about it, but not Ma and PaKettle," he added. "When people ask me why we're not hyping the Netmore, I say, "Because we're a profit-making company, not an Internetcompany.' "Forrester's Punishill said he thought Kiplinger was missing a goodbet, just the way some traditional brokerage houses did when theydismissed the potential of online stock trading.Merrill Lynch & Co. "didn't think online brokerage was goinganywhere, either," Punishill said.