Online tax preparation generally secure, but consumers should be careful

WASHINGTON (AP) - People entering the brave new Internet world with their most personal financial information - using online tax preparation services - should take care to ensure the sites respect the privacy of taxpayer information and can transmit returns securely, experts warn.

''If you buy a book on the Internet and it's not a good book, you can return it,'' said Marty Bush, a tax expert at the consulting firm CCH Inc. ''If you rely on information or software on the Internet to research or file your taxes and something's wrong, the repercussions could be expensive and scary.''

The Internal Revenue Service projects that 33.6 million taxpayers will file federal returns electronically by this year's April 17 deadline, up from 30 million last year. For the first time, many are preparing and filing their returns directly on the Internet, trusting that passwords and computer technology will safeguard their sensitive financial and personal information far from home.

Intuit Inc., maker of the leading TurboTax software, completed 632,000 tax returns through its online service through March 27, compared with only 240,000 during all of last year. About 1 million have begun returns on the H&R Block online site, but the company is not sure how many will finish.

A shudder went through the industry earlier this year when 26 H&R Block customers were temporarily able to read other people's financial data due to a programming glitch caused by the company. After taking the system down for a week earlier this year for repairs, the company says things are now running fine.

''We have taken every possible precaution to make sure that kind of programming error can never happen again,'' said Gene Goldenberg, senior vice president for software and e-commerce at Block.

Even though hackers have never disrupted a tax site or the IRS, such mistakes could undermine consumer confidence in online preparation.

''This kind of thing hurts everyone in our business,'' said Bob Meighan, personal tax vice president at Intuit.

But government and company officials insist the system works well, as long as taxpayers choose a reputable Internet service and do a little homework.

''It's a safe and secure system,'' said Robert E. Barr, assistant IRS commissioner for electronic tax. ''In fact, electronic filers by and large do have a better experience.''

There are two things to keep in mind when choosing an online tax preparer: how the firm protects the privacy of taxpayer names and data, and the level of security for the storage and transmission of tax information.

Federal law protects the privacy of taxpayer information such as 1040 forms, treating online services the same as a regular tax preparation firm with a physical office. The IRS requires all these firms to adhere to strict confidentiality requirements, which should be posted on the company's Web site.

''It says, basically, thou shalt not use this data,'' Barr said.

There are some gray areas, however. H&R Block, for example, will share ''contact information'' it collects on its tax site - name, e-mail address, mailing address, phone number - with other financial companies with which it has contracts. Taxpayers can request that their names not be shared by following instructions in a box that pops up as they begin preparing their returns.

Most online tax firms use the same security technology as banks, insurance companies and the federal government. This technology, called Secure Socket Layer, encrypts tax data before it is transmitted so that no entity except the parties involved have access.

''This is how almost all information moves from business to business around the country,'' Barr said. ''It's basically dial and dump over a secure line, and it's been going on for a quarter of a century.''

Again, taxpayers should look for a posted security policy on a firm's Web site. Experts advise never to share a password with anyone, make sure to sign off after work is done, and close the computer's browser window to prevent someone who uses the computer later from viewing the tax information.

If the online preparer checks out, Barr said most taxpayers will find they are happier doing their taxes this way rather than the old, slow paper system. A recent IRS survey found that e-filers had a satisfaction rate of 74 percent, compared with only 51 percent for those who used paper.

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On the Net: Internal Revenue Service: http://www.irs.gov

List of online tax sites: http://www.taxsites.com