Tax sites brace for rush

The Internal Revenue Service reported recently that 38.7 million of the 67 million returns it had received as of March 21 were filed electronically, an increase of nearly 10 percent over last year's figures. The biggest growth was in the "self-prepared" category--taxpayers who file their own returns using desktop software on online services--up 27.7 percent from last year, to 8 million.

The IRS gave much of the credit to the Free File Alliance, a new coalition of commercial tax preparers offering free services to low-income filers. The agency said more than 2 million taxpayers had used Free File services as of March 21.

"We are extremely pleased with the performance and acceptance of Free File by the nation's taxpayers," Bob Wenzel, acting IRS commissioner, said in a statement.

Mark Ciaramitaro, vice president of e-solutions for H&R Block, agreed that Free File is helping bring more taxpayers online by targeting filers who previously filled out paper returns.

"Once those people experience the benefits of doing their taxes online, they won't be going back to pen and paper," Ciaramitaro said.

Block estimates that it will process about 6 million returns this year via its online service, an increase of more than 50 percent over last year. Market leader Intuit, which sells TurboTax software and services, also expects substantial growth in online tax services, but the company did not offer numbers.

Sales of desktop tax preparation software are also up. According to the most recent report from market researcher NPD, retail sales of tax software were up 6 percent year-over-year as of Feb. 28, from 5.8 million units in 2002 to 6.2 million this year. Revenue was up 13 percent, from $180 million to $204 million.

Intuit was the category leader, accounting for 69 percent of unit sales and 76 percent of revenue. But that represents an improvement for Block, whose market share by units increased to 31 percent, from 28 percent a year ago.

Unit sales were up 31 percent and revenue increased 23 percent for Block's TaxCut products, which may have benefited from widespread controversy over "product activation"--antipiracy technology introduced in TurboTax products this year. "We do hear from former TurboTax customers who are happy to have switched to TaxCut," Ciaramitaro said.

Intuit spokesman Scott Gulbransen said TurboTax sales were growing in all categories and complaints about product activation had tapered off. He said Intuit has beefed up customer support and other divisions to promptly handle any problems that last-minute filers experience.

"More than 98 percent of the folks who have bought desktop software have installed it with no problems," Gulbransen said. "We're making sure that we have a large enough staff in our support center so that if people do have issues, we can take care of them as quickly as possible."

Gulbransen said a third of all returns are typically filed in April, and this year shouldn't be any exception. If anything, the last-minute rush may be bigger this year due to media fixation on the Iraq war, Gulbransen said. "Obviously, the normal tax stories that tend to remind people to work on their taxes--a lot of those have gone away because of war coverage," he said.

Both Block and Intuit experienced problems with Web site slowdowns around April 15 last year. Gulbransen said Intuit has bulked up its systems to handle peak demand and then some but that it's always a good idea not to wait until the last nanosecond to do taxes.

"With April 15 coming on a Tuesday this year, we expect to see a push from Friday evening up until Tuesday," Gulbransen said. "The only time we'll have to tell people to come back because it's just too busy is the last day."

Web site tracking company ComScore said tax traffic has been brisk, with 15.3 million visits to tax-related sites in March, led by stops at the IRS site, which had 9.2 million visits.

Procrastination may not be as big a problem as expected, however. Tax-related traffic peaked in early February, shortly after most taxpayers received their W-2 forms. The IRS recorded an average of 765,000 visits a day the first week in February, compared with 400,000 visits a day last week. H&R Block's Web site had 362,000 visitors in February, compared with 122,000 in April.