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Should You E-File?

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Should you join the 68.5 million returns that were e-filed in 2005? Without looking at any numbers (trading off the interest lost by mailing in a return versus the cost of e-filing), I think you should. When you mail in a return, it can potentially be lost by the postal service, compromised by unscrupulous citizens, or in some other way be prevented from making it on time to your neighborhood IRS facility. But, if you wanted to just do a financial trade-off (remember, it’s not that much to e-file), if you have to pay $10 to e-File, you only want to do it if your return is greater than $32,510. (E-File anyway!)

First things first, if you’re adjusted gross income (AGI) is under $50,000 then you are eligible for free E-Filing and it’s a no brainer – definitely e-file no matter what you expect to get back as a refund. If you’re part of the other 30% of the population not eligible for free e-filing, then you’re looking at something like a $10 fee for using the E-File feature.

According to the IRS, a refund on a paper tax return can take about six to eight weeks. They claim an electronic return can be processed in half the time, 3-4 weeks. (link) Here is the E-File 2006 Refund Cycle Chart [PDF] and basically when the return is accepted, a direct deposit is sent out two Friday’s later. If you request a paper check, it’s three Fridays later.

So the difference is 3-4 weeks of interest if you E-File, so how much does your refund need to be to cover the $10 fee at 4% for a mere 4 weeks? For simplicity’s sake, we’re treating the 4% APY as simple interest so it’s 0.00769% per week, or 0.03076%. In order to earn more than $10 in interest (ignoring the taxes you’d have to pay on it too), your refund has to be more than about $32,510… which it likely isn’t.

Strictly by the numbers, it’s not financially correct to E-File… but you should do it anyway because the peace of mind you get from knowing something as important as your tax return won’t be lost in the mail is worth way more than a measly $10 E-Filing fee.

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4 Responses to “Should You E-File?”

  1. Jayfer says:

    Peace of mind…my sentiments exactly. I e-filed with TurboTax, and it cost $14.95, not $10. But I got my refund (direct deposit) 2 weeks later. So, I’m generally happy with my choice.

  2. CK says:

    The speed and minimizing the chance of government bungling do it for me. I wonder if people on direct deposit for S.S. have to recieve a return by direct deposit since they already do for their S.S. money. Makes sense to me, but this is the federal government.

  3. Miller says:

    Anyone know WHY they charge for e-filing? Seems to me, they should prefer it because it automates more of the process, hence making it cheaper for the government…

    • Strebkr says:

      Fast forward to 2011…. Paid tax preparers are now required to e-file all returns. Individuals are the only ones allowed to paper file. I bet in a few years they will pull the plug on that as well.


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