E-filing stands for electronic filing and is an option the IRS offers for those who want to skip paper tax returns and go electronic. There are many benefits to e-filing your taxes, ten of which I’ll list below, but there are still a lot of people who don’t e-file for reasons I’m not completely sure I understand. I know a lot of filers simply aren’t familiar with the system and are used to filing a paper return; I completely understand their reservations. I didn’t trust electronic billpay for the longest time and I’m 28, not someone who had been mailing checks to pay for bills for twenty years.
Seriously now, why does it cost money to e-file my taxes?
If processing an e-filed return were to take more time, require more effort, and consume more resources of the great Internal Revenue Service, I would be more accepting of the charge to e-file – except it doesn’t. In fact, I would venture to guess that the government saves far more money than the cost of e-filing when I actually e-file and that they should incentivize e-filing by at least making it free.
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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.