Watch CBSN Live

Internet Tax Filers Beware

People using online tax preparation services should take care to protect the privacy and security of their returns, experts warn.

"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," said Marty Bush, a tax expert at the consulting firm CCH Inc.

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.

Speed and ease are why filers are increasingly choosing to file electronically. 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.

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.

Government and company officials insist the system—which uses the same security technology as banks, insurance companies and the federal government—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."This is how almost all information moves from business to business around the country."

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, whether on paper or online. The IRS requires all these firms to adhere to strict confidentiality requirements, which should be posted on the company's Web site.

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.

Taxpayers should look for a posted securit policy on a firm's Web site and never share a password with anyone.

After their work is done, filers should sign off and close the computer's browser window to prevent someone else from viewing the tax information later.

According to the most recent statistics from the IRS, electronic filing is up 15.6 percent this year over last, with computer returns up 22.1 percent and telephone filing down 9.9 percent.

By Curt Anderson