TurboTax Prepared for Filing Crunch

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More on Tax Day

The IRS is bracing for a flood of last-minute tax returns and so is the nation's leading producer of tax preparation software. TurboTax had a bit of a meltdown last year when it was unable to process tens of thousands of tax returns in the days leading up to the deadline. The company says it has taken steps to avoid a repeat of last year's performance.

"Last tax season at the end was so anxiety-producing and frustrating for our customers and we regret that tremendously," said TurboTax spokeswoman Julie Miller.

A problem with the company's computer database slowed TurboTax's electronic tax filings to a crawl in the final days of the tax season last year. A process that usually takes taxpayers a few minutes was stretching into hours, even as the midnight deadline approached. The IRS ultimately granted taxpayers a 48-hour extension, and TurboTax refunded customers about $10 million. But the experience still left a bad taste for about 170,000 taxpayers, some of whom vented on the company's message board.

One woman wrote that she wouldn't use the company's software "to file my nails, let alone my taxes."

Since then, San Diego-based TurboTax and its parent company Intuit have overhauled their system, investing in new hardware and running stress tests to make sure they're ready for a crush of last-minute filers.

"We've learned a lot about how we build our systems, how we need to test our systems, the kind of pressure that's on them in those peak filing days," Miller said. "And I think we're going to be ready for the 14th and 15th this year."

Last year's headaches don't seem to have hurt sales of TurboTax. The company controls about 75 percent of the market for desktop tax preparation software. H&R Block's TaxCut is a distant second. TurboTax got even more business this year, especially for its online product.

"New people coming in and younger tax filers, aged 18 to24, it's not surprising that they would choose the Web site. It's just like shopping online, banking online, everything else online," Miller said.

However people do their taxes, the IRS is encouraging them to file electronically. The number of e-filers has been growing, but not fast enough. Congress set a goal for the agency of having 80 percent of tax returns filed electronically last year, but the total was closer to 60 percent.

"We have, frankly, billions of pieces of paper that get put in the backs of large semi- trucks and rolled up to IRS facilities," said David Williams, IRS' director of electronic tax administration. "And we've got to keep track of it all. And so when people file right there at the end of the filing season, it takes us a lot more time to get through and make sure that we've done the right thing with their tax return."

The IRS now hopes to reach the 80 percent threshold by 2012. There are a number of obstacles to that, including fees for electronic filing, and taxpayer concerns about dealing with third-party processors. In addition, people who owe money to the government are sometimes reluctant to file electronically because they think they'll have to pay faster. That's not true. If you owe, you can put off paying until April 15.

This year, the government is expecting millions of extra tax returns from people who don't ordinarily file but have to in order to claim their economic stimulus payment. TurboTax's Miller says the company offers a free form on its Web site for filers with those simple returns.

Who Tried to Duck Their Tax Debts?

Maria Bastone/AFP/Getty Images

It's been nearly 20 years since a former housekeeper of Leona Helmsley infamously testified that the wealthy real estate investor claimed that "only little people pay taxes."

Helmsley was subsequently charged with tax evasion – due to her attempt to claim as business expenses renovations on her Connecticut home – and ended up serving 18 months in federal prison.

When it comes to shorting Uncle Sam at tax time, Helmsley is certainly not alone. Throughout the history of the tax system, tax collectors have grabbed headlines in their quest to make sure that VIP status does not preclude the payment of taxes.

The most famous case is no doubt that of Al Capone, who, in 1931, was convicted on tax evasion charges stemming from his organized crime earnings. Agents from the Internal Revenue Bureau (as the agency was known then) determined Capone failed to report more than $1 million in income and proposed taxes and penalties of nearly $385,000. Documents released by the IRS earlier this year offer a new glimpse into the tax case – and into the danger involved with the investigation that eventually took down Capone.

Capone served six-and-a-half years of an 11-year sentence. He was released early for good behavior.

Like Capone, illegal activities are often the reason taxes go unpaid. For example, in 2002, a jury found that Rep. James Traficant (D-OH), did not pay taxes on kickbacks and bribes. Traficant was expelled from the House and sentenced to eight years in federal prison.

Madam to the stars Heidi Fleiss was sentenced to 37 months for tax evasion and money laundering tied to her high-end prostitution service.

Still others claim they got bum tax advice.

Most recently, Wesley Snipes got into tax trouble after his accountants told him that Americans are not required to pay federal income taxes. Snipes was required to pay $17 million in back taxes plus penalties and interest.

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