Americans are turning to their computers and the Internet in record numbers to file their annual federal income tax returns -- many of them for free through a service called Free File.

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Some 3.74 million taxpayers had filed their 2004 returns using Free File through March 25, up almost 44 percent from the total number of people who filed their 2003 returns using this service, the Internal Revenue Service says.

Now, in its third year of operation, Free File aims to allow more Americans to file online by making it accurate, secure and affordable. The IRS has for years offered electronic filing capabilities, but earlier offerings were used by a small subset of citizens -- partially due to cost, partially because taxpayers were skeptical of putting their information on the Net.

With more individuals than ever using the Internet for personal transactions, Free File gives them the option of choosing a software company with which to complete their returns, then submit the completed returns to the IRS without having to pay fees. But there are caveats.

Free File is being offered by a public-private partnership between the IRS and The Free File Alliance, a consortium of companies that produce electronic financial software. The goal of the partnership is to make free electronic filing available to the 60 percent of taxpayers who have the lowest incomes. Higher income individuals can use it too. All they need is an Internet connection and some time.

IRS spokesperson William Cressman said a taxpayer who uses the service was essentially using the same software as the software company offers direct to consumers. The differences are that the off-the-shelf software has more bells and whistles and additional options that some taxpayers may find useful. The individual taxpayer can thus choose whether to use Free File by starting at www.IRS.gov, or purchasing the product himself at some other Web site or at a retailer.

Free File Alliance spokesman Patrick Dorton says each member of the alliance must adopt a code of best practices and provide certain guarantees for the consumer, which includes tax return privacy, protection of Social Security number and a way to print the return at one's own computer without having to pay a fee.

The alliance partners are allowed to provide other value added services, sometimes requiring a fee, to differentiate their offerings. Dorton says the user will be advised in advance before being offered a commercial product and that positive consent must be obtained.

The number of companies offering services via Free File has risen 25 percent this year, to 20 from 16 last year. To be included in the Free File program, the company must conform to the alliance code of practice and submit its software to the IRS for testing and certification. That ensures that each online software package correctly calculates your taxes, based on the data the user provides, and is secure.

Not going it alone

Of course, using Free File suggests that you are doing your taxes yourself, although some software companies in the alliance have accountants available for a fee if you stumble. Some taxpayers won't feel comfortable filing without their accountants.

Many accountants also submit to the IRS electronically, although they do it through professional submission services instead of through Free File.

Accountant Dennis Piper, president of Dennis Piper & Associates, says electronic filing helps him keep the costs down for his clients by saving keystrokes and eliminating the paper transfer, thereby cutting down on the likelihood of errors.

Many of his clients will either submit their books to him electronically directly from their financial software such as QuickBooks, MYOB or Peachtree. For others, he operates an online organizer, where his clients can log in to submit the data securely to Piper. His staff of accountants will use the online organizer much the same way as accountants have traditionally used paper organizers to obtain data from their clients.

Does it make sense?

Piper says that while Free File makes sense for some taxpayers, it may not be the best solution for all taxpayers.

He uses as an example an individual who has capital losses that need to be carried forward from one year to another. With Free File, the individual taxpayer needs to track those losses from year to year -- and to manually enter them with each submission of taxes. "If the individual forgets, or doesn't have the organizational skills to track it between years, he'll lose money."

The IRS is committed to increasing the number of people who submit their returns online, and the IRS' Cressman says the satisfaction rating from those who have used Free File is very high. Now in the last year of the program's initial three-year term, he expects the program to be renewed for an additional two years.