IRS: No penalty for TurboTax users affected by overtaxed computers

SAN JOSE, Calif. -- Taxpayers who couldn't electronically file 11th-hour returns using Intuit Inc.'s TurboTax, ProSeries and Lacerte software won't be penalized for delays caused by the company's overtaxed servers, the Internal Revenue Service said Wednesday.

"We will do everything we can to assist taxpayers affected by the situation," said IRS spokesman Bruce Friedland. "If people couldn't e-file last night, we encourage them to file as soon as they can."

A record number of returns from individual taxpayers and accountants on Tuesday choked the Mountain View-based company's computers, leading to delays in customers receiving confirmation that their returns had been submitted successfully, Intuit spokeswoman Julie Miller said.

As the midnight filing deadline approached, the problem got worse.

Usually, it takes only a few minutes after hitting the submit button for TurboTax users to get a confirmation. By Tuesday evening, it was taking hours.

Returns are not transmitted to the government until Intuit processes them and sends a notice to the taxpayer.

The company's server farm near San Diego processed more than a million returns Tuesday alone, twice the amount during the peak filing day last year, Miller said.

And once the system reached its capacity, many filers were simply turned away. The company said it will refund the $16.95 electronic filing fee for TurboTax users who experienced delays.

Intuit does not yet know how many people were affected, and it has not received reports of users mistakenly paying multiple e-filing fees as they tried to resubmit their returns.

Penalties for late filing start at 5 percent of the unpaid taxes per month, and max out at a total of 25 percent. The IRS said it would extend the deadline to midnight April 19 for people who encountered problems.

Customers lit up Intuit's online customer support forums with complaints, with some angrily swearing off Intuit's software altogether for future returns and others threatening to sue the company if they were penalized by the IRS.

Beyond Intuit's consumer products, the delays also hampered professional tax preparers who use the company's Lacerte brand software.

Wesley Fachner, a certified public accountant in Campbell, Calif., said the slowdowns started Monday and got worse Tuesday, with backups cropping up for nearly all of the 20 returns he filed those days. The system would alert him that the files were having trouble transferring, or were sitting in a queue behind other returns and weren't being processed.

"I just kept sending it until it got through -- it was stopping my work process and I wanted those things out of my hair," he said. "Eventually there must have been a little gap and it would get through."

Fachner said he had no plans to stop using Intuit software.

"If it had been happening in March, I would have been a little upset -- that would have shown their systems weren't in good order," he said. "But on the 16th and 17th of April, with the volumes they were getting hit with, I can't say it's their fault."

Kansas City, Mo.-based H&R Block Inc., whose TaxCut software also allows people to file electronically, said Wednesday it did not experience any slowdowns despite a similar spike in traffic. The company did not provide details on the number of filings it received.

Technology experts were flabbergasted that Intuit was caught off guard by a surge in activity on its busiest day of the year.

"The irony is that most servers are just at 18 to 20 percent of their capacity. This was probably not a capacity issue but a configuration issue," said Bruce Milne, vice president of products and marketing for HyPerformix Inc., an Austin, Texas-based company that makes IT capacity planning software. "They probably could have avoided this whole thing altogether without a lot of extra expense" by performing more capacity analysis beforehand, he said.

Miller, the Intuit spokeswoman, said the company is studying ways to ensure the delays don't occur again next year.

"We had quite a bit of backlog that cleared itself out overnight as we came off the peak," Miller said. "Volume was a key contributor to this, but we're going to dig under and try to understand it from a technology perspective."

At the peak, Intuit was processing 50 to 60 returns per second.

Last month, the company said it had sold nearly 11 million copies of its TurboTax federal software as of March 17, although not everybody who uses the tax preparation software files electronically.

Shares of Intuit rose 5 cents to close at $29.45 on the Nasdaq Stock Market.