Why the IRS Wants You to E-File

Congress has set a goal of 80% of returns filed electronically by 2007 -- and that would cut the agency's costs dramatically

At first glance, Americans seem to have plenty of enticements to file their tax returns electronically. For one, taxpayers due for a refund can expect payment from Uncle Sam in 10 days, while paper filers wait at least a month and a half. The error rate is less than 1%, compared with about 20% for those mailing in their returns, according to IRS officials. E-filers receive automatic confirmation of receipt as soon as they submit their returns. And they circumvent the gridlock that's a staple of post offices in mid-April.

Thus far, however, the majority of taxpayers haven't jumped on the e-filing bandwagon. For 2001, only about a third opted to file electronically (this group, however, contributes the majority of tax dollars the IRS collects). Two major impediments seem to be standing in the way: Persistent taxpayer concerns about Internet security and the extra fee for the service. With an eye on the congressionally mandated goal of cajoling 80% of Americans to file online by 2007, the IRS is making an aggressive effort to address those issues head-on.


  Because tax returns are basically a snapshot of your personal finances, it's perhaps no surprise that some Americans balk at transmitting the information via the Internet. And after horror stories about prying auditors, providing the IRS access to your bank account (which the agency must have to directly deposit your refund) doesn't appeal to many. "An urban myth is out there that the government will somehow mine the data you provide them," says Steven Holden, an assistant professor of information systems at the University of Maryland at Baltimore County, who worked on the agency's e-filing initiative in the late 1990s. The IRS's long history of computer snafus doesn't help either.

IRS officials say those fears are ill-founded, however. They note that none of the agency's computer problems have involved e-filing. And your chances of being audited don't vary whether you file electronically or on paper, they say. Plus, the IRS has processed more than 250 million online returns since 1986 without a security breach. "If you look at our internal security, it's higher than what you would find in the private sector," says Terry Lutes, director of electronic tax administration at the IRS. "We know that if [there were security breaches with electronic filing,] it would be over."

For some taxpayers, money is an issue. Ever since e-filing began as a pilot program in 1986, private concerns have served as gatekeepers to the IRS, and they have charged an average of about $12 for the service. Congress has made moves to have the IRS develop its own software for taxpayers. And the Bush Administration floated a proposal as part of this year's budget to allow taxpayers to file electronically for free.


  That didn't go down well with private tax-software companies, which argue that having the IRS as a competitor would undermine not only their interests but the interests of taxpayers. "Would the IRS necessarily be as good at developing software with the purpose of finding deductions for people?" asks Michael F. Cavanaugh, executive director of CERCA, an industry group. "Or would the public be better served by having a competitive system, where you have private players fighting in the marketplace to create the best possible product? I think the policy question answers itself."

So a compromise was reached between the federal government and the tax-software industry: Beginning next year, private outfits will offer free online tax-filing services to 60% of taxpayers. Links to these electronic services will be available through a single, centrally located Web portal at www.irs.gov. If a significantly higher number of taxpayers start filing via the Internet, the government will probably shelve plans for the IRS to get into the tax-software market, officials say. Otherwise, all bets are off.

It's no surprise that the IRS is eager to promote e-filing. It costs the agency $1.50 to process a paper return vs. about 75 cents for an electronic return. The IRS employees that laboriously punch in the paper-filed data could be used for other duties, such as answering taxpayer queries. And the agency wouldn't have to store all of the paper returns.


  But the IRS doesn't trumpet the benefits it would reap, in large part because its focus-group research has shown that electronic filing would turn off many Americans if they knew it would help the agency they love to hate.

Instead, the IRS underscores how e-filers are generally happier with their tax-filing experience than paper filers by a margin of about 75% to 50%, according to the University of Michigan Business American Customer Satisfaction Index (ACSI). And government officials hope that by allaying security concerns and making the service more affordable, they'll realize their goal of convincing four-fifths of taxpayers to take the electronic plunge within five years.

By Alexandra Starr in Washington

Edited by Douglas Harbrecht

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