Paperless Tax Returns: We're Making Progress
Nothing can make tax filing pleasant. But for those who dream of the day when technology turns tax preparation into something as easy as a couple of clicks on a mouse, new features from the Internal Revenue Service and the Quicken TurboTax tax-filing program may make the task a bit less onerous this year.
About 130 million individual returns are expected to rain down upon the IRS this tax season. Under prodding from Congress, the IRS has been encouraging taxpayers to ship in those returns electronically, both to make the process more efficient and to save itself money. But until this year, e-filers still had to follow up their computer transmissions by mailing a paper form bearing their signature. Some couldn't e-file at all, since their situations required using tax forms or attachments that the IRS wouldn't accept electronically. Last year, only 5 million Americans filed returns to the IRS over the Internet. An additional 25.2 million electronic returns came in from tax preparers. Some 5 million filers--those with simple enough taxes to use the 1040EZ Form--had only to call up the IRS's TeleFile system and punch in their numbers.
The IRS expects the total either phoned in or sent by computer to climb to 42.3 million this year, representing 32.5% of all returns. That still puts the agency off-target for meeting its goal of 80% of all returns being computer-filed by 2003, admits Terry Lutes, director of the IRS electronic tax administration. One problem is that the IRS is getting resistance from tax professionals unhappy that they have to maintain two separate systems, paper and electronic. Also, some do-it-yourselfers worry about cyberspace security--or just don't feel comfortable using a computer.
But for individuals filing garden-variety returns, the coming tax season will be a landmark. "For the first time, it's going to be a totally paperless experience," explains an IRS spokeswoman. Uncle Sam has decided to let taxpayers make up their own secret PIN number to identify themselves, just like customers of automated teller machines do, rather than having to mail in the paper signature form. Only those mailed codes by the IRS because they had filed electronically before or have used a computer to do their return could do that previously.
The IRS also is busily removing the remaining roadblocks against filing certain forms electronically. A total of 23 forms--including Form 2350, a simple request for a filing extension--will become digitally available for the first time this year; an additional 40 will appear in 2002, for the 2001 tax year. That will still leave forms that must be filed on paper, including a commonly used one that allows the noncustodial parent in a divorce to claim the child as a dependent and take the exemption, as well as a form used by people making large noncash contributions, such as art or an auto, to charity. In both cases, the complication is the requirement for some signature other than the taxpayer's. Still, Lutes says, this year's additions will mean 97% of all taxpayers could file online. With next year's changes, that grows to 99.3%.
DISASTER. Quicken TurboTax, the leading tax-preparation program for consumers, is at the forefront of the paperless push. Last tax season, TurboTax executives persuaded Salomon Smith Barney to download Form 1099 taxpayer information, such as interest, dividends, and stock sales, directly into its program. This year, financial-services firms, such as Fidelity Investments, Vanguard Group, TD Waterhouse Group, and T.Rowe Price Associates, have come onboard. That means TurboTax users with online accounts at those investment houses can get the same data downloaded into their program that the firms report to the IRS.
TurboTax also is working with three major payroll-processing firms, so employers can ship employee W-2 wage information into the program as well. Participating companies will notify their workers, who'll then be freed from the task of entering the numbers for such things as earnings and the amount of federal, state, and local taxes deducted. Colleen Ferrin, a TurboTax spokeswoman, says 250 employers representing more than a half-million employees have signed up so far. They include catalog company Lillian Vernon Corp. as well as Autodesk, a maker of PC design software. To participate, taxpayers will need TurboTax or TurboTax Deluxe software or the company's Web version, available at www.turbotax.com.
Intuit is the clear leader in this area, says Jaime Punishill, senior analyst at Forrester Research, a technology research firm. Intuit's major tax-prep software competitor, H&R Block, is still recovering from last year's disaster, when some taxpayers using the company's Web-based product complained they could see other users' tax information. This year, it is partnering with Microsoft Corp., so its Kiplinger TaxCut program can more easily pick up tax-related information from the Microsoft Money personal finance software. But there are no direct feeds of 1099 or W-2 information into TaxCut. H.D. Vest Financial Services, a brokerage firm providing free online tax preparation on its Web site, doesn't offer downloads of 1099s and W-2s, either.
Next year, Intuit hopes to expand the number of companies electronically pouring in 1099 and W-2 data, says Bob Meighan, Intuit's vice-president and general manager. Then it's on to mortgage bankers for the mortgage interest deductions and perhaps even to local tax collectors for property-tax deductions. Picking up charitable contributions might be possible, as more people donate over the Web.
There will probably never come a time when every tiny bit of information for each and every taxpayer is electronically fed into a tax-filing program, says Forrester's Punishill. The medical industry, for example, is a long way from providing electronic information for taxpayers who want to write off health costs.
Of course, taxpayers willing to do a two-step could already transfer income and expense information stored in their Quicken and other personal-finance software into TurboTax. Ditto for transfers into TaxCut. And remember, those using personal-finance software can get some information electronically from brokerages and charge-card companies such as American Express.
All this looks pretty impressive to such taxpayers as Roger Turner, 69, who saw a TurboTax demo when Meighan appeared before the computer club at Turner's retirement community in Laguna Woods, Calif. "I think it's cool to be able to get [the information] automatically," the retiree says. Though a professional has done his taxes for years, Meighan thinks he's ready to go it alone.
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