The Treasury Department’s Inspector General for Tax Administration has released a report recommending that the IRS seek mandatory electronic filing of individual tax returns by paid preparers, and legislation is being readied to write such a requirement into law.

J. Russell George

TIGTA also recommended in the report that the IRS use readily available scanning technology to convert paper returns into electronic files. The IRS employs up to 5,000 individuals during filing season to enter data from paper-filed tax returns into its databases.

TIGTA's report found that the error rates for paper-filed returns are considerably higher because of transcription errors by IRS employees. Most paid preparers already use electronic software to prepare returns, even those who file returns on paper, TIGTA found, and state tax agencies use readily available software to scan paper returns rather than transcribing taxpayer data.

The report concluded that requiring tax preparers to e-file tax returns could result in a 26.9 percent increase in e-filing. Using scanning technology would allow the IRS to convert 13.2 million paper tax returns into electronic format.

TIGTA recommended that the IRS work with the Treasury Department to seek approval of legislation mandating e-filing for all paid preparers and begin using scanning technology to convert paper tax returns into electronic files. The IRS told TIGTA that it is seeking legislative authority from Congress for mandatory preparer e-filing as part of its fiscal year 2010 budget request. The IRS also said it is pursuing the use of scanning technology.

The recommendations are part of TIGTA’s audit of the IRS’s efforts to modernize the way it processes paper tax returns. “The recommendations in this report are not made lightly,” said TIGTA Inspector General J. Russell George in a statement. “The IRS has tried four times since 1988 to replace its paper return processing system but has had little success. In these difficult economic times, the IRS must seek practices that more efficiently and effectively serve the American people."

According to the report, the IRS continues to receive large numbers of paper-filed individual income tax returns despite a continued growth in e-filing. In 2008, the IRS received 156.3 million individual tax returns, of which 66.4 million (42.5 percent) were paper-filed.