The 80 percent e-file goal, in place since it was proposed in the IRS Restructuring and Reform Act of 1998, was a major contributing factor to the growth in electronic filing, despite the fact that it fell short of the 2007 deadline, according to the Internal Revenue Service Oversight Board.
Recently, the board proposed that the e-filing deadline be extended by Congress to 2012.
"We do not view this as a failure," said board chairman Paul Jones. "Rather, the IRS and its private sector partners have achieved continuous and significant progress in all parts of electronic tax administration, very much in keeping with RRA 98's intent."
The Oversight Board also stated that, in its opinion, the IRS must exhaust all reasonable steps to maximize voluntary participation in individual e-filing before imposing any mandates on preparers. But current trends and practices indicate that without mandates the IRS will fall short of the 80 percent goal for Form 1040s, whether or not the goal is extended to 2012, according to the Electronic Tax Administration Advisory Committee.
In its just-released 2008 report to Congress, ETAAC noted that in 2007, tax preparers using software completed over 23 million tax returns and had the taxpayers paper-file them, even though they could have easily been e-filed. This happened not because the taxpayer was opposed to e-filing, but because the preparer had not recommended e-filing as an alternative, according to the Taxpayer Assistance Blueprint project of the IRS.
WAITING ON A MANDATE
Many existing tax preparers who do not electronically file eligible returns are waiting for government to require or mandate e-filing, according to ETAAC. It noted that states that have preparer mandates have found little negative feedback received from tax preparers related to the mandates.
"At this time, ETAAC believes that all reasonable voluntary means have been exhausted with respect to encouraging preparers to e-file individual tax returns, and it is time to take a stance by announcing an e-file mandate for tax return preparers," the report stated.
Therefore, ETAAC recommended that Congress act to give the IRS authority to require paid preparers who, using tax software, prepare more than 50 individual returns per year to file all returns electronically. However, there should be exceptions that recognize situations where e-filing may not be practical or possible.
"These exceptions might include non-software-prepared returns, ineligible returns and taxpayer preference," the report said. "An information-gathering or opt-out process would also allow the IRS to see where e-file resistance occurs and be able to act accordingly to issues raised."
"The committee's view is that it appears that the IRS has done everything possible to get people to embrace e-filing -- I'm not sure what the [Oversight Board] expects the IRS to do that they haven't already done," said Robert Meighan, vice president of software developer TurboTax and a member of ETAAC.
"If you mandate it for the professional community, you'll get to the 80 percent mark right away. They're already doing it electronically; the only thing is they're still submitting it in a paper format," he said.
"It's a convoluted process to prepare a return electronically and then revert to a paper format, so we think it's not much of a burden for the professional community to have mandates," he said. "We want to be sure that there's not a significant burden on either taxpayers or the professional community. And in our view, mandates do not impose any significant burden."
"I'm not a big fan of mandates. because I know from personal experience that there are taxpayers that don't want to e-file," said Roger Harris, chief executive of Athens, Ga.-based Padgett Business Services and former chair of the IRS Advisory Council.
"We all know that e-filing is a lot more efficient and we all should be doing it, but there are exceptions," he said. "Sometimes mandates don't account for the exception. If they really don't want to e-file, do you give me the authority to enforce it, or do I just tell them to go somewhere else?"
ETAAC noted a disparity between paper and e-file methodologies.
More than 10 percent of individual returns filed electronically are rejected by IRS systems for a number of reasons, many having to do with matching Social Security numbers. For example, the most common rejects include a dependent's SSN having been previously used on another current-year return; a taxpayer Social Security number not matching their name as shown on Social Security Administration records; and a taxpayer's or spouse's SSN having been used as a dependent on another current-year tax return.
There are times when the taxpayer believes that the return is correct, even though it is rejected by the IRS system, according to ETAAC.
"Even though the taxpayer believes that his/her return is accurate, he/she is not able to file the return electronically, which forces the taxpayer to print and mail it. The IRS then must open it and key the return, and the issue that prompted the original reject will still have to be resolved," its report said.
ETAAC recommended that e-filed tax returns should have more parity with paper returns, with additional opportunities to e-file returns that would normally be e-filed on paper when the return reject is known to be in error.
"If a return has been rejected previously for something other than a math or format error, then the IRS should allow the taxpayer to provide an explanation in the electronic record and request to submit the return electronically with an imperfect return indicator," ETAAC said in the report. "This would prevent the return from having to be paper-filed, hand-keyed by the IRS and the resolution of the problem from being delayed."
"There has been some fraud in e-filing, and as a result there are certain filters that an e-filed return has to go through that a paper return doesn't," said Padgett's Harris. "People looking to beat the system are e-filing. For all the good e-file created, it created an opportunity for criminals as well, so while I agree that they should put paper and e-file on the same level, you can't do it at the expense of allowing fraud."
Harris predicted that e-filing would reach its goal at some point in the near future. "Most of the resistance to e-filing is in older preparers and taxpayers," he said. "As younger people enter the workforce and become taxpayers, this resistance will diminish."
