The ambitious goal of having 80 percent of federal tax returns electronically filed by 2007, suggested by Congress in 1998 legislation, may not be out of reach.

"We don't want to give up on that goal yet," said Bert DuMars, director of Electronic Tax Administration for the Internal Revenue Service. "I'm not giving up until I have to. Over 50 percent of all individual returns will be e-filed this year," he said.

DuMars believes that much of the future growth in e-filing will be fueled by the favorable experiences of people using it. "There's been tremendous word-of-mouth promotion. People are saying, 'This is the way I do my returns now.' We're actually spending less on marketing and advertising."

While early filing figures are not yet available, software manufacturers have noticed a strong uptick in the number of e-filed returns. CCH's Torrance, Calif.-based ProSystem fx has seen a surge in e-filing interest. "Everything's running smoothly," said Ron Sosinski, product manager for customer relations. "All indications are that there will be a significant increase in volume this year."

"The percentages will go way up this year," echoed Boyd Gackle, product manager of Carrollton, Tex.-based RIA's GoSystem RS. "In 2004, we had an 80 percent increase over 2003. A lot of our customers have started e-filing, so that when mandates are put in place, they'll be ready."

Last year, GoSystem RS processed 1.2 million returns over its Web-based system. "Although not all of those returns were e-filed, we've had a tremendous amount of interest in the focus sessions we had throughout the country," said Gackle.

The IRS recently released regulations that require certain large corporations and tax-exempt organizations to electronically file their income tax or annual information returns beginning in 2006.

John Vora, president of Randolph, N.J.-based TaxSimple, has noticed an easing in individual resistance to e-filing. "More and more are e-filing this year," he said. "They feel more confident that they can do it, and every year the software gets better and easier to use."

The advantages of e-filing are apparent both to the taxpayer and the government.

"It's much less than half the cost to process than a paper return, because e-file goes straight into the system," said DuMars. "We've been closing down service centers and eliminating paper filing capacity over the last several years. All this has been enabled by e-filing."

DuMars credited states that mandate e-filing with aiding the federal program. "Taxpayers figure as long as they e-file their state return, they might as well e-file the federal," he said.

Seven states currently mandate e-filing for preparers who prepare a certain volume of returns. The lowest threshold is 50 returns, while the highest is 250.

DuMars expected the percentage for e-filed business returns to increase dramatically this year. "This is the first year that 97 percent of all business returns can be done electronically," he said. "The percent of e-filed business returns isn't as high as individual returns, but it will grow rapidly."

"Business return e-filing is 'nicer' than individual e-filing," he said, "because the error codes are more understandable and the acknowledgement happens in minutes, whereas the individual return can take up to 48 hours."

The advantages of e-filing business returns are even more pronounced than individual returns. "We have received a corporate return from a Fortune 500 company that was over 55,000 pages long," observed DuMars. "It used to be delivered by truck. Now it's e-filed."

"When you consider the cost of doing the return, printing it out with indexes, and duplicating it to send to two locations, the advantages are obvious," he said. "Managing it on our end it also far simpler. People who need to review certain parts can just print out what they need, or they can review it online."

The IRS emphasized a number of advantages that e-filing gives taxpayers. These include faster refunds, more accurate returns, electronic confirmation, completely paperless returns and payment options for balance-due taxpayers.

Converting tax preparers from paper to e-filing would significantly impact the e-file rate for individual returns, according to National Taxpayer Advocate Nina E. Olson. Because practitioners prepare nearly 60 percent of individual returns and more than 85 percent of business returns, "it is clear that preparers are key to the growth and success of e-filing," she told Congress in her January report.

DuMars agreed.

"There's still a lot of room for growth among practitioners," he said. "Many of them use sophisticated software and then print out the return. We need them to come across the finish line and send it electronically, so we all can benefit."

Free File controversy

Almost one of every four tax returns completed online by individuals was filed for free through the Free File program, a partnership between the IRS and tax software companies, according to Bill White, CPA and chief executive of St. Joseph, Mo.-based The IRS has supported the program to get more taxpayers to e-file.

Nevertheless, taxpayer advocate Olson has objected to certain commercial activities related to the program, and has recommended that the IRS should not renew the contract with the Free File Alliance, which expires at the end of this season.

Negotiations to renew the program will begin in mid-February, and could go on for six months, according to DuMars. Our intention is to renew," he said. "Last year, the program grew 26 percent over the first year. At the same time, the number of issue-related phone calls dropped by 66 percent, so the quality went up dramatically."

Currently, there are 19 private industry software company participants in the program.

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