The Internal Revenue Service needs to increase the number of business tax returns and information returns that are filed electronically, recommends a new government report.
The report, from the Treasury Inspector General for Tax Administration, noted that the Restructuring and Reform Act of 1998 required e-filing as the preferred and most convenient method of filing federal tax and information returns. The law also established a goal that at least 80 percent of all returns, both individual and business, be filed electronically.
Since the 1998 law went into effect, however, the IRS has focused most of its efforts on increasing the e-filing rate of individual tax returns. These efforts have resulted in considerable growth in the e-filing of individual tax returns. In processing year 2012, the rate of e-filing of individual tax returns was at 81 percent, compared to a 41 percent rate for business tax returns in tax year 2012.
TIGTA’s review concluded that, while the e-filing of business tax returns continues to increase, the e-filing rate of business returns still lags behind that of individual tax returns. The IRS has not set up processes for business returns to ensure consistent compliance with e-filing requirements and assessment of penalties. Employment tax returns provide the most significant opportunity for growth in business e-filing, but a burdensome electronic signature process constitutes a barrier to growth in this area, TIGTA noted.
Electronic filing benefits both taxpayers and the IRS, TIGTA pointed out, such as faster refunds, electronic confirmation of receipt of their tax returns, and secure and confidential submission of sensitive return information. For the IRS, the benefits include a significant reduction of submission processing costs and the receipt of more accurate tax returns, which reduces taxpayer burden and avoids additional processing costs.
“With appropriate controls, electronic filing can be beneficial both to taxpayers, by expediting refunds and protecting the confidentiality of sensitive information, and to the IRS, by reducing processing costs and ensuring greater accuracy,” said TIGTA Inspector General J. Russell George in a statement. “Through a service-wide strategy to increase the rate of e-filed business returns, the IRS can continue to improve and promote the benefits associated with e-filing.”
In addition, TIGTA found that, by establishing certain requirements for paid preparers that would apply to the e-filing of business returns in a manner that corresponds with existing requirements for e-filing individual tax returns, the IRS could increase the number of e-filed business returns. Overall, based on its review of tax year 2012, TIGTA determined that it would be possible for the IRS to increase its e-filing rate for business returns by 23.8 percent and reduce its paper return processing costs by more than $17 million.
In its report, TIGTA recommended that the IRS develop a service-wide e-filing strategy for business returns, continue to expand the types of business returns that can be e-filed, and consider providing business filers with the option of Free Fillable Forms. In addition, the IRS should develop a less burdensome electronic signature process for employment tax returns and evaluate a number of other processes and procedures to increase the overall e-filing rate of business tax returns.
In response to the report, IRS officials agreed with five recommendations made by TIGTA but disagreed with three others, such as a recommendation of evaluating the feasibility of using the Electronic Federal Tax Payment System, or EFTPS, to e-file employment tax returns. The IRS said that its Modernized eFile system, or MeF, has been established as the system for receiving employment returns electronically. TIGTA said it believes it is important to consistently identify all businesses not meeting the e filing requirements as outlined in the law and take the necessary actions to ensure future compliance, including assessing penalties when needed.
“The IRS has recently initiated a work group that is identifying opportunities for the IRS to increase the business e-file rate,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Initial actions planned for the near term are the development of a communications outreach strategy to promote e-file options available to business taxpayers. The development of a longer-term strategy will include identifying potential solutions for service-wide taxpayer authentication services, to improve the taxpayer experience associated with e-signature services and identity verification, and identification of solutions to remove the challenges taxpayers face in electronically filing business returns.”
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