Observers predict that this year's e-filing season, which kicked off on January 13, will far outpace previous years in terms of the number of e-filed returns."We experienced a big surge compared to last year," said Jo Ann Cummings, product manager for CCH's Torrance, Calif.-based ProSystem fx Tax. "We e-filed over 3 million returns last year, and we expect a big increase in that."

"Twice as many filed during the first three hours of e-file this year compared to last year," echoed Julie Kozloski, product manager of Intuit's Lacerte and ProSeries e-file. "Last year we had a 20 percent increase over the previous year, and this year will probably trend that way or even show a greater increase. This year, a lot of preparers were ready to go right out of the gate, and there are a lot more preparers coming on board as [electronic return originators]."

While preliminary statistics are not yet available from the Internal Revenue Service, the agency expects a large increase over last year's numbers, according to David Williams, director of the service's Earned Income Tax Credit unit.

Much of the e-file increase is due to state and federal mandates, explained Kozloski. "This is the first year that the IRS has mandated e-filing for large corporations," she said. "And a number of states are now mandating it for professionally prepared individual returns. For example, New York is requiring preparers who prepared over 200 returns last year to e-file. As a one-time exception, they're allowed to use 2D barcode just this year."

Large corporations - those with assets over $50 million and with 250 or more returns - now are required to e-file their federal Form 1120s, said ProSystem's Cummings. "For the purpose of this rule, 'return' includes W-2s, 1099s, excise and employment tax forms, so most corporations with more than $50 million in assets are in this category," she noted.

Benchmarks, anniversaries

This year marks e-file's 20th anniversary. It surpassed a benchmark last year when more than 68.4 million tax returns - 52 percent of all returns - were filed electronically.

The e-file program began in 1986 as a pilot project in Cincinnati, Phoenix and Raleigh-Durham, N.C. That year, there were 25,000 tax returns filed electronically. The program expanded nationwide in 1990 with 4.2 million tax returns e-filed.

Nevertheless, the 80 percent goal of e-filed returns by 2007, suggested by Congress in 1998 legislation, remains elusive.

In fact, the IRS Oversight Board now recommends the goal be extended to 2011.

"The congressionally mandated e-filing goal has exerted a powerful effect on the tax administration community and on the IRS. The IRS Oversight Board believes that extending the goal will allow that positive effect to continue," said IRS Oversight Board chairman Raymond T. Wagner, Jr.

The Oversight Board based the new recommendation on its independent analysis of e-filing trends, which shows that by 2011, nearly 80 percent of individuals will file their returns electronically, provided that today's trends continue.

"[The 2007 goal] just seems unlikely," said Charles Tzinberg, a partner in the Glen Carbon, Ill.-based CPA firm Tzinberg & Goldberg. "A large part of the reason is the IRS itself. They want to make e-filing the preferred method of filing, but they've placed obstacles in the way of making it easy."

A perfect example, said Tzinberg, are the extra steps required for e-filed returns. "The W-2 and the 1099 both require additional information. Practitioners say, 'Why should I file electronically when it requires more information than a paper return?' The W-2 requires the name and address of the payor - for taxpayers with multiple W-2s, such as a laborer who might have 20 or 30, the extra steps can be an obstacle."

Nevertheless, some regions are reporting a surge in e-filing.

"We've seen a very strong start with New York returns," said Gene Salo, development manager for Dexter, Mich.-based Creative Solutions' Ultra Tax CS.

"New York's mandate of preparers filing over 200 returns has contributed to a 50 percent increase in electronic filing," he said. "California also went with a mandate last year, and we're seeing strong e-filing from both federal and state returns there, as well as in other states with mandates - New Jersey, Connecticut and Massachusetts."

Salo noted that eight states still do not have e-filing available for their state returns.

"So states like Texas, Florida and Washington can only e-file federal returns," he said. "What we are seeing is an increase in the number of returns that are in multiple-state situations; for example, the taxpayer works in New York, but lives in Connecticut, and both states are filed electronically along with the federal return."

As a result of tax legislation enacted late last year, a small number of 2005 tax forms were delayed for e-file availability until late in January. None of the most commonly used forms were affected by the delay. Based on last year's January filings, the IRS said that a few hundred thousand taxpayers could be affected by the delay, with the largest group involving people filing Form 8863, Education Credits.

RIA's Carrollton, Texas-based GoSystem RS is bracing for a huge increase in corporate tax returns as a result of the federal mandate for large corporations, according to product manager Boyd Gackle.

"The IRS is anticipating 22,000 returns that fall into that category, and we expect to do about 80 percent of those returns," he said. "We're encouraging our clients [who] e-file Form 7004 to put the corporate return on extension to get them used to the e-filing process. It gives them time to get their feet wet in the e-filing process."

"It's a different process than paper filing - you can't just print out a bunch of paper and mail it to the IRS," Gackle said. "We can only submit one file to them for the entire corporate return. All the information has to be consolidated into one file before we submit it, so we have enhanced our software to ensure that the return won't be rejected because of some unknown business rule."

Says Tzinberg, "All the big preparers like [H&R] Block have been e-filing forever; now it's just the holdouts that for one reason or another aren't buying in," he said. "I've been e-filing for years, and I believe it's better for everyone, but a lot of preparers are hanging on to reasons not to e-file. If the IRS would remove these obstacles, a lot more would do it."

Other initiatives

On the same day that e-filing opened for business in 1986, the IRS launched "Electronic IRS," a centralized source for all IRS electronic options, on its Web site. Tax preparers who click on the Electronic IRS logo on its Web site will be taken to a page that contains an overview of all the electronic tasks that can be accomplished online.

Meanwhile, the IRS and its private-sector partners announced the renewal of Free File, the free tax prep and e-filing initiative that begins its fourth year. The 3 million taxpayers who formerly filed their returns through TeleFile, an option no longer available, now automatically qualify for Free File. Some 70 percent of taxpayers are eligible this year, covering those with adjusted gross income of $50,000 or less.

"This year, we have our electronic services available in one place at the new Electronic IRS section of our Web site," said IRS Commissioner Mark W. Everson. "The Electronic IRS provides a gateway to services for both taxpayers and tax preparers, and makes these services available 24 hours a day, seven days a week."

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