Electronic Filing, a Midterm Report
Colabella, Patrick R., Maury, Mary, Petersen, James F., The CPA Journal
Despite the rapid growth in electronic filing, many CPA firms are reluctant to take part in the program. The authors give a report card on the program and its participants to date and provide advice to those who haven't joined yet.
In 1985 an IRS research study showed that over 20% of all tax returns were prepared by computer. These returns, already in magnetic form, were printed and mailed to the IRS and re-keyed into the database. The only winner in this redundant, error-prone, and costly process was the U.S. Postal Service. As a result, in 1986 the IRS tested the concept of electronic filing in a pilot program with five tax preparation firms and 25,000 refund-eligible returns. The program has grown dramatically ever since. In 1989, over 1 million personal tax returns were filed, albeit in the limited areas where electronic filing was permitted. In 1990, electronic filing was available in all fifty states, and over 3,000,000 returns were filed electronically. In 1991, approximately 7,500,000 returns were electronically filed. The number of electronic filings grew 44% this year with 10,800,000 returns filed as of April 17th, 1992. The IRS anticipates that approximately 15,000,000 returns will be filed electronically in 1993. Electronic filing is by far the most successful program the IRS ever implemented.
THE IRS GOALS
Electronic filing is no longer an option in the eyes of IRS planners. The IRS's direct labor costs for processing an electronic return are only four cents, compared to 40-50 cents for paper returns. The IRS error rate is only 3% for electronic returns, compared to 16% for manual returns. Electronic filing is a necessary if the IRS is to control costs, maintain effectiveness, and meet its overall automation objectives.
WHO HAS ADOPTED
Non-CPA tax preparers have embraced electronic filing more quickly and completely than the CPA community. Many of these are high-volume tax preparers who see electronic filing as an important feature they must make available to their clients to remain competitive. Many CPAs, particularly those with high-volume practices, feel electronic filing is an important service, but do not view it as vital to their competitive position. CPAs in smaller practices consisting of high net worth individuals are more critical and view electronic filing as impractical for the type of tax returns they do, particularly since there are limitations on returns that can be electronically filed. They do not believe that their clients really need or want the service and therefore question the need to expend the resources to get involved. Despite these criticisms, the popularity of electronic filing continues to grow, and it is becoming more practical in the process.
There are limits as to which returns qualify for electronic filing. Electronic filing can handle easy to moderately complex returns. More complex returns, ones with more than nine rental properties or over three businesses, do not currently qualify for electronic filing. Realistically, electronic filing still isn't for everyone.
The jury is still out on the subject of balance due returns. In 1992 only half of 1% of returns filed electronically were balance due returns. Many practitioners surveyed said they cannot imagine clients paying a fee to transmit a return with an amount due. On the other hand, some feel there is a comfort benefit in the IRS' guarantee of acceptance or rejection notification within 48 hours of receipt. Even with a balance due, the taxpayer does not have to remit until April 15. The IRS hopes to offer in the near future credit card payment capability for balance due returns.
HOW TO GET STARTED
You must first register with the IRS by filing Form 8633, which identifies what role you plan to play--originator or transmitter--and is the basis for assignment of an identification number or EFIN. You may not participate until officially notified of acceptance. …