It's a dubious advantage: In theory, the IRS can save so much money as more people rely on e-filing, that it will be able to hire more auditors, which, in turn, becomes a good reason to reject e-filing. But love it or hate it, e-filing continues to grow.
What started as a pilot program in 1986 with 25,000 electronically filed returns and went national in 1990 with 4.3 million e-filed returns, shot up to 73.3 million--or 54 percent of the 135.7 million tax returns processed--in 2006. "It's been an extremely successful program," says Nancy Mathis, IRS spokeswoman.
But while e-filing is relatively simple for the rank and file, when it comes to wealthier individuals, there are still snags to be worked out, says Alan J. Straus, chairman of the New York State Society of Certified Public Accountants' (NYSSCPA) Relations with the IRS committee.
Consider attachments. "Some people have anywhere from 150 to 1,000 stock sale transactions in a year," explains William Jones, who is chairman of NYSSCPA's Taxation of Individuals committee and senior tax manager at Marks Paneth and Shron LLP in New York. Stock brokerages send a statement with the client's gains and losses. "We've always taken the sum--with sale date, purchase date, the gain, and a description of the stock and say 'see schedule attached.'" For some clients, that can mean 40 to 60 attachments. How is this done with e-filing? Extra schedules needed to be worked out.
Taxpayers may submit broker statements, says IRS spokeswoman Mathis, if they show the exact type of information requested on Schedule D: That means full details, not mere summaries. The [IRS] ruling says there may be multiple Schedule Ds to describe transactions. The rub has been transferring the information. "No one wanted to copy all that minutiae painstakingly over to the form," Jones notes.
Another fly in the ointment has been the depth of forms. "They've broadened, again because we've brought up the problem," says Straus. Today, more Schedule K-1s are accepted. "Esoteric forms like [those for] passive foreign investments still have to be sent in separately," Straus reports. CPAs mail the schedules with a cover sheet, the client's name, address and Social Security number, specifying that the rest of the return has been e-filed.
With complex filings involving many forms, is it easier to get away with fraud? "On the contrary," says Steven Mayer, president of Mayer, Shanzer, Mayer PC in Conshohocken, Pa. "There are fewer mistakes, but," he adds, "it seems to be harder to rectify them." One of his clients sent his 2004 return late. The IRS processed it as 2005. "I'm still getting messages wondering why he filed two returns for 2005." (Officially, the error rate is less than 1 percent with e-filing.)
Avoiding an audit is the number-one reason many people don't want to file electronically. It's assumed returns are processed and perused more easily, whereas paper is more difficult to input, ergo--less opportunity for auditing. But paper-only people should understand that their returns become "electronic," too, entered into computers almost as easily via scanning or bar codes.
Another e-filing worry is security, but Jones thinks that is unwarranted. "I haven't heard anything ever of returns being hacked into." Still, Social Security numbers flying through the ether gives many people pause. Jones admits that the very idea of e-filing is foreign to folks who are not technology-savvy. "You might say, I'll PDF the form to you, and the client may not know what you're talking about. Some people haven't even recognized email yet."
And despite e-filing euphoria, Straus believes there will always be an opt-out alternative for those who don't want to e-file. "Although the service says everyone can e-file, if you prepare more than 100 returns, your clients have the right to opt out. There are whole practices that opt out." Meanwhile, he adds, the IRS has made improvements. "The process has gotten much smoother; electronic signatures show how CPAs and the IRS work together to find answers."
In fact, Straus's committee logged many hours to make it easier to get clients to sign off. Preparers now choose a PIN number for clients. Originally, the IRS thought practitioners and clients would choose them together. "We're not H&R Block--clients aren't sitting there as we prepare returns," says Straus. "They're often in other countries. So we explained that it didn't work, and the IRS changed the rule."
Sign-off provisions have included faxed signatures as well. But what Straus likes best are PDF files. "It's evolved. I can e-file clients' returns, PDF clients' copies and save my copies as PDFs--meaning not printing hundreds of pages of forms. I save on paper, postage and storage costs."
However, CPA Jones thinks it would be unfortunate if the IRS suddenly mandated that returns had to be e-filed. "I don't think this should be considered. It isn't right to mandate what isn't perfected yet," he argues. In fact, some states are mandating that a specific number of returns be e-filed. In New Jersey, for example, preparers are urged to e-file for more than 50 returns. On the other hand, Jones adds, "Aren't we glad, though, that the people who tried to stop e-filing didn't prevail?"
Janice Fioravante wrote about the economics of Christmas in November 2006.
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