Messrs. Chairmen and Members of the Commission:
Thank you for inviting me to comment today on ways to increase the number of tax returns that are filed electronically, which will result in lower costs for the IRS.
H&R Block handled more than 17 million returns in the United States, Canada and Australia last tax season. In the United States alone, H&R Block processed tax returns for one out of every seven Americans. We have nearly 9,700 offices worldwide, with approximately 8,300 in the U.S.
Our participation in electronic filing in this country is significant. Last year H&R Block transmitted more than 6 million of the 12 million returns filed electronically by commercial practitioners with the IRS.
Why Clients Do and Don’t File Electronically:
Most of our clients who select electronic filing do so for one reason -- they need their refund as fast as possible. That is also the reason our refund anticipation loan product is so popular. In just one or two days, taxpayers receive their money, which is actually a loan based on the anticipated refund amount.
Having said that, however, the majority of our clients who do not file electronically also get refunds. Therefore, unless the need for cash is urgent, a speedier refund is not reason enough to prompt some clients to use electronic filing.
According to our studies, cost does not appear to be a major factor in selecting electronic filing. We tested free electronic filing over several years in about a third of our U.S. offices. Yet, approximately 60% of our clients still preferred paper filing.
Taxpayers’ reasons for not choosing electronic filing vary. Some clients fear that an electronically filed return will increase the possibility of an audit. Some are technophobes who generally distrust computers. And others are simply more comfortable with the familiar ritual of a trip to the post office.
There are other obstacles besides taxpayers’ attitudes which are limiting the amount of electronic filing. Changes made by the IRS to reduce fraud have resulted in the loss of about 6 million electronically filed returns over the past two tax seasons. The elimination of the direct deposit indicator in 1994 resulted in fewer taxpayers qualifying for refund anticipation loans, which are processed only with an electronically filed return. In addition, those who did qualify paid more for the service, because lenders raised their fees to manage the increased risk of providing loans.
H&R Block applauds the IRS in its efforts to crack down on fraud. The Service has become more sophisticated and successful in detecting and eliminating fraud through various methods, such as matching social security numbers and improving information screens. Accordingly, we would welcome reconsideration of the kind of information it shares with professional tax preparers to aid in electronic filing. For example, the IRS now assists mortgage lenders by verifying a borrower’s income. We are encouraged by such actions and look forward to working with the IRS in a similar, cooperative fashion.
Another way to remove obstacles to electronic filing would be to modify several IRS restrictions. These modifications could make the electronic filing process easier for tax preparers as well as reduce administrative costs for the IRS. Let me suggest the following.
First, we recommend eliminating the signature document (Form 8453) that is required with electronic returns and mailed to the IRS. A taxpayer’s signature could be secured in other ways, such as through the use of PINs, voice signatures, or public/private keys. In Canada and Australia, for example, signature documents do not have to be mailed to the revenue department. All of H&R Block’s tax returns are filed electronically in Australia, while in Canada, about 65% of our clients file electronically.
Second, we recommend the IRS eliminate the "responsible official" requirement for each tax preparation office that files electronically. This requirement generates thousands of applications every year, which results in a tremendous paperwork backlog at the IRS. Because of this backlog, the IRS is unable to quickly issue electronic filer identification numbers, which prevents tax preparers from offering electronic filing services to their clients. Instead of an office-by-office requirement, the "responsible official" designation could be made at a regional or national level. This would greatly reduce the amount of paperwork, speed up the process of issuing electronic filer identification numbers, and ensure that electronic filing service is available when the taxpayer wants it.
And finally, we recommend that the IRS test and confirm the electronic filer identification numbers prior to January so taxpayers do not face delays due to identification number problems. Currently, such problems are identified only after the system goes "live" for the tax season.
Advantages for IRS and Taxpayers:
The advantages of electronic filing for the IRS are clear. Electronic filing greatly reduces paperwork. In addition, the need for the IRS to keypunch tax return data -- which costs an estimated $700 to $800 million a year -- could be substantially reduced or eliminated.
But we believe many taxpayers are unaware, or not convinced, of the advantages electronic filing offers them.
While a key advantage is the ability to get a refund faster, many taxpayers don’t realize that paper filing results in a 15% to 20% error rate compared to less than 1% for electronically filed returns. In addition, rejects due to faulty social security numbers, names or birth years are quickly corrected before filing the return, and the IRS can confirm electronically that a return has been accepted. Also, the taxpayer is less likely to receive follow-up correspondence from the IRS when the return is filed electronically.
Although there are numerous taxpayer advantages, we must work harder to change taxpayers’ perceptions and promote electronic filing. We believe this can be accomplished by improving public education and by marketing more aggressively.
For example at H&R Block this year, we are spending $2.4 million on television advertising for electronic filing. Window banners promoting the service appear in most of our 8,300 U.S. offices. We distributed more than 5 million brochures written in English and Spanish highlighting the advantages of electronic filing. We also targeted a direct mail campaign to 11.5 million of our previous clients encouraging them to file electronically. Electronic filing is provided free with tax preparation service at all of our 600 H&R Block Premium offices. We also promote electronic filing on our web site (www.hrblock.com), on a CompuServe forum, and in our "Ask Henry" syndicated column distributed by United Press Syndicate. And on March 1st each tax season, we generally lower our electronic filing fee from $25 to $15.
This marketing approach, we believe, encourages more people to file electronically. We believe similar educational and marketing efforts conducted by the IRS would be helpful.
We can also be more creative in seeking ways to convert paper returns to electronic returns. One method would be for the IRS to outsource returns processing, data entry and transmission of tax returns to companies with the labor and technical resources to handle the work. H&R Block, for example, has the ability to process 50,000 to 60,000 returns an hour. This could reduce the IRS’s administration costs as well as reduce the cost of its modernization program.
The IRS could also encourage more practitioners to use electronic filing by offering toll-free connections to the IRS, as done today with Telefile.
In conclusion, we believe electronic filing can be increased by better educating the public regarding its advantages and by exploring creative marketing programs to promote the service and encourage its use. We recommend the IRS eliminate the obstacles that exist for tax preparers. And we encourage the IRS to turn to private industry to outsource work and for assistance in developing solutions.
However, we also believe the IRS should be more realistic in its projections of increased electronic filing. Taxpayers will choose electronic filing only when there is a clear benefit for them to use it. And right now, the only benefit driving its use is a fast refund.
H&R Block is ready to be a productive partner with the IRS, Treasury and the Commission to improve electronic filing programs and make them more attractive. I’d be happy to try to answer your questions.