Electronic filing holds great potential to increase cost savings and compliance with only a small investment by the IRS. With a cohesive plan to market and implement electronic filing, the IRS can improve its customer service capabilities, modernize its processing functions, and facilitate more efficient compliance efforts. Such a plan must eliminate barriers and provide benefits and incentives for practitioners and taxpayers.
The IRS presently receives approximately 205 million tax returns each year. The largest workload involves the nearly 120 million individual tax returns. The ten service centers process paper returns using an error prone process during which approximately forty percent of the tax return data is entered and perfected manually. The error rate for this data capture and perfection process is approximately twenty percent, half of which is attributable to the IRS. Because electronically filed returns usually are prepared by computer programs with built in checks, undergo pre-screening by the IRS, and experience no key punch errors, these returns have an error rate of less than one percent.
Presently over one half of all individual tax returns exist in electronic format prior to submission to the IRS. Practitioners usually prepare returns on their computers, but print them out and send them to the IRS on paper. Digital-to-paper-to-digital conversion inefficiencies, including physical handling of the paper returns, opening of mail, physical arranging and batching of paper documents, and error prone manual data entry, add to the cost of processing paper returns. Common sense tells us that information already in electronic format should be transmitted directly to the IRS, avoiding these redundancies and inefficiencies.
In addition, the pipeline (IRS paper return processing function) still uses antiquated equipment, such as the Distributed Input System (DIS) and Remittance Processing System (RPS), to input information from paper documents. Installed in 1984 and 1978, respectively, these systems experience significant downtime and slow operator productivity.
In 1993 the IRS established an electronic filing goal of eighty million tax returns by 2001. However, the IRS has not yet developed a comprehensive, plausible strategy to meet this goal. Better marketing to taxpayers, elimination of taxpayer burdens and barriers, increased cooperation with tax practitioners, and lower costs of filing are the keys to greater electronic filing. Previous efforts at marketing have focused almost exclusively on those taxpayers concerned with quick refunds. The IRS must reach beyond this group of taxpayers and develop appealing strategies for various segments of taxpayers and practitioners in order to achieve its stated goal.
The IRS reports that it could accept over 100 million electronically filed returns annually without requiring any new systems development effort. However, to accomplish this goal the agency needs to put in place additional building blocks, including acceptance of all form types, internet capability, and paperless payment.
1. Strategic Marketing Plan
The IRS must develop a strategic marketing plan to make paperless filing the preferred and most convenient means of filing for the vast majority of filers in ten years.
The IRS needs a strategic marketing plan to make paperless filing the preferred and most convenient means of filing for the vast majority of filers in ten years. This goal can be achieved through increased industry partnership, elimination of barriers, use of competitive market forces to lower costs, additional benefits to taxpayers, and changes to IRS systems and procedures.
In promoting movement toward electronic filing, a key element is cooperation with paid preparers. In testimony to the Commission, however, there was an overwhelming response from relevant stakeholders that the IRS has not partnered with external stakeholders to increase the level of electronic filing, and that the IRS does not make it easy for practitioners or individuals to file electronically.
The current electronic filing process can be complicated, and measures to protect against fraud can increase this complexity unnecessarily. To help move taxpayers toward electronic filing, many tax practitioners believe that these barriers should be removed by:
· Making the process truly paperless by eliminating the
current requirement to file Form 8453 to obtain the taxpayer’s
· Reducing the cost to the taxpayer for electronic filing;
· Marketing electronic filing beyond that segment of taxpayers who desire a quick refund;
· Enabling taxpayers to file all forms electronically;
· Streamlining the annual procedures for certification as an electronic return originator;
· Enabling taxpayers to submit supplementary notes, explanations, or elections when filing electronically; and
· Eliminating the erroneous perception that electronically filed returns are prone to greater audit scrutiny.
The IRS has not achieved its original objectives for electronic filing because its current program has limited appeal to taxpayers and practitioners. The Commission has concluded that no single modification will change taxpayer or practitioner behavior, and that a comprehensive plan to remove barriers, increase benefits, and broaden the appeal of electronic filing to all segments of the taxpayer and practitioner population is essential. The Commission recommends that the IRS, Congress, and the Administration establish a goal that less than twenty percent of all tax returns be filed on paper within ten years, and that IRS leadership be held accountable for accomplishing that goal. The Commission believes that this goal can only be achieved by implementation of a comprehensive plan that is accepted by Congress, the Administration, and stakeholders. Based on extensive discussions with relevant stakeholders, the Commission has developed one such plan, which is presented in Appendix G. Many elements of this plan require legislative action, and the Commission recommends that Congress act to pass the required legislation so that the IRS can begin to implement the plan. In holding the IRS accountable for the stated goal, the IRS should bear the responsibility for recommending changes to the plan in future years that may be necessary to achieve the stated goal.
Because the IRS will need continued input from practitioners as it implements its electronic filing strategy, it should consider institutionalizing this partnership by establishing an Electronic Commerce Advisory Group (ECAG) to address issues of mutual concern to IRS and the practitioner community. For example, the ECAG could work with IRS to develop marketing campaigns to encourage electronic filing and educate taxpayers about its benefits.
2. Incentives for Electronic Filing
Congress should eliminate barriers, provide incentives, and use competitive market forces to increase electronic filing.
Many external stakeholders support electronic filing because they believe it reduces burden for themselves and taxpayers, in addition to reducing burden for the IRS. Presumably, as the volume of electronically filed returns increases, demand in the marketplace will drive down prices for electronic filing. Most tax practitioners charge for electronic filing today because they incur additional expenses, including costs of communications and third party transmitters. Surveys indicate that the cost of electronic filing is a disincentive to taxpayers to file electronically. The Commission expects that more taxpayers would file electronically, but for its cost.
To expand the appeal and broaden the benefits of electronic filing, the IRS strategic plan should incorporate a range of features that makes electronic filing attractive to both taxpayers and practitioners, including the following:
· Paperless filing;
· Extended due dates for electronically filed returns;
· Acceptance of all forms and attached schedules;
· Regulation of all paid preparers;
· Incentives for filing electronically; and
· Secure access to taxpayer account data for taxpayers who file electronically.
Because increased electronic filing will yield significant cost savings for the IRS, some sharing of these savings with stakeholders may provide a useful incentive. A combined incentive and mandate plan would help to increase levels of electronic filing, particularly if it facilitates free electronic filing. In the plan outlined in Appendix G, the IRS would pay transmitters an incentive for each return filed electronically. Assuming that transmitters shared these incentives with originators based on market competition, this plan should facilitate increased electronic
filing when coupled with requirements for practitioners to file returns electronically at some point in the future. As the level of electronic filing increases, the incentives could be phased out.
Realignment of return submission deadlines
Realigning the due dates for tax and information returns could rationalize the entire filing process, provide a more realistic timetable for submission and incentives for electronic filing, level the workload of the IRS and tax practitioners, and establish the foundation for return-free filing for many individual taxpayers. These changes merit serious consideration by Congress. We also recognize that these due date realignments may have a major impact, and Congress should explore these ideas thoroughly to ensure that they have stakeholder buy-in.
In addition to tax returns, the IRS and the Social Security Administration (SSA) receive and process over 1.1 billion information returns each year—including Forms 1098, 1099, and W-2—many of which are received in magnetic format. The IRS has reported to the Commission that it receives more than five million updated, corrected information returns during the year. In addition, significant numbers of returns are corrected by taxpayers prior to submission, and untold numbers of returns are never corrected. Several stakeholder groups informed the Commission that the current due dates for W-2s and some 1099s can impose burdens on both small businesses and large providers of information returns, such as brokerage houses. While some may argue that extending the deadlines for information reporting would delay information reporting further, this logic ignores the complexities of taxpayer compliance processes and problems. In relieving these burdens on information reporting, the Commission expects that providers will continue to provide information returns to taxpayers as soon as the information is available. Sufficient time to perfect data would allow taxpayers to submit accurate information returns, eliminating the duplicative work caused by corrected return submissions and reducing extension requests. As part of its electronic filing strategy, the IRS should set a goal of receiving substantially all information returns electronically within a ten year period.
3. Modernizing return processing
The IRS should use technology to update its return processing approaches.
Increased electronic filing would facilitate IRS compliance efforts, allowing the IRS to receive information and tax returns and match data during the same calendar year. Moreover, better data capture capability will facilitate customer service. At present, only forty percent of data on individual income tax returns is entered into IRS computers. To improve compliance and customer service, the IRS must modernize its return processing approach to reflect the realities of the information age.
The IRS must process returns more efficiently once they are received. In particular, the IRS should consider aggressive plans to improve processing paper and electronic returns through managed competition. Such plans should include incentives to encourage electronic return processing. A major challenge to the IRS will be management and consolidation of its service center pipeline capacity, maintaining paper return refund processing times at six weeks, as the number of electronically filed tax returns increases.
Finally, the IRS should pursue simplification efforts that would allow more taxpayers to use Forms 1040EZ and 1040A, which are simpler to file and process. In particular, such efforts should include expansion of the TeleFile program to more taxpayers.