The Future of E-Filing: Building the Better Mousetrap

If you build a better mousetrap the world will beat a path to your door,” claimed Ralph Waldo Emerson. I’m not equating tax returns with mousetraps, but where electronic filing is concerned, I agree.

Thanks to a variety of cost-effective technology options, an increasing proportion of paper-filed returns are prepared with tax software, only a short step away from e-filing. According to the IRS, 53 million federal personal income tax returns were e-filed in 2003, more than 40% of all individual returns filed. E-filing isn’t yet a boon to every taxpayer, and the IRS is struggling with outdated systems. But the government has committed to modernization, and the IRS wants 80% of all returns e-filed by 2008.

In general, e-filing provides fast processing of returns and refunds, fewer processing errors, and a high level of customer service. It also eliminates the delays and uncertainties of filing returns by postal mail. To address security and privacy concerns, taxpayers and preparers can sign e-filed returns using a personal identification number (PIN). Taxpayers can pay balances with electronic withdrawals from a savings or checking account, or with a major credit card. Taxpayers can also elect to have refunds deposited directly into their checking or savings account.

Many states’ taxation departments are working hard to make e-filing effective. New York State now offers e-filing for personal income tax returns through its Federal/State and Direct programs. More than 20 different New York State forms can currently be e-filed. Software developers must pass the state’s participant acceptance test before they can e-file state personal income tax returns. A list of approved software developers is available at www.nystax.gov/elf. In the Federal/
State program, tax professionals e-file clients’ federal and state returns in a single transmission to the IRS. Once the IRS accepts the federal return, the state return is made available for the state to retrieve and process. The Direct program allows a New York State return to be transmitted directly to the Department of Taxation and Finance. All tax professionals accepted into the IRS e-filing program can participate in New York State’s e-filing program; more than 14,000 participants have already been approved.

When a return is e-filed, the Department sends an electronic message to indicate whether the return was accepted or rejected. A rejection describes the error so the preparer can correct and retransmit the return. Heretofore, the IRS has never given taxpayers or preparers receipts for paper-filed returns.

Although for most CPAs the expense of maintaining the systems and processes to provide both manual and e-filing services are obstacles, e-filing promises to be more efficient in the long run. Software vendors have made enormous strides just in the last year in being able to support multistate filers, one of the biggest problem areas for mid-sized and large practitioners.

The NYSSCPA’s Tax Oversight Committee has an E-Filing Task Force that provides chapter outreach, advises software vendors, and helps CPAs and the taxpayer community make the transition to e-filing both swift and effective.

A completely integrated federal and state e-filing system is being developed. This will take time and work, but because CPAs are helping to design it, I have confidence that the better mousetrap will succeed. To help us focus our thinking and flesh out our understanding of both the positives and the negatives, I’m interested in hearing from readers about your personal experiences with e-filing.

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