Washington Technology: The IRS and E-filing Your Income Taxes Guest: Terry Lutes, Director, IRS Electronic Tax Administration
Tuesday, Feb. 19, 2002
The Internal Revenue Service is re-examining whether to allow citizens to file income taxes directly online, a move that has raised the ire of tax preparation software companies and their supporters on Capitol Hill. According to a report filed by Washington Technology staff writer William Welsh, the IRS is considering direct e-filing for individual taxpayers and tax professionals as part of the EZ Tax Filing project, one of the Office of Management and Budget's e-government initiatives started last fall.
Welsh hosted the head of the IRS EZ Tax Filing project, Terry Lutes, for a discussion of how the agency hopes to achieve its internal goal of having 80 percent of all tax and information returns filed electronically by 2007. The goal is one strongly favored by the Bush administration, according to a report filed by Washington Post reporter Glenn Kessler.
An edited transcript follows:
Good afternoon, Mr. Lutes. Thanks for joining us today for an online chat about the IRS' EZ tax filing project. The IRS has set a goal for itself of having 80 percent of all individual tax returns filed by 2007. Is the agency on target for obtaining that goal? What are the challenges it faces in achieving that goal?
Terry Lutes: Actually, the 80 percent goal was established by law in the IRS Reform and Restructuring Act of 1998. And it is a goal, not a mandate. The challenges we face are very similiar to any traditional, paper-based organization looking to move it's transactions into an electronic environment. Customer acceptance of electronic transaction is developing at a steady pace, but many still do not trust or see the need to go electronic. We believe that once most people try electronic filing, they will stay with it. The American Customer Satisfaction Index for 2001 showed that customer satisfaction with IRS e-filing was a 77 as compared to a 70 for private sector electronic services. We need to get everyone to try it.
I would file my IRS taxes electronically, except that I would have to pay. I filed my Virginia tax online, because it's free. Virginina has a convenient form which can be filled in on-line. Until the IRS has the same type of forms for Form 1040, and schedules A, & D, I will not file electronically. Until then, I will continue to do my taxes on paper, myself. I believe the IRS should look at what Virginia does. I also believe it should also be possible for those with more complicated taxes to file electronically.
Terry, can you review for us exactly which federal tax forms (e.g., 1040EZ, 1040A, 1040) individuals can file electronically at this time?
Terry Lutes: This year 99.3% of all 1040 tax returns can be filed electronically. That includes 1040 EZ, 1040 A, and most full 1040s. Schedules A & D can be filed electronically. Quite a number of states do offer free electronic filing on the Web. However, they generally only accept a more limited set of returns and even the most complex return in most states, is considerably simpler than the typical federal return as the states accept bottom-line entries from the federal return rather than having them all submitted and they later get the backup data, generally from IRS. This means their system developments costs, and more substantially, their customer support costs are considerably less than would be the case for IRS. I do understand your sentiment though.
Hi, I'm a tax preparer and I'd like to know one thing about e-filing. It seems to me that for the past several years that electronic deposits from IRS are only transmitted on Fridays, is this true?
Terry Lutes: Yes, you are correct. Because our basic processing systems are over 30 years old, and are thus based upon weekly batch processing, both paper checks and the faster electronic deposits only occur once a week. Our systems modernization program will be changing that over the next few years and the government will be able to generate refunds at least 5 times a week which will speed up the delivery of the refunds.
I applaud the initiative. There's no reason I should have to input data into my computer, print it in, mail it, and then pay (through our taxes) for someone to type the information into another computer. Have you been talking with state governments about their experiences with direct e-filing? And why is the federal government behind so many of the states, when federal resources are so much greater?
Terry, I don't know if I would agree with this person that the IRS is behind the states. Isn't it more of a collaborative effort between the states and the IRS?
Terry Lutes: We are very familiar with the state initiatives. I believe all of them accept only a limited set of forms and schedules with their returns. Complexity of the federal return adds significantly to the cost of such an effort, although we are working to find a way to provide wider free electronic filing, consistent with the statement to this effect contained in the President's 2003 budget which was submitted to Congress earlier this month.
I strongly encourage you to allow taxpayers to file their tax returns electronically directly with the IRS before 2007. I have used commercial tax software and Web sites for the last four years, but I have only been successful in filing electronically two out of the four years, and I have never been satisfied with the process.
I plan to go back to mailing paper returns if commercial tax services continue to raise their rates for e-filing, especially when their programs do not save me any significant time or effort over paper filing. Considering that electronic filing saves the government a significant amount of money, it certainly should be offered for free by the IRS, shouldn't it?
Terry, this person raises an important point. All of us have experienced electronic glitches when trying to complete various types of electronic commerce transactions. I know I have. Apparently the system is not glitch proof. Have you heard of problems like this?
Terry Lutes: As mentioned before, we are exploring alternatives for providing expanded free filing over the Internet. What is of interest to me is the problems you have mentioned in two of the last four years. Believe me, that is not a typical situation based upon the support we receive from professional tax return preparers or those who prepare their own on commercial software or web sites. Electronic filing by professional return preparers continues to grow (it will be well over 30 million this year) and the fastest growth is in the self-prepared e-filed returns which is up over 35% so far this year. Your situation could be from trying to file with attachments to the 1040 that we just began to accept this year or some of the error correction processes we have to assure the greater accuracy. On your final point, electronic filing does not save us as much money as most people assume. Since we have decades worth of experience, we are extremely efficient in our paper processing. The saving for processing an electronic return as compared to a paper one is only about $1.20 as the direct processing cost of a paper return is less than $2.00.
The e-file program is great. I filed my state and federal taxes at 8 PM on Monday. Friday, around lunchtime, I was checking my accounts online for something else and there was my state tax refund, sitting in my account. It was great. Companies can and will always prepare tax returns, why should they present a barrier to the common person who does his or her own taxes on his or her personal computer and wants to e-file directly with Uncle Sam? I think it's wrong to make people go through a commercial provider when they can submit it themselves.
Terry, a lot of folks writing in today are questioning the role that tax preparation software companies are playing in the IRS' current e-filing framework. Can you give us one or two reasons why these companies play an important role?
Terry Lutes: In addition to comments made earlier, I would point out that many of the commercial companies produce excellent products, backed by years of experience and, in the case of some of the more widely used products, extensive useability testing to assure maximum ease of use and value for the customer. A number of these companies already make available to a substantial percentage of taxpayer free filing through their Web products. One of the avenues we are exploring, as an alternative to building a proprietary federal government product, is a way to make those products more widely available at no charge. These companies are of course in business to make money so there clearly needs to be added value they can offer to their customer base so they can stay in business. But both the government and IRS feel that we have some potential in a partnership approach to this issue.
Front Royal, Va.:
Mr. Lutes, when will I be able to use my ATM/debit card to pay my taxes online?
Terry Lutes: We are exploring the acceptance of debit cards with the financial community right now, but I can't give you a date when we might be accepting them. For taxpayers filing a return and owing money we currently have three options; for those enrolled in the Electronic Federal Tax Payment System (there are 3.5 million enrollees) they can use that system, an automated withdrawal from a savings or checking account as part of the electronic return with the payment withdrawal held until the date the taxpayer specifies (until April 15), or the taxpayer can call one of our two credit card processors and pay by credit card with a user fee added on by the processor. The user fee is due to the fact that by law we cannot pay the merchant fees paid by stores when accepting a credit card.
I am still somewhat leery about online tax filing. What sort of technology are you using to secure these Web transactions?
Is the security technology still evolving, Terry?
Terry Lutes: The IRS actually does not currently receive any of the e-filed returns via the Web. They come in from transmitters who put the file into the IRS readable format and then send to us in bulk over either dial up, or in the case of the larger companies, over leased lines. We carefully screen companies doing business in this area, doing tax compliance and criminal history checks on them, and have processes to assure that we only accept returns from legitimate program participants. We have safely processed over 240,000,000 returns since the program started. We pay considerable attention to the security of our systems as we recognize that if the public believes we cannot protect their private data, they will not e-file. We in fact have a cybersecurity organization that monitors our systems 24 hours a day for attempts at unauthorize access. We will be moving to accepting these transmissions over the internet once we know we have the systems in place to provide adequate protection. Security is a continual process that will never be finished but we are totally focused on its criticality.
As a college student I earned less than $25,000 last year and was able to use the free filing service from Quicken's TurboTax at www.quicken.com/freedom. Why is the IRS not actively promoting this service on college campuses and encouraging the already-computer-savvy college population to embrace electronic filing? Seems as if you are into it when in college you will stick with it aftwards.
Terry Lutes: That is a great question. We have had a lot of discussion about this and we are currently looking at this. One reason we have been hesitant in the past is that a variety of companies offer some form of free filing but the criteria vary and this changes from year to year. We are working with the software industry to not only expand the scope of the free offering, but to assure some core consistency from year to year and across companies so that as the government we can feel comfortable promoting these privately provided services. I'm hoping that by next year we can be doing something in this area.
I applaud the IRS e-filing initiative, and especially applaud your ability to keep your cool in the face of complaints that the IRS is acting too much like a business. It seems ironic that many critics of this initiative are people who urge the government to "act more like a business" in all other areas.
Terry, it seems there is some real support out there for the IRS' electronic filing effort. Are you getting a lot of support from the public, and importantly, from lawmakers, too?
Terry Lutes: Very thoughtful comments. We have gotten a lot of comments from the public in support of our directly providing free Internet filing. We have received some support and a lot of issues from those in government. There is a principle spelled out in an Office of Management and Budget Circular that originated in the 1970s that says that where the private sector has staked out ground with a commercial product, the government should not attempt to compete with them. This is at the center of any concerns with us moving into this arena. From a practical business standpoint though, there are some significant issues with making a business case for the up-front and on-going support such a free offering would require. Several examples:
1. Considering that there are commercial products that are more robust than a government offering, what would be the real demand. Utilization rate on the state Internet offerings is low and in Australia, which has had a free Internet product for a number of years, only 3 percent of their taxpayers use it and over 70 percent still go to a tax professional even though their tax code is simpler. The examples of wide-spread utilization of a basic government internet tax product has been impossible to find. This may change over time but it is something we consider in determining what investments to make, considering the many IT needs we have in striving to improve overall service to the public.
2. All of the tax software companies that currently provide for e-filing all say that one of their largest expenses is customer support. The IRS already takes over 10,000,000 calls each year over those we have the resources to answer. So how would we answer the support calls as we would not get any additional staffing to support this?
I have filed both District of Columbia and federal taxes online this year and love the process. I have two questions: First, do you have even ballpark figures about how much time and dollars (for both government as well as the filer) is saved per year by this process? Second, does filing electronically make me easier to be audited?
Terry Lutes: There are several more questions in the que about cost so let me try to address that first. As I mentioned earlier, we now save about $1.20 per electronic return in direct processing cost. What shocks everyone who looks at it is how cheaply we process paper returns. For the taxpayer the saving can be in time but it depends on how complex their return is. For a 1040 EZ filer, the time is actually about the same. The value added for e-filing is the faster refunds, the more accurate transaction (meaning they are much less likely to get one of those wonderful letters from the IRS!) and the confirmation that their return was accepted by IRS. On the important audit question, you are no more likely to be audited as a result of electronic filing. While electronic filing does not guarantee that you report all of your income or that all of the deductions claimed are valid, the selection criteria for audits are exactly the same, and based upon identical data elements on the return, as for a paper return.
I work with a federal agency and we met with the IRS a few years ago to discuss issues relating to enforcement using electronically filed information. At the time, the IRS told us (but could not say publicly) that it was not considering bringing any criminal enforcement cases based on electronically filed returns. Is this still the case? Has anyone been prosecuted for criminal tax fraud based on an electronically filed return?
Terry Lutes: Yes we have taken criminal action based upon electronically filed returns. There are lots of dollars involved in tax refunds and thus we have always attracted our share of people trying to defraud the government and, in reality, the American public. As is the case in the private sector, electronic interactions attact considerable attention from this element and I assure you that there are people who have been convicted on tax fraud charges for electronic filing schemes. Some of these schemes are individuals working on their own and some are well organized involving a number of players. Remember, though, that the same things go on in a paper filing environment.
Hello, I am from one of your approved providers for the Business 940 and 941 returns, Lewis Software Associates LLC. I am particularly interested in how the IRS is intending to provide more incentives for electronic filing. I have heard in the individual program that some deadlines may be extended for electronc filers. Are there other concessions that the IRS is willing to make to foster growth in the electronic filing programs. Also, why do businesses have to register to electronically file which takes some of their enthusiasm away from using this process?
Terry Lutes: Yes, another proposal that was contained in President Bush's 2003 budget, is offering an additional 10 days or more (the exact number will be announced soon) for taxpayers who file and, if there is a payment due, pay their taxes electronically. If legislation is passed in time, this may go into effect next year. On the issue of business return filing, there are additional complexities there around the signatures and authentication of the return. On an individual 1040 return, the taxpayers generally sign for themselves but a business can't sign so we need to know that the individual submitting and attesting to the accuracy of the return is legitimate. We are working on ways to use new technologies to simpify that process and hope to have a new course of direction in the near future. Thanks for your support for the program.
Terry, a lot of the readers of Washington Technology work for technology companies throughout the country. Are these companies making a contribution to state and federal electronic tax filing and how might they play an active role in the future of state and federal electronic filing efforts?
Terry Lutes: There are a lot of technology companies involved in supporting e-filing across the country. Some are providing technologies and support for the tax software and transmission companies, helping them find ways to better support their customer base. Our internal systems use a variety of technology products from security to database and platform products. Many companies also share with us their advances in technical tools which could make our efforts to make the tax process an easier one for citizens and I'm sure this will continue. A final plug, some companies also help with ease of access by, through arrangements with Web software companies, offering access to free electronic filing as an inexpensive employee benefit. That's it for our time. I've enjoyed it and hope I've provided some useful information and insight. Thanks to everyone for participating.
Terry, thanks for sharing your insights with us about so many aspects of electronic tax preparation and filing. I would like to thank you and also thank everyone who participated. We had some terrific questions from the audience. Thanks everybody, have a good afternoon.
Editor's Note: Washingtonpost.com moderators retain editorial control
over Live Online discussions and choose the most relevant questions for
guests and hosts; guests and hosts can decline to answer questions.