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By Larry Barrett  |  Posted 2003-04-09 Print this article Print

The IRS wants 80% of all returns filed electronically by 2007. But—surprise—its systems aren't ready.

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How e-filing works

Once an electronic return is filed, it's transmitted through a secure network connection to the IRS processing computers in Austin, Texas, or Memphis, Tenn. At that point, the document is transferred into a proprietary format developed by the IRS. (This format eventually will be replaced by the one running on an XML-based system.) The returns are then sent to the IRS' Electronic Management System, which uses equipment from NCR Corp. This equipment is scheduled to be changed over to Sun Microsystems workstations.

E-filings are then processed through Unisys error-detecting software. If errors are found, the return is automatically kicked back to the site for review. Typical errors include incorrect Social Security numbers, erroneous addresses and misspelled names. After the returns are reviewed for errors, they are sent to mainframe computers in the IRS' Masterfile System in Martinsburg, W.Va. From there, the returns eligible for refunds are sent in large batches to Treasury Department computers in Washington, D.C. While it's true that e-filing does "speed up" the processing of tax returns, those gains in efficiency essentially come from reducing the amount of time IRS employees spend entering selected data from paper returns as they arrive at the various processing centers.

It typically takes an IRS processor a couple of minutes per return to enter this data into the IRS system. E-filings eliminate this step because the data is plugged into the system when it's transmitted by a tax preparer.

Another potential benefit: The typical error rate for electronic returns is believed to be 1%, compared with 18% for paper filings, according to an IRS study. However, the IRS could not provide historical data on errant filings to support that claim.

v"Electronic filing improves the efficiency of the current system because it gets the data into the IRS computers directly rather than having the data from mailed returns inputted into the computers at the processing centers by IRS employees," Lutes says. "It cuts down on errors and helps filers who are eligible for refunds get their refunds faster."

To realize the benefits of e-filing, the IRS has to find ways to improve participation. IRS officials briefly considered offering their own e-filing system but realized, according to Lutes, that it did not have the architecture or funding to offer electronic filing directly. In a highly visible initiative, the IRS has turned to commercial companies to help reach its goal and has targeted taxpayers who use the simplest forms. Enter the Free File Alliance (FFA), a consortium made up of Intuit, H&R Block, Jackson Hewitt and 14 other firms. Starting this year, these companies are offering free e-filing services to taxpayers who fit certain criteria. Most offer the services to individuals who reported less than $27,000 a year in adjusted gross income.

Taxpayers eligible for free e-filing services simply log on to the irs.gov Web site where they're directed to one of the tax preparation providers participating in the FFA. Once a participant is selected, the taxpayer is redirected to the company's site to begin filling out the return.

It's a tenuous quid pro quo arrangement best summed up by Intuit spokesman Scott Gulbransen, who says the FFA "is a corporate philanthropic effort but also, in all honesty, a way for us to keep the government out of our business."

The bottom line: Tax preparation services and software providers protect their role as middlemen to the IRS, and these companies get to offer taxpayers—for a fee—other services such as refund anticipation loans or consulting services with a tax preparer.

Senior Writer
Larry, of San Carlos, Calif., was a senior writer and editor at CNet, writing analysis, breaking news and opinion stories. He was technology reporter at the San Jose Business Journal from 1996-1997. He graduated with a B.A. from San Jose State University where he was also executive editor of the daily student newspaper.

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