Wooing the taxpayer

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.

Wooing the taxpayer

According to the IRS, there are 32.1 million taxpayers who use "simple" returns-1040A, 1040EZ and 1040 forms without attachments. By definition, they are the most basic of income tax returns and require the least explanations and accompanying attachments. In 2001, 27% of taxpayers fitting this profile filed electronically, and the IRS now hopes to woo the others into filing through the FFA, though only a portion are eligible for the free service.

Intuit, which began offering free e-filing services in 1998, filed 10.2 million returns electronically last year. Of these, just over 1 million were free e-filings.

Gulbransen says Intuit hasn't figured out how much it actually costs the company to offer the free e-filings and would not disclose how many additional services it sold to customers using its e-filing services.

One drawback to the FFA cited by consumer advocates has nothing to do with technology—they worry that low-income taxpayers due an income tax refund will opt for a high-cost loan secured by their refund. These so-called refund anticipation loans carry annual percentage rates of 67% to 774%, and, critics say, are tempting to those who can least afford them.

Eventually, the IRS will have to reach out to the 20.3 million taxpayers who use more complex returns. (In 2001, 24.1% in this segment filed electronically.) But the IRS is holding off on courting these people because its systems cannot accept Word or PDF documents and other attachments.

Then, there are other factors making these taxpayers less likely to file their forms electronically. "Folks with complex returns are generally higher income and either owe money or are in a financial position that does not make our key marketing message—a faster return—as attractive to them," Lutes says. Tax preparers are not rushing out to promote e-filing to those with complex returns either—at least until the IRS can accommodate attachments. That's because the preparers can end up spending as many as two hours entering data into electronic filing fields—required by IRS' proprietary software—to document, for example, hundreds of stock transactions.

"If I want to input 5,000 long-term transactions, I can and the IRS will accept them." says Rolnick, a tax advisory committee member and a certified public accountant at McConachie & Moore in Sun City, Ariz. She'd rather not, preferring to send paper documents to support the tax return.

If the IRS is ever going to get 80% of all Americans to file electronically, it also needs to address the daunting challenge of mollifying fears—real or imagined—that many taxpayers have about e-filing. Whether right or wrong, some taxpayers believe they are more likely to be audited by the IRS if they file electronically.

Others—especially those expecting to pay taxes—prefer to file a paper return because getting a faster refund, the only real incentive to electronic filers, doesn't apply to them.

"People are frightened by the IRS and the IRS knows this," says Marc Aulbaum, a lawyer based in New York City. "It's unrealistic for the IRS to think it's going to hit this (80%) goal. Especially when filing electronically really isn't in the taxpayer's best interest."

With that kind of thinking, the IRS might be filing for an extension of its own.

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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