2008 E-File Numbers Set Records

The Internal Revenue Service has released statistics for electronically filed tax returns for the 2008 filing season, which ran from January through October. All told, some 155.49 million personal tax returns were filed, of which 89.886 million where submitted electronically. So just over half, or 57.8%, of returns were filed electronically. And since e-file requires the use of software or a tax preparer, that means at least half of us are turning to software or accountants to prepare and file our taxes.

These statistics can be viewed as part of two larger contexts. First, 2008 was an unusual filing season. Many Americans filed a return to receive their stimulus check, even if they did not otherwise need to file a return. This pushed up volume of tax returns processed by the IRS, although the agency did not identify how many returns were filed solely to claim the stimulus. Second, if 57.8% of taxpayers are using e-file, that means 42.2% of taxpayers are mailing in their tax returns the old fashioned way, on paper. And just because people are filing on paper does not mean they are preparing their returns by hand. A wide variety of tax returns simply cannot be e-filed due to various technical limitations with the e-file system. But let's take a look at who's e-filing. Of the nearly 90 million e-filed tax returns, some 63 million were sent in by tax accountants, representing 70% of the total for e-file returns. The IRS did not provide a breakdown of total tax returns, and so we're not able to determine if e-filing is skewed towards paid preparers or not.

From a tax planning perspective, e-file has two main advantages that I can think of. First, taxpayers receive a confirmation through their software that the IRS has received their tax return. Second, the data is processed by the IRS computers without needing to be re-typed by a data entry agent. Together, this means the IRS can process a tax return more efficiently and accurately. As an accountant, I appreciate these efficiency benefits. It means I can spend less time trying to fixing processing errors. This saves time for me, and reduces costs for my clients. So the efficiency gains of e-file only indirectly impact taxpayers.

In my imagination, e-file adoption will progress faster if all types of tax return situations could be submitted electronically. One common example of this: when more than one taxpayer tries to claim a dependent, the second person to file will be forced to file on paper if they want to claim the same dependent. The system could add functionality to indicate that the taxpayer does indeed qualify to claim the dependent, and then the tax returns could be processed electronically by the IRS, perhaps through a streamlined process to review the dependents. Another improvement that could be easily adopted would be to add attachments to the return. Adding attachments (as scanned PDFs, for example) could make it easier for the IRS to review and audit tax returns. The IRS should also implement its own e-file portal so individual taxpayers can file their returns directly with the agency instead of going through a third-party provider. While this might anger people in the industry, it would boost the confidence among taxpayers.

But if e-file is really going to take off, why not give the taxpayer some benefits in exchange for e-filing? It's might take some software programming muscle, but I could imagine a system where taxpayers file electronically, and then they could login to a secure IRS portal to download copies of their returns or download copies of their W-2s and other documents, or track their refund, or even reply to a letter from the IRS. This would make the interaction between the IRS and the taxpayer even more efficient, and would benefit more than just the professional community.