Recommendations for Improving E-File

The Electronic Tax Administration Advisory Committee, a fourteen-member panel that advises the IRS, has presented its 2009 annual report to Congress (pdf file, 27 pages). In their report, the committee recommends ten improvements to the Internal Revenue Service's electronic filing programs. Among their recommendations: require tax professionals to e-file, developing standards for tax software programs, and continuing the Free File Alliance for providing online tax preparation without cost to the taxpayer.

The problem that the IRS faces is getting at least 80% of tax returns to be submitted electronically. This 80% goal was mandated by Congress as part of the Restructuring and Reform Act of 1998. The 80% goal was supposed to be achieved by 2007. It hasn't happened. For 2009, the committee estimates that 59% of all tax returns were e-filed. For personal tax returns (Form 1040 and related forms), 69% were e-filed.

There are numerous advantages and disadvantages with e-file. Certainly, e-filing a return speeds up processing times, so taxpayers get the refunds quicker from the IRS. But most of the benefits are on the government side: they don't have to hire people to transcribe the tax forms into their computer databases. The disadvantage of e-file is that some tax returns simply cannot be filed electronically at all. And e-file requires using software to prepare and transmit the return, and using software is simply a very different process than filling out a paper form.

The committee highlighted security concerns in their report, and this particularly caught my attention. They claim existing IRS security protocols "does not set sufficiently clear security standards to protect taxpayer information" (page 22). With the massive amount of tax return information being collected, stored and transmitted to the IRS, one has to wonder why stricter security protocols haven't been adopted sooner, and to what extent the committee thinks taxpayer data is in jeopardy?

The report does not mention anything about the IRS developing its own tax software application so that people could file directly on the IRS Web site. Many states already allow direct filing. California has even gone one step further with its ReadyReturn program, in which the government has pre-populated tax forms with data culled from W-2s, and all the taxpayer has to do is log in, review the return, make changes, and file. I would think the IRS would have the resources to develop something similar.