Electronic Tax Return Filing:

Improvements Can Be Made before Mandate Becomes Fully Implemented

GAO-11-344: Published: Mar 7, 2011. Publicly Released: Mar 7, 2011.

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The Internal Revenue Service's (IRS) goal is to receive 80 percent of all major types of tax returns electronically by 2012. Legislation passed in November 2009 supports the 80 percent goal for individual income tax returns by requiring tax return preparers who file more than 10 individual returns per year to file them electronically, or e-file. In 2009, IRS electronically processed nearly 95.5 million individual tax returns, or roughly two-thirds of all individual tax returns filed. IRS estimated that it saved $3.10 for each e-filed return that it did not have to process on paper. If the remaining paper returns had been e-filed, IRS could have saved about $148 million in processing costs for 2009 alone. In addition to reducing costs, e-filing provides higher accuracy rates, improved convenience, and faster processing and refunds for taxpayers. Furthermore, IRS officials said that having increased information available electronically could improve the effectiveness of IRS's compliance programs and bring in additional enforcement revenue. Congress asked us to review IRS's implementation of the e-file mandate. In response to this request, this report assesses IRS's initial implementation of the mandate. It also provides our assessment of (1) the expected effect of the mandate on electronic filing rates and (2) early mandate implementation issues that could affect IRS's administrative costs, preparer burden, or rates of electronic filing. We plan to issue a related report this summer that provides additional information on IRS's implementation efforts and its use of electronic data.

(1) IRS has taken several positive steps to implement the mandate, such as communicating the details of the implementation and publishing proposed regulations for public comment. However, paid preparers raised concerns regarding the proposed regulations, especially with respect to their timing. The proposed regulations were issued approximately 1 month before the effective date. IRS officials told us that preparers should have been aware of the mandate's implementation date and that IRS plans to be flexible with enforcement for the first year. (2) The e-file mandate may affect fewer paid preparers and e-file rates may be lower than IRS originally anticipated because of its legal interpretation of the word "file." The e-file mandate applies to paid preparers who file returns. IRS interpreted this to mean that a preparer whose clients choose to file finished paper returns themselves will be relieved of the mandate if the preparer does not file more than 10 returns for other clients. Even if the preparer files more than 10 returns, the clients can still choose to file paper returns as long as the preparer does not submit them to IRS. After making its legal interpretation, IRS revised its initial projection of e-file rates in 2011 from 82 to 75 percent, and its projection for 2012 from 84 to 77 percent. The mandate could have a greater impact if the word "file" were replaced with "prepare or file" or similarly broader language. Fifteen out of the 22 states with e-file requirements use either the word "prepare" alone or the term "prepare or file" in their requirements. (3) Multiple identification numbers may burden paid preparers and raise administrative costs for IRS. The Electronic Filing Identification Number (EFIN) and Preparer Tax Identification Numbers (PTIN) will have similar application processes and suitability tests once new PTIN requirements are fully effective. Because PTINs identify each preparer, whereas EFINs will not always do so, it might be possible to use only preparers' PTINs as the authorizing numbers to e-file their taxpayers' returns, with no loss of ability to track preparers. IRS has not studied whether it would be cost effective to do so. (4) IRS may be missing opportunities to educate taxpayers about the benefits of e-filing. Currently, neither the Form 8948, "Preparer Explanation for Not Filing Electronically," nor the statement IRS suggests preparers ask taxpayers to sign to assert that they are choosing to file on paper, describes the benefits of e-filing. A few states use such statements on their forms. If Congress wants to expand the applicability of the e-file mandate beyond those preparers who file tax returns, Congress may wish to amend paragraph 6011(e)(3)(B) of the Internal Revenue Code by replacing the word "file" with broader language, such as "prepare or file." To improve implementation of the e-file mandate, we recommend that the Commissioner of Internal Revenue direct IRS officials to take the following two actions: 1. determine whether it would be practical and cost effective to use preparers' PTINs as the authorizing numbers to e-file their taxpayers' returns. If IRS determines it is advantageous, it should create a timetable and plan to modify e-file systems accordingly; and 2. update the taxpayer choice statement discussed in Notice 2010-85 as well as Form 8948, "Preparer Explanation for Not Filing Electronically," to include information about the benefits of e-filing.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: If Congress wants to expand the applicability of the e-file mandate beyond those preparers who file tax returns, then Congress may wish to amend paragraph 6011(e)(3)(B) of the Internal Revenue Code by replacing the word "file" with broader language, such as "prepare or file."

    Agency Affected: Congress

    Status: Open

    Comments: Legislation was introduced on June 28, 2011 which provided clarification on the electronic filing requirements for paid preparers. This included language that changed the language in the original bill (Section 6011 (e)(3) (B)) from "filed to prepared." However, this legislation had not progressed as of April 2014.

    Recommendation: To improve implementation of the e-file mandate, the Commissioner of Internal Revenue should direct IRS officials to determine whether it would be practical and cost effective to use preparers' PTINs as the authorizing numbers to e-file their taxpayers' returns. If IRS determines it is advantageous, it should create a timetable and plan to modify e-file systems accordingly;

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In response to our recommendation, IRS conducted a study to determine if it was practical and cost effective to use preparers Preparer Tax Identification Number (PTIN) as the authorizing number to e-file taxpayers' returns. In March 2012, IRS issued an internal report on the study results. IRS interviewed a number of internal and external stakeholders during this process, and during this time, changed a major process of the PTIN application--no longer requiring preparers to obtain a fingerprint/background check. Largely based on this change, IRS determined that it would be neither practical nor cost effective to establish the PTIN as the authorizing number for e-file. The processes for determining suitability for the two programs are no longer as duplicative as they were during the course of the audit.

    Recommendation: To improve implementation of the e-file mandate, the Commissioner of Internal Revenue should direct IRS officials to update the taxpayer choice statement discussed in Notice 2010-85 as well as Form 8948, "Preparer Explanation for Not Filing Electronically," to include information about the benefits of e-filing.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In March 2011, we reported on the Internal Revenue Service's (IRS) implementation of the e-file mandate for paid preparers. We found that some states, such as New Jersey, provide information about the benefits of e-filing on their taxpayer "opt out" forms. IRS requires preparers fill out and submit Form 8948, "Preparer Explanation for Not Filing Electronically," if they are not electronically filing a taxpayer's return. We recommended that the Commissioner of Internal Revenue direct officials update the Form 8948, "Preparer Explanation for Not Filing Electronically," to include information about the benefits of e-filing. IRS agreed with our recommendation. On March 28, 2011, IRS issued Revenue Procedure 2011-25 which outlined the steps a preparer should take if taxpayers choose to file on paper, which included the taxpayer choice statement. IRS included the benefits of e-filing in this statement based on our recommendation. In December 2011, IRS updated Form 8948, "Preparer Explanation for Not Filing Electronically," to include the benefits of e-filing on the form. This form is included with the taxpayer's tax package and as a result, taxpayers now have an additional opportunity to learn about the benefits of e-filing, at a low cost to IRS and without imposing an extra burden on paid preparers. If the information influences some taxpayers to choose to e-file, IRS administrative costs would be reduced.

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