Tax Administration

Electronic filing is a cornerstone of the Internal Revenue Service's (IRS) plan to move away from the traditional filing of paper returns. Because electronic filing of tax returns in 1994 was most popular among those using Forms 1040A or 1040EZ--the simplest and least costly to process--IRS is not saving as much as it expected from electronic filing. Meanwhile, it appears that IRS will fall far short of its goal of 80 million tax forms filed electronically by the year 2001. A major impediment to the expansion of electronic filing is its cost to the public. Taxpayers who file an electronic return through a preparer or electronic filing transmitter must pay as much as $40 for these services. By focusing solely on its goal of 80 million tax forms, IRS may be targeting its limited resources toward groups of taxpayers or types of returns that will boost the number of electronic returns but not necessarily yield the greatest reductions in IRS' paper-processing workload and operating costs. Although a marketing strategy that focuses on reducing paper and costs may generate fewer than 80 million returns, it could have a more significant impact on IRS' overall operations. The contract that IRS awarded in May 1995 may provide cost/benefit data that the agency can use to reassess its strategy. That information may help IRS identify steps to make electronic filing more attractive to those taxpayers and preparers who are now put off by its cost.

GAO found that: (1) IRS will fall far short of its 2001 goal of 80 million electronic returns if the increase in electronic filing continues at its present pace; (2) IRS believes the decrease in the number of returns filed electronically in 1995 was due to its actions against electronic filing fraud; (3) IRS is having little success in increasing the electronic filing of individual 1040 and business tax returns which constitute the bulk of returns and take the most time to process manually; (4) the transmittal fees for electronic filing tend to deter filers unless they need their tax refunds quickly; (5) IRS does not have the data needed to determine whether greater electronic filings of 1040 and business returns would reduce its administrative costs; (6) IRS has contracted to gather some data on why taxpayers do not use electronic filing more and how many returns it could expect if it could motivate people to file electronically; (7) IRS plans to use scanning more to process paper returns, which should reduce some costs; and (8) unless IRS can increase electronic filing, its customer service and paper processing workloads may overwhelm its planned staffing and alter various aspects of its modernization efforts.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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