Electronic Tax Return Filing
Improvements Can Be Made before Mandate Becomes Fully Implemented
Gao ID: GAO-11-344 March 7, 2011
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.
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.
Director:
James R. White
Team:
Government Accountability Office: Strategic Issues
Phone:
(202) 512-5594
GAO-11-344, Electronic Tax Return Filing: Improvements Can Be Made before Mandate Becomes Fully Implemented
This is the accessible text file for GAO report number GAO-11-344
entitled 'Electronic Tax Return Filing: Improvements Can Be Made
before Mandate Becomes Fully Implemented' which was released on March
7, 2011.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as
part of a longer term project to improve GAO products' accessibility.
Every attempt has been made to maintain the structural and data
integrity of the original printed product. Accessibility features,
such as text descriptions of tables, consecutively numbered footnotes
placed at the end of the file, and the text of agency comment letters,
are provided but may not exactly duplicate the presentation or format
of the printed version. The portable document format (PDF) file is an
exact electronic replica of the printed version. We welcome your
feedback. Please E-mail your comments regarding the contents or
accessibility features of this document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
United States Government Accountability Office:
GAO:
Report to the Subcommittee on Financial Services and General
Government, Committee on Appropriations, U. S Senate:
March 2011:
Electronic Tax Return Filing:
Improvements Can Be Made before Mandate Becomes Fully Implemented:
GAO-11-344:
Contents:
Letter:
Background:
Summary of Findings:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Briefing Slides:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Table:
Table 1: E-filing Rates for Major Return Types Subject to the 80
Percent Goal, Filing Season 2009:
Figures:
Figure 1: Time Line for E-file Mandate Implementation:
Figure 2: IRS's Original and Revised Electronic Filing Rate
Projections for Individual Income Tax Returns Based on Legislative
Language:
Figure 3: New Jersey E-file Opt-Out Request Form:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 7, 2011:
The Honorable Richard J. Durbin:
Chairman:
The Honorable Jerry Moran:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
United States Senate:
The Internal Revenue Service's (IRS) goal is to receive 80 percent of
all major types of tax returns electronically by 2012.[Footnote 1]
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.[Footnote 2]
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.[Footnote 3] 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.
You asked us to review IRS's implementation of the e-file mandate. In
response to your 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.
To do our work, we analyzed IRS's planning documents, outreach
materials, and weekly reports pertaining to the mandate, as well as
the new legislation, IRS's proposed regulations and revenue procedure,
and public comments received. We also interviewed IRS officials,
including those who are a part of the Electronic Tax Administration,
the group responsible for the mandate's implementation. We also
analyzed historical e-filing rates and IRS projections. We found IRS's
projections of individual e-filing rates to be sufficiently reliable
for the purposes of presenting relative likely e-filing rates under
different scenarios. We reviewed state-level e-file implementation
documents, forms, and data to determine any lessons learned from the
22 states that had implemented an e-file mandate.
We conducted this performance audit from July 2010 through March 2011,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives. (See appendix
I for more information on our scope and methodology.)
Background:
The IRS Restructuring and Reform Act of 1998 established a goal that
80 percent of tax returns be filed electronically by 2007.[Footnote 4]
Electronic filing increased steadily after 1998, but IRS did not meet
the goal. In 2007, the IRS Oversight Board recommended extending the
time period to 2012 and expanding the scope so that the 80 percent
goal be applied to each major type of return, including individual,
business, and exempt organizations.[Footnote 5] As of 2009, IRS was
well short of the goal for all major return types (shown in table 1).
Table 1: E-filing Rates for Major Return Types Subject to the 80
Percent Goal, Filing Season 2009:
Type of return (form number): Individual (1040);
Total number of returns filed: 143,533,000;
Total number of returns e-filed: 95,455,000;
Percentage of returns e-filed: 66.5%;
Number of additional e-filed returns required to reach 80 percent
goal: 19,371,000.
Type of return (form number): Employment (940/941);
Total number of returns filed: 29,428,000;
Total number of returns e-filed: 6,674,000;
Percentage of returns e-filed: 22.7%;
Number of additional e-filed returns required to reach 80 percent
goal: 16,869,000.
Type of return (form number): Corporate (1120);
Total number of returns filed: 6,706,000;
Total number of returns e-filed: 1,766,000;
Percentage of returns e-filed: 26.3%;
Number of additional e-filed returns required to reach 80 percent
goal: 3,599,000.
Type of return (form number): Partnership (1065);
Total number of returns filed: 3,350,000;
Total number of returns e-filed: 976,000;
Percentage of returns e-filed: 29.1%;
Number of additional e-filed returns required to reach 80 percent
goal: 1,704,000.
Type of return (form number): Fiduciary (1041);
Total number of returns filed: 3,047,000;
Total number of returns e-filed: 781,000;
Percentage of returns e-filed: 25.6%;
Number of additional e-filed returns required to reach 80 percent
goal: 1,657,000.
Type of return (form number): Tax Exempt (990);
Total number of returns filed: 980,000;
Total number of returns e-filed: 346,000;
Percentage of returns e-filed: 35.3%;
Number of additional e-filed returns required to reach 80 percent
goal: 438,000.
Total:
Total number of returns filed: 187,045,000;
Total number of returns e-filed: 105,998,000;
Percentage of returns e-filed: 56.7%;
Number of additional e-filed returns required to reach 80 percent
goal: 43,638,000.
Source: GAO analysis of IRS data.
Note: IRS's 2012 e-file goal also includes real estate mortgage
investment conduits and excise tax returns. These returns are small in
volume and are not included in this chart. Numbers may not sum to
totals due to rounding.
[End of table]
In November 2009, Congress enacted legislation that requires tax
return preparers to e-file if they expect to file more than 10
individual income tax returns per year, for calendar year 2011 and
beyond.[Footnote 6] IRS is implementing the e-file mandate in two
phases. In 2011, paid preparers who reasonably expect to file 100 or
more individual, trust, or estate income tax returns are required to e-
file.[Footnote 7] In 2012, the e-file mandate will apply to paid
preparers who reasonably expect to file more than 10 individual,
trust, or estate income tax returns. According to an IRS official, IRS
decided to implement the law in two phases primarily to give paid
preparers time to make any necessary changes to their business
practices and help the agency prepare for the increased volume of
anticipated e-file applications.[Footnote 8]
The proposed regulations provide exceptions to the mandate for paid
preparers who cannot e-file for certain reasons. First, preparers may
request waivers for economic hardship and other reasons. Second,
administrative exemptions are available for paid preparers who belong
to certain classes of preparers or are filing certain types of returns
such as those that include forms that cannot be filed electronically.
Finally, paid preparers need not e-file returns for clients who choose
to file in paper format.
As of January 1, 2011, tax return preparers must obtain Preparer Tax
Identification Numbers (PTIN), and use them to sign all returns they
prepare, paper and electronic. PTINs will allow IRS to identify the
preparer and help ensure the preparer is compliant with rules relating
to tax return preparers.[Footnote 9] In addition, a second number is
required to electronically file. This Electronic Filing Identification
Number (EFIN) is issued to firms. Multiple preparers within the same
firm may share the firm's EFIN. Each preparer, on the other hand, will
have a unique PTIN.
Summary of Findings:
* 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.[Footnote 10]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.
* 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.
* Multiple identification numbers may burden paid preparers and raise
administrative costs for IRS. The EFIN and 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.
* 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.
Appendix II provides more detail on each of our objectives and related
findings.
Conclusions:
E-filing is an important part of the foundation for a modernized IRS.
IRS has made significant progress increasing e-filing rates, but it
still has a way to go until it reaches its 80 percent goal. The e-file
mandate should help increase e-filing, but the use of the word "file"
instead of "prepare" limits its effect, covering fewer preparers than
originally expected. Even with IRS's positive steps to implement the
mandate, opportunities may exist to reduce costs by investigating the
potential for eliminating duplication, and to increase e-filing rates
by educating taxpayers about the benefits of e-filing.
Matter for Congressional Consideration:
If Congress wants to expand the applicability of the e-file mandate
beyond those preparers who file tax returns, then Congress could amend
paragraph 6011(e)(3)(B) of the Internal Revenue Code by replacing the
word "file" with broader language, such as "prepare or file."
Recommendations for Executive Action:
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.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Commissioner of Internal
Revenue for his review and comment. The Deputy Commissioner for
Services and Enforcement provided written comments, which are
reprinted in appendix III. IRS also provided us with technical
comments, which we incorporated into the report as appropriate.
In response to our draft report, the Deputy Commissioner expressed
appreciation to GAO for recognizing IRS's achievements toward
implementing the mandate and agreed with both of our recommendations.
In response to the first recommendation, the Deputy Commissioner
stated IRS will determine whether it would be practical and cost
effective to use preparers' PTINs as the authorizing numbers to e-file
after the PTIN system is fully implemented at the end of 2013. IRS
would require lead time to make this change, in part because it would
require significant programming changes. In response to our
recommendation to include the benefits of e-filing on Form 8948 and in
the sample taxpayer choice statement, IRS will add language about the
benefits of e-filing.
We plan to send copies of this report to the Chairmen and Ranking
Members of other Senate and House committees and subcommittees that
have appropriation, authorization, and oversight responsibilities for
IRS. We are also sending copies to the Commissioner of Internal
Revenue, the Secretary of the Treasury, the Chairman of the IRS
Oversight Board, and the Director of the Office of Management and
Budget. The report is also available at no charge on the GAO Web site
at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions or wish to discuss the
material in this report further, please contact me at (202) 512-9110
or WhiteJ@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Individuals making key contributions to this report can be
found in appendix IV.
Signed by:
James R. White:
Director, Tax Issues Strategic Issues:
[End of section]
Appendix I: Scope and Methodology:
To compare the Internal Revenue Service's (IRS) initial implementation
of the e-file mandate to program implementation criteria, we reviewed
IRS's planning documents and outreach to paid preparers, monitored
weekly status reports, and reviewed the public comments on the
proposed regulations and revenue procedure and compared them to
program implementation criteria from prior GAO reports and IRS
documents. To assess the expected effect of the mandate on e-file
rates, we reviewed and analyzed section 17 of the Worker,
Homeownership, and Business Assistance Act of 2009 and the proposed
Treasury regulations relating to the provision.[Footnote 11] We also
reviewed and analyzed IRS historical data and compared IRS's original
and revised e-file projections.
To determine the reliability of these projections, we interviewed the
IRS officials who made the projections and reviewed IRS's mean percent
errors for past years' projections. We found IRS's methodology for
calculating the e-file rates under different scenarios to be
sufficiently reliable for the purposes of presenting them in this
report.
To identify and assess early mandate implementation issues we reviewed
and analyzed draft forms, planning documents, and outreach materials.
We compared the steps taken to criteria from prior GAO reports, IRS's
strategic plan, and the Internal Revenue Manual.[Footnote 12] We
shared these criteria with IRS officials, who were generally in
agreement with their relevance, noting that the relative weight of
each criterion could differ. We also reviewed state-level e-file
implementation documents, forms, and data to determine any lessons
learned from the 22 states that had implemented e-file requirements.
For each objective, we also interviewed officials at IRS offices of
Electronic Tax Administration and Return Preparer Implementation. Our
work was done primarily at IRS Headquarters in Washington, D.C. and
its division offices in New Carrollton, Maryland, and Atlanta,
Georgia, where the IRS officials who manage the e-file mandate
implementation are located.
We conducted this performance audit from July 2010 through March 2011
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Briefing Slides:
IRS Has Taken Positive Steps to Implement the E-file Mandate, but
Preparers Have Concerns with the Proposed Regulations:
Objective:
Assess IRS‘s initial implementation of the e-file mandate.
Background:
As of January 1, 2011, certain paid preparers are required to file
returns electronically.[Footnote 13] In 2011, IRS is applying the
mandate to paid preparers who file 100 or more returns. In 2012, IRS
is applying the mandate to paid preparers who file more than 10
returns. IRS published proposed regulations and a notice of proposed
revenue procedure in December 2010 detailing the requirements of the
mandate. The proposed regulations provide exemptions from the mandate
for paid preparers who cannot e-file for certain reasons and allow
taxpayers to choose to file on paper.
IRS‘s initial implementation of the e-file mandate is consistent with
criteria for new programs listed in prior GAO and other reports that
call for dedicating a management team, establishing a communications
strategy, providing necessary staff, and developing a time line.
[Footnote 14] In mid-2010, IRS assigned executive leadership and
formed a team to implement the e-file mandate. IRS linked the team
with the Return Preparer Implementation Project Office that was
created to manage a separate, broader set of new requirements for paid
tax return preparers.
IRS communicated with paid preparers and industry groups about the
mandate, including information sessions at forums and conferences. It
also published notices, forms, and frequently asked questions on
IRS.gov,[Footnote 15] and held monthly teleconferences with software
developers. Until the program is fully implemented, the effectiveness
of these efforts will not be known.
IRS plans to use about 38 additional full time equivalent (FTE) staff to
process anticipated new e-file applications, and has already added 27
FTEs. In the first 3-1/2 months of fiscal year 2011, IRS received
25,013 e-file applications, a 19 percent increase from last year in
the same time period. IRS officials are projecting about 18 percent
more new
applications in fiscal year 2011 than in fiscal year 2010. An IRS
official noted that because of the increase in staff, so far this year
IRS has processed applications within 45 days of receipt, the same as
prior years.
In December 2010, IRS invited public comment on its proposed
regulations and revenue procedure. IRS received comments from 49
different industry groups and private firms. One concern cited several
times was the short time frame between the issuance of the proposed
regulations and the effective date of the mandate (approximately 1
month), as shown in figure 1. One commenter noted that a midyear
implementation could result in a disruption of the filing season.
Another commenter wrote that a short implementation period may pose
problems for some paid preparers, particularly those paid preparers
who have never e-filed. IRS officials told us that paid preparers have
been aware that the e-file mandate requirements were coming due to
their prior and ongoing outreach efforts. Further, IRS officials noted
at the January 7, 2011, public hearing that Congress did not enact a
specific penalty related to the mandate and that IRS plans to be
flexible with enforcing the e-file requirement for the first year.
[Footnote 16]
Figure 1: Time Line for E-file Mandate Implementation:
[Refer to PDF for image: time line]
November 6, 2006: Law passed.
December 1, 2010: Proposed regulations issued.
2011: Mandate in effect.
January 3, 2011: Public comments due to IRS.
January 7, 2011: Public hearing.
Early 2011: Final regulations to be issued.
Source: IRS.
[End of figure]
Another frequent concern was that under the proposed regulations, paid
preparers would be prohibited from mailing returns for taxpayers who
choose to file on paper.[Footnote 17] Paid preparers noted that they
routinely mail returns for clients who are elderly, infirm, or want
this service for various other reasons, and that they would like to
continue to do so. Other comments noted that some administrative
questions were not settled by the proposed regulations. For example, a
finalized Form 8948, ’Preparer Explanation for Not Filing
Electronically,“ along with guidance on how and when paid preparers
should use this form, had not been issued before the end of the public
comment period. IRS officials said that they may make some revisions
to the proposed regulations based on the public comments.
[End of section]
The Mandate May Affect Fewer Paid Preparers and Increase the E-file
Rate Less Than IRS Originally Anticipated:
Objective:
To assess the expected effect of the mandate on electronic filing
rates.
Background:
Under the proposed regulations for the e-file mandate, an individual
income tax return is considered to be ’filed“ by a paid preparer if the
preparer submits the tax return to IRS on the taxpayer‘s behalf, either
electronically or in paper form.[Footnote 18] Tax return preparation,
as distinct from filing, is the act of filling out a tax return.
Matter for Congressional Consideration:
If Congress wants to expand the applicability of the e-file mandate
beyond those preparers who file tax returns, then Congress could amend
paragraph 6011(e)(3)(B) of the Internal Revenue Code by replacing the
word ’file“ with broader language, such as ’prepare or file.“
IRS originally projected that the e-filing rate would reach about 82
percent by 2011 and 84 percent by 2012 with the implementation of the
e-file mandate. However, the mandate as currently worded does not
cover all paid preparers. The legislation specifies that ’any tax
preparer unless such preparer reasonably expects to file 10 or fewer
individual income tax returns during such calendar year“ must e-file
returns.[Footnote 19] In practice, many paid preparers who do not e-
file give prepared returns back to the taxpayers, who file them. If
these preparers‘ clients choose to continue filing on paper, the
preparers will be relieved of the mandate if they do not file more
than 10 returns. Due to its interpretation of the word ’file,“ IRS
revised its 2011 e-file projections downward to about 75 percent and
its 2012 projections to about 77 percent (see figure 2).
Figure 2: IRS‘s Original and Revised Electronic Filing Rate
Projections for Individual Income Tax Returns Based on Legislative
Language:
IRS e-file goal: 80%.
Year: 2005;
Actual E-filed: 50.7%;
Actual Paper filed: 49.3%.
Year: 2006;
Actual E-filed: 56%;
Actual Paper filed: 44%.
Year: 2007;
Actual E-filed: 59.2%;
Actual Paper filed: 40.8%.
Year: 2008;
Actual E-filed: 59.9%;
Actual Paper filed: 40.1%.
Year: 2009;
Actual E-filed: 68.5%;
Actual Paper filed: 31.5%.
Year: 2010;
Actual E-filed: 70.5%;
Actual Paper filed: 29.5%.
Year: 2011;
Actual E-filed: 81.8%;
Projected E-filed: 75.3% (E-filed -7.7%);
Actual Paper filed: 24.7%;
Projected Paper filed: 18.2%.
Year: 2012;
Actual E-filed: 84.3%;
Projected E-filed: 76.6%;
Actual Paper filed: 23.4%;
Projected Paper filed: 15.7% (Paper filed =7.7%).
Source: GAO analysis of IRS historical data for 2005-2010 and IRS
projections for 2011 and 2012.
Note: IRS reports that its 2-year projections of the number of
individual e-filed returns have been within an average of 2.45 percent
of the actual number of returns filed for the four most recent
projection cycles.
[End of figure]
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 that have e-filing requirements for preparers use either
the word ’prepare“ alone, or the term ’prepare or file,“ in their
requirement. When IRS officials studied the likely results of using
the word ’file,“ they revised their projections for 2012 downward by
almost 8 percentage points because they thought a lower percentage of
paid preparers would change their current practices and e-file returns
in the future. If the mandate used language similar to that used by
the states, e-filing in 2012 might be closer to the rate of the
original projections and help IRS achieve its e-filing goal for
individual returns. We determined that this change could reduce
administrative costs by as much as $64 million for 2011 and 2012
combined, with continued savings in future years.
Furthermore, an improvement in e-filing rates could eventually increase
the revenue collected from IRS‘s enforcement programs. Officials told us
that shifting staff from paper return processing to compliance programs
could increase revenue collected by at least $175 million annually.
[Footnote 20] Additionally, an increase in e-filing rates could bring
IRS closer to the point where it is cost effective to transcribe all
lines of data from the remaining paper returns. Since IRS only uses
data in its compliance programs if it is available from all returns,
full transcription could increase the effectiveness of those programs.
While a change to the mandate‘s language could help increase the e-
filing rate, reduce costs for IRS, and provide higher accuracy rates
and faster refunds for taxpayers, it could result in transition costs
for some paid preparers. Officials from one industry group noted that
small businesses that currently do not e-file could incur costs such
as purchasing software for electronic filing. According to IRS data,
about 13 percent of all preparers could incur these costs.
Multiple Identification Numbers May Burden Paid Preparers and Raise
Administrative Costs for IRS:
Objective:
Analyze early mandate implementation issues that could affect IRS‘s
administrative costs, preparer burden, or rates of electronic filing.
Background:
As of January 1, 2011, paid preparers must obtain a Preparer Tax
Identification Number (PTIN), an exclusive number to identify each
preparer. This number allows IRS to track paid preparer compliance,
competence, and adherence to ethical standards.[Footnote 21]
Currently, paid preparers cannot use a PTIN to submit a return
electronically. To submit a return electronically, IRS requires the use
of a second number, an Electronic Filing Identification Number (EFIN).
EFINs are assigned to tax preparation firms, not necessarily to a
single preparer. Each preparer must have a unique PTIN. Preparers
within the same firm may share the firm‘s EFIN. EFINs are also used by
firms such as tax software companies that do not prepare tax returns,
but instead transmit returns to IRS on behalf of preparers.
What GAO Recommends:
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.
PTINs and EFINs may be duplicative for paid preparers. Once the new
PTIN system is fully implemented, EFINs may not add any additional
identifying information beyond that provided by PTINs. The numbers will
have similar application processes and suitability tests including
background checks and fingerprinting.[Footnote 22] IRS‘s strategic
plan seeks to streamline processes, and recent legislation requires
GAO to identify program overlap and duplication.[Footnote 23] Reducing
the duplication between PTINs and EFINs may provide such an
opportunity.
Although similar, there are some inconsistencies in the application
processes for the two numbers, which IRS officials recognized could
cause problems for preparers. For example, the minimum age to apply for
a PTIN is 18, while for an EFIN it is 21. In October 2010, IRS
established a working group that developed an action plan to reconcile
the differences between the PTIN and EFIN requirements. However, the
working group was not tasked with determining whether it would be
practical or cost effective to authorize preparers to e-file returns
using only their PTINs.
IRS administrative costs and preparer burden could be reduced by
allowing preparers to use only their PTINs to e-file. Of the two
numbers, PTINs should be considered for use as the authorizing number
for e-filing because PTINs identify each preparer. In contrast, EFINs
are assigned to firms and will not always enable IRS to identify the
preparer. Although self reported, both preparer and firm information
is captured on the PTIN application, and IRS could identify both using
just the PTIN.
IRS May Be Missing Opportunities to Educate Taxpayers about the
Benefits of E-filing:
Objective:
Analyze early mandate implementation issues that could affect IRS‘s
administrative costs, preparer burden, or rates of electronic filing.
Background:
Under the new mandate, certain paid preparers are required to e-file
all returns that they file. However, under the proposed regulations,
individual taxpayers working with paid preparers may choose to file
on paper if they file their returns themselves. IRS outlined the steps a
paid preparer should use to document taxpayers‘ decisions not to
electronically file their returns.[Footnote 24] The proposed
regulations require taxpayers to sign a taxpayer choice statement that
paid preparers keep in their files, with suggested language provided
by IRS. The return filed with IRS must include Form 8948, ’Preparer
Explanation for Not Filing Electronically.“
What GAO Recommends:
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.
As previously noted, IRS has taken steps to educate paid preparers about
the e-file mandate, but it could take additional steps to educate
taxpayers about the benefits of e-filing, such as faster refunds and
reduced chance of errors. When reviewing state e-file requirements, we
found that some provided information about the benefits of e-filing on
the taxpayer opt-out form. This provided taxpayers an additional
opportunity to learn how e-filing can benefit them, without further
burdening paid preparers. For example, as shown in figure 3,
New Jersey‘s Form NJ-1040-O notes several benefits. E-filing benefits
are also mentioned on Virginia‘s Form 8454T and Alabama‘s Form EOO.
Figure 3: New Jersey E-file Opt-Out Request Form:
[Refer to PDF for image: illustration]
Statement on benefits of e-filing:
An Important Message to NJ Taxpayers from the NJ Division of Taxation:
N.J.S.A. 54A:8-6.1 requires most tax preparers to electronically file
(E-file) New Jersey Income Tax Resident Returns. By having your return
filed electronically, you receive the following benefits:
* A faster refund. Most E-filers get their refund in two weeks. Paper
return filers can wait up to 12 weeks for their refund.
* Direct Deposit Option. Refunds can be directly deposited into your
bank account.
* Reduced chance of errors. E-filed returns have fewer errors which
may delay the processing of your return.
The NJ Division of Taxation strongly urges you to allow your tax
preparer to electronically file your NJ Resident Return. However, if
you do NOT want your return filed electronically, you can "opt out" by
completing Part I of this form and giving it to your preparer to
authorize him or her to file your 2010 NJ Income Tax Return on paper.
Source: New Jersey Division of Taxation form.
[End of figure]
IRS does not provide information about the benefits of e-filing in its
suggested statement to be signed by taxpayers who are choosing to file
on paper, nor on Form 8948, ’Preparer Explanation for Not Filing
Electronically,“ the form that paid preparers must include with a paper
filed tax return. According to an IRS official, due to the short time
frames for implementing this mandate, IRS did not have a chance to
research all the lessons learned from the states that have implemented
e-filing requirements.
Inserting a sentence in the taxpayer choice statement that affirms
that a preparer discussed the benefits of e-filing with the client
could help encourage such conversations. Even if the preparer does not
in fact discuss the benefits of e-filing, a sentence included in the
statement a taxpayer is required to sign would convey the desired
information. Similar statements on Form 8948 could include somewhat
more detailed information. Taxpayers who chose to file on paper would
have the opportunity to see it because it is required to be included
in the tax packages that they review and mail.
While we have not determined the extent to which such information could
increase e-filing rates, an official from the New Jersey Division of
Taxation said the statement posed no additional costs for them. Thus,
IRS risks missing an opportunity to educate taxpayers who do not yet e-
file in an easy, low-cost, and targeted way. Providing information on
the benefits of e-filing on papers that taxpayers review could
encourage them to e-file.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224:
February 28, 2011:
Mr. James R. White:
Director, Tax Issues:
U.S Government Accountability Office:
441 G Street, N.W.
Washington. DC 20548:
Dear Mr. White:
I have reviewed your draft report entitled "Electronic Tax Return
Filing: Improvements Can Be Made before Mandate Becomes Fully
Implemented" (GAO-11344). I appreciate your recognition of our
significant achievements taken to implement the mandate, such as
communicating the details of the implementation and publishing
proposed regulations for public comment.
E-Filing provides benefits to taxpayers and to the IRS by improving
accuracy, reducing processing costs and delivering refunds more
quickly. Today, e-Filing is the norm rather than the exception as
approximately 70% of tax returns were filed electronically in 2010.
The IRS has for years sought to increase the rate of electronic filing
and recently concluded a two-part, congressionally-mandated study of
ways to advance e-Filing. The current mandate was enacted before that
study was concluded, but it is clear that the single most effective
way to increase e-Filing is to mandate the practice among tax
professionals. We are committed to implementing the e-File mandate as
effectively and equitably as possible.
We will take appropriate actions to address or further review issues
as they are identified. We agree with the two recommendations and look
forward to continued engagement by the Government Accountability
Office on the next phase of implementation. Our specific comments to
your recommendations are enclosed. If you have any questions, please
contact me, or a member of your staff can contact David R. Williams,
Director. Return Preparer Program, at (202) 522-7990.
Sincerely,
Signed by:
Steven T. Miller:
Deputy Commissioner for Services and Enforcement:
Enclosure:
[End of letter]
Enclosure:
Recommendation 1:
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 number to e-file their taxpayers'
returns. If IRS determines it is advantageous, it should create a
timetable and a plan to modify e-file systems accordingly.
Corrective Action:
The IRS agrees with this recommendation. We will determine whether it
would be practical and cost effective to use preparers' PTINs as the
authorizing number to e-file their taxpayers' returns after the PTIN
system is fully implemented. Full implementation is scheduled for
December 31, 2013. If IRS determines it is advantageous, IRS will
create a timetable and plan to enable preparers to e-file based solely
on having a current and valid PTIN. Because a change of this type
requires significant programming changes and new system interfaces, as
well as extensive coordination with the tax software industry and
communications and outreach to the tax return preparer community, the
implementation plan will need to have sufficient lead time to ensure
that these precursors are accomplished.
Recommendation 2:
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.
Corrective Action:
The IRS agrees with this recommendation. We will add language to Form
8948 that includes information about the benefits of e-filing. The
sample taxpayer choice statement will also include this language.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110, or whitej@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Libby Mixon, Assistant
Director; Amy Bowser; Michele Fejfar; Justin Reed; Cynthia Saunders;
Robyn Trotter; and Meredith Trauner made key contributions to this
report.
[End of section]
Footnotes:
[1] The major types of tax returns for the purpose of the 2012 e-file
goal consist of: individual income tax returns; employment tax
returns; corporation income tax returns; partnership returns; trust,
estate, and gift tax returns; real estate mortgage investment
conduits; exempt organization returns; and excise tax returns. In
2009, the majority (76 percent) of all major tax returns were
individual returns. In addition to major returns, IRS received over 2
trillion information and withholding documents.
[2] Worker, Homeownership, and Business Assistance Act of 2009, Pub.
L. No. 111-92, 123 Stat. 2984 (Nov. 6, 2009). A tax return preparer
(called paid preparer in this report) is any individual who is
compensated for preparing or assisting in the preparation of all or
substantially all of a tax return or claim for refund of tax. 26
U.S.C. § 7701(a)(36).
[3] IRS estimated that processing a paper return in 2009 cost the
service $3.29 per return whereas an e-filed return only cost 19 cents.
[4] Pub. L. No. 105-206, title II, § 2001, 112 Stat. 685 (July 22,
1998).
[5] IRS Oversight Board, Electronic Filing 2006: Annual Report to
Congress, Feb. 28, 2007.
[6] Worker, Homeownership, and Business Assistance Act of 2009, Pub.
L. No.111-92, 123 Stat. 2984 (Nov. 6, 2009).
[7] 75 Fed. Reg. 75,439 (Dec. 3, 2010). The proposed regulations and
revenue procedure specify that reasonable expectations should be
determined by adding together all of the individual tax returns the
return preparer's firm reasonably expects to file in the calendar
year, except for returns subject to administrative exemptions and
returns for which the taxpayer chooses to file on paper.
[8] An IRS official noted that some paid preparers may have to change
their existing business practices in order to e-file if they were
previously only preparing and filing returns on paper. This could
include purchasing computer systems and software.
[9] 26 C.F.R. § 1.6109-2.
[10] 75 Fed. Reg. 75,439 (Dec. 3, 2010).
[11] Pub. L. No. 111-92, 123 Stat. 2984 (Nov. 6, 2009) and 75 Fed.
Reg. 75,439 (Dec. 3, 2010).
[12] Criteria were developed from sources such as: GAO, Digital
Television Transition: Increased Federal Planning and Risk Management
Could Further Facilitate the DTV Transition, [hyperlink,
http://www.gao.gov/products/GAO-08-43] (Washington, D.C. : Nov. 19,
2007); Results Oriented Cultures: Implementation Steps to Assist
Mergers and Organizational Transformations, [hyperlink,
http://www.gao.gov/products/GAO-03-669] (Washington, D.C.: July 2,
2003); Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001), Executive Guide: Effectively Implementing the Government
Performance and Results Act, [hyperlink,
http://www.gao.gov/products/GAO/GGD-96-118] (Washington, D.C.: June
1996); IRS Publication 3744, IRS Strategic Plan 2009 2013, and the
Internal Revenue Manual Exhibit 1.5.1 5.
[13] 26 U.S.C. § 6011(e)(3).
[14] Criteria were developed from sources such as: GAO, Digital
Television Transition: Increased Federal Planning and Risk Management
Could Further Facilitate the DTV Transition, [hyperlink,
http://www.gao.gov/products/GAO-08-43] (Washington, D.C.: Nov. 19,
2007); Results Oriented Cultures: Implementation Steps to Assist
Mergers and Organizational Transformations, [hyperlink,
http://www.gao.gov/products/GAO-03-669]
(Washington, D.C.: July 2, 2003); Internal Control Management and
Evaluation Tool, [hyperlink, http://www.gao.gov/products/GAO-01-1008G]
(Washington, D.C.: August 2001), Standards for Internal Control in the
Federal Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.:
November 1999); IRS Publication 3744, IRS Strategic Plan 2009-2013,
and the Internal Revenue Manual Exhibit 1.5.1-5.
[15] See [hyperlink,
http://www.irs.gov/taxpros/providers/article/0,,id=223832,00.html];
[hyperlink, http://www.irs.gov/newsroom/article/0,,id=231931,00.html];
and
[hyperlink, http://www.irs.gov/taxpros/article/0,,id=231871,00.html].
[16] IRS has proposed regulations to amend Circular 230 Standards of
Practice to make willful failure to e-file a violation subject to
sanctions. Preparers could have their PTIN revoked and thus be
prohibited from preparing and e-filing returns if they do not comply
with the mandate. 75 Fed. Reg. 51,713 (Aug. 23, 2010).
[17] Under the definition of ’file“ in the proposed regulations, if a
taxpayer chooses to submit a paper return, it must be the taxpayer and
not the preparer who will submit the return to IRS. 75 Fed. Reg.
75,439 (Dec. 3, 2010).
[18] 75 Fed. Reg. 75,439 (Dec. 3, 2010).
[19] 26 U.S.C. § 6011(e)(3)(B).
[20] We previously reported that although we have not independently
verified IRS‘s methodology, IRS officials said that if all data from
paper tax returns were transcribed, the Automated Underreporting
Program could eliminate some human screeners. IRS officials estimated
that if the screeners could be reallocated to performing audits, they
could bring an additional $175 million annually. This figure is an
estimate for a single program, the Automated Underreporting Program,
so an estimate that included other enforcement programs might be
larger. See GAO, Tax Administration: 2007 Filing Season Continues
Trend of Improvement, but Opportunities to Reduce Costs and Increase
Tax Compliance Should be Evaluated, [hyperlink,
http://www.gao.gov/products/GAO-08-38] (Washington, D.C.: Nov. 15,
2007).
[21] 26 C.F.R. § 1.6109-2. IRS will be phasing in these requirements
over the next few years. See Publication 4832, Return Preparer Review
(Rev. 12-2009).
[22] For the EFIN, evidence of professional status such as being an
attorney, Certified Public Accountant, or Enrolled Agent may
substitute for fingerprinting.
[23] Statutory Pay-As-You-Go Act of 2010, Pub. L. No. 111-139, title
II, § 21,124. Stat. 8 (Feb. 12, 2010).
[24] Notice 2010-85.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: