E-file: Off the Mark

WASHINGTON (03/21/2000) - The Digital Age is a pleasure and a problem for the U.S. Internal Revenue Service. This year, the IRS' "e-file" program for Internet tax filing promises something close to a paperless trail for taxpayers. But it is not one-stop shopping, and it comes at a price. Indeed, it is still not as fast as older, less sophisticated technologies.

By the time a taxpayer buys the $20-or-more software required to file a tax return via the Internet, downloads the electronic tax return form off the IRS World Wide Web site and sends in a handwritten signature as confirmation, the convenience is questionable. Refunds don't come instantly, either, according to electronic filers.

Those are the findings of a Federal Computer Week test to find out how fast and reliable electronic tax filing really is. FCW asked three staff members -- all single, filing a short form and expecting a refund -- to test the system. Each filed their tax return a different way -- by U.S. mail, TeleFile and e-file.

The results showed that although Internet tax filing is a significant improvement over the traditional filing method of sending in a hard-copy tax return via the U.S. mail, it is still not paperless or as easy as it could be.

The IRS' experience with providing electronic services to the public is symptomatic of the struggles many agencies are facing as they try to transform paper-based services into e-services.

John Dyer, chief of information technology at the Social Security Administration and a member of a new CIO Council committee that will focus on electronic government, said new electronic programs in government always have growing pains before they operate smoothly. The IRS is no exception.

"I look at it as the IRS being clever trying to figure out how to get to taxpayers electronically," he said. "They are still trying to nail it down.

They are giving a service in interim steps. They set it up in a way that provides security and is making it as easy as possible when we still don't have things like electronic signatures."

The IRS is a good case study for electronic government. For several years, the IRS has encouraged taxpayers to file electronically -- either by TeleFile, in which taxpayers input their tax return via a touch-tone phone, or by using a PC and filing via the Internet.

Taxpayers seem to like the options. Last year, 25 percent of all taxpayers filed electronically -- about 30 million people -- and this year, the IRS hopes that number will grow to more than 30 percent.

"If someone does it on a computer, there is practically zero chance there will be math errors," said Paul Cosgrave, chief information officer for the IRS. He filed electronically for the first time last year.

Electronic returns have a faster turnaround rate, Cosgrave said. Taxpayers get immediate verification that the return has been sent, no paper forms are necessary and ultimately, the refund arrives faster.

While electronic filing is sold as a convenience to tax payers, it also is a cost-saver for the IRS. With electronic returns, IRS clerks don't have to type information into the agency's computer system, as they do with paper returns, and that reduces the cost of processing.

FCW's test showed that electronic filing, via the phone or the Internet, is indeed faster -- but not by much. TeleFile, which the IRS introduced in 1992, had the fastest turnaround time, with a refund deposit made 14 days after filing. A tax return filed via e-file using Intuit Inc.'s TurboTax software (estimated retail cost: $29.99, but many retailers offer rebates), which became an option in 1995, had a turnaround time of 24 days. A refund check was received from a mailed-in tax form 38 days after the forms were dropped off in a mail box -- two weeks longer than the e-file method.

But that doesn't tell the whole story. While all three tax-filing methods have distinct advantages, e-file remains a clunky system that is not yet the simple, smooth process envisioned by the IRS.

The growing pains may keep taxpayers from moving into the Electronic Age before the kinks are worked out.

"Do I trust the IRS to properly get my electronic return? Let's put it this way -- I'm filing by paper this year," said Larry Allen, executive director of the Coalition for Government Procurement, an industry group that represents 300 vendors on the General Services Administration schedule.

Nevertheless, the IRS hopes to have 80 percent of all taxpayers filing online by 2007. To reach that goal, President Clinton is promoting online filing, proposing a $10 rebate in the fiscal 2001 budget for anyone who does so.

But while the number of electronic tax returns is increasing, the method is not for computer novices. The FCW employee who tested e-file spent an hour filling out the 1040EZ form and zapping it to the IRS. The employee still had to print out the forms, sign them and mail them to the IRS.

Once the employee got started, he was asked about a dozen questions by the Intuit software package to make sure he was paying the right tax amount. The questions -- about medical savings accounts, real estate and the federal fuel tax -- were designed to jog the taxpayer's memory to make sure all deductions were included. The employee provided his e-mail address and other tidbits of information that added filing time.

The software prompted the employee to check on the status of his return two days later to make sure the IRS had received the electronic form. He then was asked to send in a paper form with his signature because the IRS does not yet offer the option of using digital signatures, which would verify the identity of the person sending in the electronic form.

Congress is considering legislation to legalize digital signatures. The IRS is testing them with 18,000 taxpayers, but it will be several years before the capability will be available systemwide, Cosgrave said.

Digital signatures are the linchpin of the whole system, said Philip Kiviat, a consultant for companies that do business with the government.

"It's one of those problems that have to be worked out. Digital signatures are a necessary thing to full e-business," he said.

Unknown to the FCW employee -- and most other taxpayers -- the IRS does not receive electronic returns directly because of security concerns. Instead, the return is filed to an authorized transmitter, who passes it on to the IRS. This process could cause an additional delay if the system crashes.

The process for e-file is more complicated for companies that want to electronically transmit tax returns. To secure the system for electronic corporate tax returns, every company wishing to file electronically must undergo a background check, according to Robert Barr, assistant commissioner for the IRS' Electronic Tax Administration.

"They are fingerprinted. We do FBI checks, tax compliance checks," Barr said.

Large companies and certified public accountants are exempt from the background check, but large public companies must nominate three officers who are subject to tax-compliance checks. This process costs the government time and money. The requirements and cost of filing using e-file has IRS critics wondering why the agency has even bothered to offer the service.

"It seems strange the government would make it financially difficult for taxpayers to want to use the service," said Pete Sepp, a representative of the National Taxpayers Union, a consumer watchdog group. "Governments are notoriously unable to walk on the cutting edge. They end up bleeding."

Despite the extra time involved in filing via e-file, professional tax preparers are sold on the system.

"It's fast and accurate," said Todd Ransom, a spokesman for financial services company H&R Block Inc., which has offered customers an e-file option since 1986. "The error rate is less than 1 percent. With paper returns, it's 20 percent."

However, H&R Block had its own e-filing problem last month when it was forced to shut down its Internet site for a week after a bug corrupted the system. The problem was discovered when taxpayers tried to file their returns online using the company's $9.99 service. When 10 taxpayers called up a tax form on the company's Web site, they got a form filed by another taxpayer. The problem was an internal one and did not affect the IRS, Ransom said.

In contrast to e-file, the simpler TeleFile technology is a less burdensome method that provides returns much faster. The FCW employee using TeleFile filed his tax return easily, experiencing none of the hassles that the e-file tester found.

He received a TeleFile package in the mail this year because he had filed the 1040EZ file by mail last year. The package came with a five-digit customer service number that the filer uses instead of a handwritten signature.

The TeleFile tester called a toll-free number, punched in his W-2 information and the amount of interest he earned in 1999, and the system computed his adjustable gross income, standard deduction, taxable income and refund.

In place of signing the form, he entered his customer service number, and TeleFile issued him a 10-digit confirmation number to keep on file. The entire process took about 15 minutes. The FCW TeleFiler's refund was deposited into his bank account two weeks after he filed.

There are shortcomings, however. TeleFile is limited only to those who can file 1040EZ forms.

TeleFilers must either be single or married and filing jointly, claim no dependents, have a taxable income of less than $50,000 and taxable interest of less than $400. And only those who receive the TeleFile package in the mail can file via the phone. The restrictions exclude many taxpayers.

Although the system isn't perfect, there are some distinct advantages to using a computer to file a return.

A computer checks the filer's math for mistakes. The tax return is easily stored on a hard drive and tax return programs ask questions to remind the taxpayer about what to include. And if a taxpayer owes money, e-filers can have the payment taken directly from a checking or savings account by authorizing a direct debit on a selected date. In other words, they can file early but still make the payment closer to the April deadline.

Electronic filing clearly is the wave of the future.

"Our goal is to get all forms online and in place," Cosgrave said. "We're very close to that. We're moving to make it seamless." Cosgrave said he thinks that most forms will be available online for tax season next year.

Nevertheless, major cultural changes will have to happen before e-government is the norm rather than the exception, said Ann Reed, former CIO at the Agriculture Department and now vice president for the government global industry group at Electronic Data Systems Corp.

"There's more pressure on the commercial side to be responsive to customers," Reed said.

"Government...hasn't quite yet figured it out. What ought to be very easy is very hard."

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More about CIO CouncilElectronic Data SystemsFBIH&R BlockInternal Revenue ServiceIntuitIRSIRS

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