# Internal Revenue Service



# Advancing E

- file **Study Phase 1 Report** 
**Achieving the 80%** E

- file **Goal Requires**  **Partnering with Stakeholders on Ne**  **w Approaches to**  **Motivate Paper Filers** 

**September 30**  **, 2008** 

**Approved f**  **or Public Release; Distribution Unlimited. Case Number 08** 

**- 1062.** 



## Version **1. 3** 

**Document Number 0206.02**  **10**

The views, opinions, and/or findings contained in this report should not be construed as official Government position, policy, or deci sion unless so designated by other documentation. No warranty or guarantee , express ed or implied, is made concerning the accuracy, authoritativeness, completeness, or currency of data herein

.

© 2008 The MITRE Corporation. All Rights Reserved.THIS PAGE INTENTIONALLY LEFT BLANKAdvancing E

- file Study Phase 1 Report i Table of Contents 

# T **able of Contents**

Table of Cont ents

................................ ................................ ................................ ........... i
List of Figures

................................ ................................ ................................ ................ v

List of Tables

................................ ................................ ................................ ............... vii

1. Introduction

................................ ................................ ................................ ............. 1

1.1 Purpose of This Report

................................ ................................ ............................ 1
1.2 Origin and Approach

................................ ................................ ............................... 2
1.3 Scope and Organization

................................ ................................ .......................... 2
1.4 Conventions

................................ ................................ ................................ ............ 5

2. E

- file Goal, Stakeholders, and History

................................ ................................ ...... 7
2.1 80% E

- file Goal

— Scope, Value, and Progress

................................ ....................... 7
2.2 US Tax System Stakeholders

................................ ................................ ................. 10

2.2.1 Relationship with Third Party Partners

................................ ........................... 10 2.2.2 Relationship with States

................................ ................................ .................. 19 2. 2.3 Relationship with Federal Government Organizations

................................ ... 20
2.3 History of E

- file

................................ ................................ ................................ ...... 22 2.3.1 E

- file Timeline

................................ ................................ ................................ .. 23

3. IRS E

- file and Technology Adoption

................................ ................................ ....... 25
3.1 User Adoption of Technology

................................ ................................ ............... 25

3.1.1 Diffusion of Innovations

................................ ................................ .................. 25
3.2 IRS E

- file Adoption: History and Projections

................................ ......................... 28
3.3 Related Technology Adoption Trends

................................ ................................ ... 30

3.3.1 E

- file Compared with Online Banking and Online Bill Pay

............................... 31

4. Introduction to Research on Filer Motivators and Concerns

................................ .. 37

4.1 Overview

................................ ................................ ................................ ............... 37
4.2 Taxpayer Assistance Blueprint

................................ ................................ .............. 38
4.3 Taxpayer Communications Tracking Studies

................................ ........................ 40
4.4 Taxpayer Attitudinal Tracking Studies

................................ ................................ .. 43
4.5 Taxpayer Satisfaction Studies

................................ ................................ ............... 44
4.6 ETA Full Year Database Analyses

................................ ................................ ........... 44
4.7 Practitioner Business Impact Studies

................................ ................................ .... 45
4.8 One

- on

- One e

- file Research Among Taxpayers and Preparers

............................. 47
4.9 E

- file Practitioner Attitudinal Tracking Study

................................ ........................ 48

5. Taxpayer Motivators and Concerns

................................ ................................ ....... 49

5.1 Overview

................................ ................................ ................................ ............... 49
5.2 Awareness

................................ ................................ ................................ ............. 50
5.3 Availability

................................ ................................ ................................ ............. 51
5.4 Accuracy

................................ ................................ ................................ ................ 52Advancing E

- file Study Phase 1 Report ii Table of Content s 5.5 Security and Privacy

................................ ................................ .............................. 53
5.6 Ease and Convenience

................................ ................................ .......................... 55
5.7 Cost

................................ ................................ ................................ ....................... 57
5.8 Taxpayer Demand

................................ ................................ ................................ . 59
5.9 Fear of Audit

................................ ................................ ................................ ......... 60
5.10 Recordkeeping and Acknowledgments

................................ ................................ . 61
5.11 Perceived Benefits

................................ ................................ ................................ 62

6. Preparer Motivators and Concerns

................................ ................................ ........ 65

6.1 Overview

................................ ................................ ................................ ............... 65
6.2 Awareness

................................ ................................ ................................ ............. 67
6.3 Availability

................................ ................................ ................................ ............. 68

6.3.1 Availability of Organizational Resources

................................ ......................... 68 6.3.2 Availability of IRS Resources

................................ ................................ ............ 68 6.3.3 Availability of Support for Complex Returns

................................ ................... 69
6.4 Accuracy

................................ ................................ ................................ ................ 70
6.5 Security and Privacy

................................ ................................ .............................. 71
6.6 Ease and Convenience

................................ ................................ .......................... 71
6.7 Cost

................................ ................................ ................................ ....................... 73
6.8 Preparer Influence and Client Demand

................................ ................................ . 73
6.9 Perceived Benefits

................................ ................................ ................................ 75

7. State Electronic Filing Experiences

................................ ................................ ......... 77

7.1 IRS

- State Relationship for Electronic Filing

................................ ........................... 77
7.2 Electronic Filing Methods for State Returns

................................ ......................... 78
7.3 Electronic Filing Growth for State Returns

................................ ............................ 84

8. International Electronic Filing Experiences

................................ ............................ 87

8.1 International Experiences at a Glance

................................ ................................ .. 87
8.2 Comparison of the United States, the United Kingdom, Canada, and Australia

... 90

8.2.1 Electronic Filing Adoption

................................ ................................ ............... 90 8.2.2 Internet Adoption

................................ ................................ ............................ 92 8.2.3 Ta x System Complexity

................................ ................................ .................... 92
8.3 United Kingdom Electronic Filing Summary

................................ .......................... 93

8.3.1 Filing Options and Features

................................ ................................ ............. 94 8.3.2 Electronic Filing History and Adoption

................................ ............................ 95 8.3.3 Role of Third Parties

................................ ................................ ........................ 98
8.4 Canada Electronic Filing Summary

................................ ................................ ........ 99

8.4.1 Filing Options and Features

................................ ................................ ........... 100 8.4.2 Electronic Filing History and Adoption

................................ .......................... 103 8.4.3 Role of Third Parties

................................ ................................ ...................... 105
8.5 Australia Electronic Filing Summary

................................ ................................ .... 106

8.5.1 Filing Options and Features

................................ ................................ ........... 107 8.5.2 Electronic Filing History and Adoption

................................ .......................... 109 8.5.3 Role of Third Parties

................................ ................................ ...................... 110Advancing E

- file Study Phase 1 Report iii Table of Contents 9. Introduction to Option Chapters

................................ ................................ .......... 113

9.1 Overview

................................ ................................ ................................ ............. 113
9.2 Summary of Opt ions

................................ ................................ ........................... 114

10. Incentive

- Based E

- filing Options

................................ ................................ .......... 117
10.1 Overview

................................ ................................ ................................ ............. 117
10.2 History and Background

................................ ................................ ...................... 118

10.2 .1 Direct Monetary Incentives

................................ ................................ ........... 118 10.2.2 Benefit

- Based Incentives

................................ ................................ ............... 118
10.3 State Experiences

................................ ................................ ................................ 127
10.4 Incentive

- Based Options

................................ ................................ ..................... 128

10.4.1 Incentive Option 1: Direct Monetary Incentives

................................ ........... 128 10.4.2 Incentive Option 2: Targeted Marketing of E

- file

................................ .......... 129 10.4.3 Incentive Option 3: Increased Marketing for Free File

................................ .. 132 10.4.4 Incentive Option 4: Expand the Free File Program

................................ ........ 134 10.4.5 Incentive Option 5: Develop New Benefits

................................ ................... 135

11. Mandate

- Based E

- filing Options

................................ ................................ .......... 139
11.1 Overview

................................ ................................ ................................ ............. 139
11.2 History and Background

................................ ................................ ...................... 140
11.3 State Experiences

................................ ................................ ................................ 143

11.3.1 Growth in Electronic Filing of State Returns

................................ ................. 144 11.3.2 Overview of State Approaches to Mandates

................................ ................ 145
11.4 Mandate

- Based Options

................................ ................................ ..................... 147

11.4.1 Mandate Option 1: Federal Mandate on Paid Preparers

.............................. 147

12. Internet

- Based E

- filing Options

................................ ................................ ............ 155
12.1 Overview

................................ ................................ ................................ ............. 155
12.2 History and B ackground

................................ ................................ ...................... 155

12.2.1 E

- filing Individual Federal Tax Returns in the Current Environment

............. 156 12.2.2 Modernized e

- File

................................ ................................ ......................... 157
12.3 S tate Experiences

................................ ................................ ................................ 158

12.3.1 Direct Internet Filing (I

- File)

................................ ................................ .......... 158 12.3.2 Online Filing Programs

................................ ................................ .................. 162
12.4 Internet

- Based Options

................................ ................................ ....................... 162

12.4 .1 Internet Option 1: Enhance IRS Systems

................................ ....................... 163 12.4.2 Internet Option 2: Direct Filing

................................ ................................ ..... 165 12.4.3 Internet Option 3: IRS

- Provided Preparation and Filing

................................ 167

13. Phone

- Based E

- filing Options

................................ ................................ .............. 173
13.1 Overview

................................ ................................ ................................ ............. 173
13.2 History and Background

................................ ................................ ...................... 174
13.3 State Experiences

................................ ................................ ................................ 177
13.4 Phone

- Based E

- filing Options

................................ ................................ .............. 177 13.4.1 Phone Option 1: Rethink Phone E

- filing

................................ ........................ 178Advancing E

- file Study Phase 1 Report iv Table of Contents 14. Paper

- Based Filing Options

................................ ................................ .................. 181

14.1 Overview

................................ ................................ ................................ ............. 181
14.2 History and Background

................................ ................................ ...................... 183

14.2.1 Current Submission Processing

................................ ................................ ..... 183 14.2.2 Current Barcode Use at the IRS

................................ ................................ ..... 184 14.2.3 Modernized Submission Processing

................................ .............................. 185
14.3 State Experiences

................................ ................................ ................................ 186
14.4 Paper

- Based Options

................................ ................................ ........................... 188

14.4.1 Paper Option 1: 2D Barcodes

................................ ................................ ........ 189 14.4.2 Paper Option 2: Character Recognition

................................ ......................... 193

15. Other Options and Research Opportunities

................................ ......................... 197

15.1 Other Options for Future Consideration

................................ ............................. 197

15.1.1 Government

- Provided Options

................................ ................................ ..... 197 15.1.2 Third Party

– Provided Options

................................ ................................ ....... 199
15.2 Research Opportunities

................................ ................................ ...................... 200

15.2.1 Research Opportunities for Taxpayer and Prepare r Motivators

................... 201 15.2.2 Research Opportunities for Refining Target Populations for Options

........... 202 15.2.3 Research Opportunities for State and International Experiences

................. 203 15.2.4 Research Opportunities for Option

- Specific Considerations

......................... 204
Appendix A. Contributors

................................ ................................ ..................... 205

Acronyms

................................ ................................ ................................ .................. 207
Glossary

................................ ................................ ................................ .................... 211

References

................................ ................................ ................................ ................ 219Advancing E

- file Study Phase 1 Report v List of Figures 

# List of Figures

Figure 1

- 1 Navigational and Informational Features of this Report

................................ ... 5
Figure 2

- 1 Federal Individual Income Tax Return Preparation and Filing Data (as of TY2006)

................................ ................................ ................................ ........... 9
Figure 2

- 2 Roles Performed by Key Stakeholders in Electronic Filing

.............................. 12

Fi gure 2

- 3 Hierarchical Relationship Among Definitions of Third Parties

........................ 14
Figure 3

- 1 Technology Adoption User Segments

................................ ............................. 26
Figure 3

- 2 Technology Adoption Plotted Cumulatively Against Time (S

- Curve)

.............. 27
Figure 3

- 3. Actual and Projected E

- file Adoption (1990

– 2014)

................................ ........ 29
Figure 3

- 4 Household Adoption of PCs and Internet (1984

– 2010)

................................ .. 30
Figure 3

- 5 Cumulative Adoption of Onli ne Banking (1998

– 2005)

................................ .... 33
Figure 3

- 6 Actual and Projected Adoption of Online Bill Pay (1999

– 2011)

...................... 34
Figure 3

- 7 Population

- Corrected Reasons Users Did Not Use Online Bill Pay

.................. 35
Figure 3

- 8 Comparison of PC, Internet, E

- file , Online Banking, and Online Bill Pay Adoption (1984

– 2014)

................................ ................................ ................. 36
Figure 4

- 1 Returns by Method, Filer, and Complexity (as of 2005)

................................ .. 45
Figure 7

- 1 States Participating in the Fed/Sta te Program (as of 2008)

............................ 82
Figure 7

- 2 States with Electronic Filing Mandates (as of 2008)

................................ ....... 82
Figure 7

- 3 States with I

- File Programs (as of 2008)

................................ .......................... 83
Figure 7

- 4 States Using 2D Barcodes on V

- Coded Returns (as of 2006)

........................... 83
Figure 7

- 5 States with Telefile Programs (as of 2008)

................................ ...................... 84
Figure 7

- 6 Proportion of State Returns Filed Electronically (as of 2005)

......................... 86
Figure 8

- 1 Preparer Problems with Electronic Filing in the United Kingdom (as of 2006) 98
Figure 8

- 2 Canadian Electronic Filing Trends (1994

– 2006)

................................ ............ 104
Figure 12

- 1 Federal E

- filing

................................ ................................ ............................. 156
Figure 12

- 2 Internet Option 1: Enhance IRS Systems

................................ ..................... 163
Figure 12

- 3 Internet Option 2: Direct Filing

................................ ................................ .... 165
Figure 12

- 4 Internet Option 3: IRS

- Provided Preparation and Filing

.............................. 167
Figure 13

- 1 Trends in IRS Telefile Usage (1998

– 2005)

................................ ................... 175
Figure 13

- 2 Filing Methods Used by For mer Telefile Filers (as of 2006)

........................ 176
Figure 14

- 1 Example of 1D Barcode (UPC

- 12 Type)

................................ ....................... 182
Figure 14

- 2 Example of 2D Barcode (PDF 417 Type)

................................ ...................... 183Advancing E

- file Study Phase 1 Report vi List of Figures THIS PAGE INTENTIONALLY LEFT BLANK.Advancing E

- file Study Phase 1 Report vii List of Tables 

# List of Tables

Table 1

- 1 Organization of This Report

................................ ................................ ................ 3

Table 2

- 1 Taxpayer Use of Paid Preparers (1997

– 2006)

................................ .................. 11

Table 2

- 2 Definition of Terms Used in Third Party Model

................................ ................ 14

Table 2

- 3 Selected Third Party Stakeholders in US Tax System

................................ ........ 15

Table 2

- 4 State Stakeholders in US Tax System

................................ ................................ 19

Table 2

- 5 Selected Federal Government Stakeholders in US Tax System

........................ 20

Table 2

- 6 Selected Legislation Affecting the IRS and/or E

- file (1986

– 2008)

.................... 22

Table 2

- 7 Selected Events in the History of IRS E

- file (1986

– 2008)

................................ .. 24

Table 3

- 1 Historic Filing of Individual Tax Returns (1990

– 2008)

................................ ...... 28

Table 3

- 2 Projected Filing of Individual Tax Returns (as of December 2007)

................... 29

Table 4

- 1 Five Filing Characteristics by Income and Generational Segment (as of TY2003)

................................ ................................ ................................ ...................... 39

Table 4

- 2 Attributes of E

- file Usage Segments (as of 2004)

................................ ............. 41

Table 4

- 3 Attributes of Filers Based on Return Complexity and Use of Preparer (as of 2005)

................................ ................................ ................................ ............. 42

Table 4

- 4 E

- file Usage Rates Among Technology Acceptance Segments (as of 2003)

..... 43

Table 5

- 1 E

- file Awareness by Technology Acceptance Segment (as of 2003)

................. 50

Table 5

- 2 Importance of Security (as of 2005)

................................ ................................ . 54

Table 5

- 3 E

- file Attitudes of Non

- Users (as of 2005)

................................ ........................ 62

Table 5

- 4 Taxpayer Reasons for Their Choice of Return Preparation Options (as of 2007)

................................ ................................ ................................ ...................... 63

Table 6

- 1 Pa id

- Preparer Returns by Complexity and Filing Method (as of 2006)

............ 70

Table 6

- 2 Self

- Prepared Returns by Complexity and Filing Method (as of 2006)

............. 70

Table 6

- 3 Perceived Benefits of e

- file by Preparer Segment (as of 2003)

........................ 75

Table 7

- 1 State Approaches to Electronic Filing (as of 2005)

................................ ........... 78

Table 7

- 2 State Participation in Filing Programs (as of 2008)

................................ ........... 80

Table 7

- 3 Growth of State Electronic Filing (as of 2005)

................................ .................. 85

Table 8

- 1 Summary of International Electro nic Filing Efforts

................................ ........... 88

Table 8

- 2 Summary of Individual Electronic Filing Adoption by Selected Country

.......... 91

Table 8

- 3 Internet Usage in the United States, the United Kingdom, Canada, and Australia (as of 2007)

................................ ................................ .................... 92

Table 8

- 4 Percentage of Preparer

- Filed Returns for Selected Countries

......................... 92

Table 8

- 5 Tax System Complexity for Selected Countries (as of 2006)

............................ 9 3Advancing E

- file Study Phase 1 Report viii List of Tables Table 8

- 6 Free Electro nic Tax Filing Services Offered by Canada Revenue Agency

........ 100

Table 8

- 7 Canadian Filing Methods (as of 2006)

................................ ............................ 104

Table 8

- 8 Canadian Revenue Agency Electronic Filing Statistics (2006

– 2007)

............... 105

Table 8

- 9 Summary of Australian Filing Methods

................................ .......................... 107

Table 9

- 1 Summary of Option Categories

................................ ................................ ...... 114

Table 9

- 2 Summary of Options and Estimated Contribution to the 80% E

- file Goal

...... 115

Table 10

- 1 Free File Adoption (2003

– 2007 )

................................ ................................ ... 125

Table 10

- 2 Potential Contribution of Non

- Monetary Incentives to 80% E

- file Goal

...... 130

Table 10

- 3 Suggestions from V

- Coding Preparers for Making E

- file Implementation Easier (as of 2005)

................................ ................................ ................................ . 132

Table 11

- 1 Thresholds for States with Preparer Mandates (as of PY2008)

.................... 144

Table 11

- 2 Potential Effect of Various Paid Preparer Thresholds on E

- file Rate (PY2006)

................................ ................................ ................................ .................... 149

Table 11

- 3 E

- filing Growth i n States with Mandates Compared with US Averages (as of 2006)

................................ ................................ ................................ ........... 152

Table 12

- 1 Overview of I

- File System Features for Eight States (as of 2006)

................. 159

Table 12

- 2 I

- File Adoption Rates for Eight States (as of 2006)

................................ ....... 161

Table 14

- 1 State Exp eriences with 2D Barcodes and Return Processing Methods (as of 2006)

................................ ................................ ................................ ........... 187

Table 14

- 2 Percentage of Paper Returns by Preparation Method (as of TY2006)

......... 189

Table 14

- 3 Downloads of 1040/A/EZ from IRS.gov (as of TY2006)

................................ 190

Table 14

- 4 First Pass Accuracy Rates for 2D Barcodes and Character Recognition

....... 192

Table 15

- 1 Research Opportunities for Taxpayer and Preparer Motivators

.................. 201

Table 15

- 2 Research Opportunities for Refining Target Populations for Options

.......... 202

Table 15

- 3 Research Opportunities for State and International Experiences

................ 203

Table 15

- 4 Research Opportunities for Option

- Specific Considerat ions

........................ 204Advancing E

- file Study Phase 1 Report 1 Introduction 

# 1. 

# Introduction

The Internal Revenue Service ( IRS ) Advancing E

- f

ile Study Phase 1 Report is a major effort to collect, synthesize, and analyze all substantial data in one document on the IRS e
- file program

— including its history, stakeholders, taxpayer and preparer behaviors, related programs and efforts, and options for e xpansion

— to help the IRS validate and launch future studies, research
, and other activities to meet the c ongressionally

- set goal of an 80% e
- file
rate. As Phase 1 of a multiphased approac h for addressing this goal, this report does not include recommendations on selecting or implementing specific options for advancing e
- file but lays the foundation for doing so in future phases. During this phase, the following themes were identified and m erit keeping in mind as the reader progresses through the report:
**There is no silver bullet** . An advancing e
- file strategy must take into consideration many complex factors, and there is no quick fix or any single option approach for the IRS to convert rem aining paper filers. **The IRS cannot meet the goal without help**  . The multifaceted landscape of the US tax system, by its very nature, requires that the IRS rely on strong partnerships with third party partners, stakeholders, and Congress to advance e
- file

. **T echnology is secondary to motivating behavior**  . Even the most innovative technology will not help the IRS achieve the 80% e
- file goal unless it is grounded in a thorough understanding of the intricacies of filer behavior

— their motivators, concerns
, and relative position s on the technology adoption curve.



### 1.1 

## Purpose of **This Report** 
Through this advancing e

- file report, the IRS is taking the first step toward defining a comprehensive strategy and set of actions to achieve the 80% e

- file goal established i n the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98) 1 . The primary purpose of this report is to gather substantiated information related to e

- fil ing in one place and analyze it to ascertain the facts and considerations that the IRS, its third party partners, and the US Congress must address to achieve the 80% e

- file goal.

1 The 80% e

- file goal derives from Title II, Section 2001 of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98): (a) IN GENE RAL.

— It is the policy of Congress that

— (1) paperless filing should be the preferred and most convenient means of filing Federal tax and information

returns, (2) it should be the goal of the Internal Revenue Service to have at least 80 % of all such returns filed

electronically by the year 2007, and (3) the Internal Revenue Service should cooperate with and encourage the private sector by encouraging

competition to increase electronic filing of such returns. 

### This report synthesizes existing information on factors influencing electronic filing of individual tax returns. It provides the foundation for future IRS efforts to evaluate, plan, and execute solutions to achieve the 80% e
- file goal set by Congress. **Contents of Chapter 1:**
1.1 Purpose of This Report
1.2 Origin and Approach
1.3 Scope and Organization
1.4 ConventionsAdvancing E

- file Study Phase 1 Report 2 Introduction This report also serves as input to future efforts to specify, evaluate, plan, and execute actions to meet the 80% e

- file goal. The question of how to achieve the 8 0% e

- file goal has been a subject of much discussion and debate. Like any issue with diverse constituents, various opinions and perspectives must be considered before any decisions are made about where to focus attention and scarce resources. While each po int of view seems reasonable on its own, looking at the ideas and opinions on the whole provides the best means of evaluating the relative impacts and merits of each. The IRS and its third party partners have made significant progress to date

— 6 0 % of indi vidual tax returns were e

- filed during the 2008
tax filing season 2 . The remaining 40 % highlights the need to explore multiple options to reach the 80% e

- file goal.



### 1.2 

## Origin and Approach

This report was prepared by T he MITRE Corporat ion , a not

- for

- profit organization that operates three Federally Funded Research and Development Center s (FFRDC)
, one of which

— the Center for Enterprise Modernization (CEM)

— serves the IRS. The report was prepared pursuant to guidelines and spec ifications provided by the IRS Office of Electronic Tax Administration and Refundable Credits (ETARC). This work was performed under Contract TIRNO

- 99

- D

- 00005, Task Order 0163
, from 17 January 2008 to 30 March 2008 , and Task Order 0206 from 31 March 2008 to 6 June 2008.

In addition to being driven by the IRS’s desire to meet the 80% e

- file goal and to improve taxpayer service overall, the report results from the specific interest of members of Congress and other stakeholders in increasing and improving electronic service for filing
tax returns. The report originated as a kind of meta

- analysis (review and synthesis) of existing information on e

- file . By design, original research was out of scope for this report, though it was agreed that gaps in available information would be noted.

To c onduct the analysis needed for this foundational first phase, the approach involved two related and overlapping workstreams: (1) identify, obtain, and synthesize existing information on taxpayer and preparer filing behavior and characteristics and (2) iden tify, obtain, and synthesize existing information on potential options to reach the 80% e

- file goal. The IRS requested that the report outline be socialized with numerous stakeholder groups internal and external to the IRS. Meetings were held with more than a dozen stakeholders, and more than 500 source documents provided information for the report

. All of these are noted in the back matter of the report. Since the intent of this phase was to survey currently available information, no original research was conducted. However, the final Chapter identifies gaps in available information and suggests ar eas where new research should be considered in future phases.



### 1.3 

## Scope **and Organization**

This report contains a synthesis of information from existing documents, reports, and studies and an assessment of the implications of potential e

- filing options . To prov ide a solid foundation for future study and decision

- making, the existing research results and study findings were combined into various topic areas:

2 IRS (2008) IRS e

- file Up Sharply in 2008Advancing E

- file Study Phase 1 Report 3 Introduction How e

- filing works, e

- file stakeholders, and the IRS relationship with third parties

. IRS progress toward the 80% e

- file goal and the effect of t echnology adoption

on e

- file (including a comparison of the IRS and banking industry experienc es in promoting online service). Taxpayer and preparer perceptions of e

- file and motivations to file electronically. Experi ences of State s and foreign countrie s on electronic filing of taxes. Information regarding options for increasing the electronic filing of taxes
, including offering incentives, setting mandates for specific groups of paid preparers, developing electronic f i ling systems (e.g., direct file ), and implementing ways to automate transfer of information from paper to electronic format (e.g., 2D barcodes).
The report concludes with a high

- level discussion of research gaps noted through the course of this study. The IRS and its key stakeholders should work together to address these additional research opportunities prior to developing detailed recommendations for addressing the 80% e

- file goal. This report contains 15 Chapters along with an acronym list, glossary, and list of references as described in Table 1

- 1

.
Table 1

- 1 Organization of This Report

Chapter Number and Title Contents

1. Introduction Defines this report’s p urpose, scope, and organization. Also explains the report’s origin and approach, and introduces conventions used in this report.

2. E

- file Goal, Stakeholders
, and History E stablishes the basis for the 80% e

- file goal and its interpretations, defines the US tax system and its stakeholders
, including the roles of third parties and State s , and pro vides a synopsis of IRS e

- file since it began in 1986.

3. IRS E

- file and Technology Adoption Introduces the concept of techn ology adoption as a driving force behind e

- file (and other technology) use, p rovides historical and projected IRS e

- file statistics, and compares e

file to online banking and online bill pay

. 4. Introduction to Research on Filer Motivators and Concerns Notes IRS research related to filer motivators and concerns and introduces studies that will be discussed by topic in Chapters 5 and 6 and referenced throughout this report.

5. Taxpayer Motivators and Inhibitors Topically s ynthesizes information that charact erizes taxpayers and their motivations to file electronically.

6. Preparer Motivators and Inhibitors Topically s ynthesizes information that characterizes preparer s and their motivations to file electronically.

7. State Electronic Filing Experiences Summarizes the various electronic filing efforts State s have used and provides statistics on their usage.

8. International Electronic Filing Experiences Summarizes the various electronic filing efforts of foreign countries ; provides a comparison of the Unite d States, United Kingdom, Canada, and Australia ; and describes these foreign electronic filing efforts in case studies.Advancing E

- file Study Phase 1 Report 4 Introduction Chapter Number and Title Contents

9. Introduction to Options Chapters Describes how Chapters 2 through 8 relate to the upcoming option Chapter s (10 through 14) , explains the structure of the option Chapter s, and summarizes the options for quick reference.

10. Incentive

- Based E

- filing Options Defines incentives for purposes of this report, provides a history of incentive

- based e

- filing at the IRS, presents related S tate experiences, and proposes incentive

- based options to advance e

- file (including for each option the targeted audience, potential contribution to the 80% e

- file goal, and considerations )

. 11. Mandate

- Based E

- filing Options Defines mandates for purposes of this report, provides a history of mandate

- based e

- filing at the IRS, presents related State experiences, and proposes mandate

- based options to advance e

- file (including for each option the targeted audience, potential cont ribution to the 80% e

- file goal, and considerations)

. 12. Internet

- Based E

- filing Options Defines Internet filing for purposes of this report, provides a history of Internet

- based e

- filing at the IRS, presents related State experiences, and proposes incentive

- based options to advance e

- file (including for each option the targeted audience, potential contribution to the 80% e

- file goal, and considerations)

. 13. Phone

- Based E

- filing Options Defines telephone filing for purposes of this report, provides

a history of phone

- based e

- filing at the IRS, presents related State experiences, and proposes phone

- based options to advance e

- file (including for each option the targeted audience, potential contribution to the 80% e

- file goal, and considerations)

. 14. Paper

- Based Filing Options Defines paper filing for purposes of this report, provides a history of paper

- based filing at the IRS, presents related State experiences, and proposes options to modernize processing of paper returns (including for each option the targeted audience, potential contribution to the 80% e

- file goal, and considerations)

. 15. Other Options and Research Opportunities Identifies other opt ions for possible analysis/consideration in the future (b y design, these options do not have the depth of analysis or consideration as those in preceding Chapter s )

. Notes gaps identified from the review of current research and information. Appendices/Back Matter Includes a list of contributors, meanings of acronyms, a glossary, and a list of references.

By s ynthesizing existing information in the preceding areas, this report represents the first step of an iterativ e process to develop a comprehensive strategy to advance e

- file

. This report

— by design

— does not include the in

- depth analysis (e.g., systems engineering feasibility studies, detailed cost/benefit analysis , security/privacy risk analysis ) necessary to draw conclusions and formulate concret e recommendations

. Instead, the overview and options discussed herein provide a framework for crafting such recommendations in the future.Advancing E

- file Study Phase 1 Report 5 Introduction Furthermore, this report is by definition limited in scope to the goal of advancing e

- file

. O ther objectives

— such as improving IRS taxpayer service

— are only discussed to the extent that they overlap with advancing e

- file

. Such goals, along with clear analysis of costs and benefits from a macroeconomic perspective, warrant close consideration and balance as the IRS p roceeds to develop an e

- file strategy

.



### 1.4 

## Conventions

This Section contains conventions used in this report and is intended to make the navigation and understanding of this report easier. Reading This Report

To the fullest extent possible, this report uses a consistent organizational and visual design for presenting information. Figure 1

- 1 describes the use of Headings, Chapter

specific Tables of Contents, informational and thematic callouts, and footnotes in this report.

Figure 1

- 1 Navigational and Informational Features of this Report

Data

To the fullest extent possible, this report us es the most current authoritative data available for a given subject. Unless noted otherwise, t he inclusion of slightly older data for a given subject may be because: i t was the most current authoritative data available (authoritative data is preferred to draft, unofficial, projected, proprietary, or estimated data) ; and/or i t was the most current complete data set available (complete data

— a

Footnotes provide concise citations (full bibliographic details are in the References) and notes Larger, decorated callouts highlight a notable finding, fact, or theme Smaller callouts provide

cross

- references and additional information Section headings are hierarchically numbered

for quick reference Chapter summary in blue provides overview and key

themes to bear in mind

Contents callout lists major

sections in this ChapterAdvancing E

- file Study Phase 1 Report 6 Introduction single source and derivation

— for a given topic is preferred to piecing separately sourced/derived data together t o form a point)

. Dates Dates are Calendar Year (CY) unless otherwise specified. Note that the Tax Year (TY) for individual returns is behind the CY by a year (TY = CY

– 1). For example, during the 2008 filing season (e.g., 1 January

– 15 April 2008) , individuals filed their tax return s for TY2007

. As returns are received, they are processed; the Processing Year (PY) for individual returns is the same as the CY (PY = CY) . Note that a PY may include a small proportion of returns beyond those from the m ost recent tax year (e.g., amended returns from 2 or more tax years ago)

. Use of Footnotes and Citations Wherever possible, citations to the source materials are provided in footnotes for purposes of information sharing and traceability . This document uses two main conventions regarding citations:
For a sentence containing a fact, quote, or idea that should and can be attributed to a source, a footnote is included just inside the period.

o Example: This sentence contains a quote that is derived from the foot note indicated “ at its end ” 1

.
o Example: This sentence illustrates how the first time a Figure or Table is referenced, the citation and/or data source for that Figure or Table is included in its footnote 2

. For a paragraph that derives from the same source, a footnote is included after the period of the last sentence in a paragraph and before the colon preceding a bulleted list . That footnote applies to all content in that paragraph or list unless modified by a sentence

- level citation as described above.

o Example: This paragraph has three sentences, the first of which contains a fact or idea from a specific source. This sentence in the same paragraph also contains a finding from that same source that should be cited. This final sentence also comes from the same source. 2

Nomenclature “IRS” refers to the US Department of the Treasury Internal Revenue Service.

“ Returns ” and “ tax returns ” refer to Federal individual income tax returns unless specified otherwise.

The terms “ e

- file
, ” “ e

- filed
, ” “ e

- file r, ” “ e

- file rs , ” and “ e

- filing ” all refer to t he IRS

- branded electronic filing program.

“ V

- Coder s ” prepare their return s o n a computer but file on paper.

“ Preparers ” are person s who assist taxpayer s in completing their tax return s

. References to State s as a group are not exclusive of the District of Columbia, because its electronic filing programs “operate exactly like those in the State s” 3

.

3 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 1Advancing E

- file Study Phase 1 Report 7 E

- file Goal, Stakeholders, and History 

# 2. 

# E

- file **Goal, Stakeholders ,**  **and History**

This Chapter provides the background necessary to place e
- filing and the 80% e
- file goal in a broader context. Laying this foundation includes developing an understanding of the goal itself and then providing an overview of how e

- file works today, who the key stakeholders involved in the e

- filing process are , and what steps the IRS has a lready made toward meeting the 80% e
- file goal stipulated by RRA98. Themes identified in this Chapter include the following : The US tax system is complex and encompasses many stakeholders. All stakeholders working together

— including State s and industry

— have played a pivotal role in the substantial progress on e
- file to date.

For the IRS to achieve the 80% e
- file goal
, strong partnerships between the IRS and its stakeholders are require d . The goal cannot be achieved without stakeholder engagement.



### 2.1 

## 80% E

- fil e **Goal**

**— Scope, Value**  **, and Progress** 

There is consensus that there is value in increasing the number of individual income tax returns filed electronically

— value to the IRS and ultimately to the US taxpayer. Electronic filing offers financial savings and overall efficiencies to the IRS. A paper return costs $2.52 more to process than one filed electronically ( about eight times more ) 4

. With fewer pape r returns to process, the IRS used 36% less staff in 2006 than in 1999 and estimates 2006 savings in salary, benefits
, and overtime of $78 million. Closing processing centers during 2007 resulted in cost savings of approximately $24.9 million 5

. Taxpayers profit from a more efficient IRS as well as from the benefits of electronic filing itself, including convenience, speed
, and accuracy. Interpretations of the 80% **E**

**- fil**  **e** Goal

The 80% e

- file goal derives from a portion of RRA98 that stipulates:
Paperless filing should be the preferred and most convenient means of f iling Federal tax and information returns, [and] it should be the goal of the Internal Revenue Service to have at least 80 percent of all such returns filed electronically by the year 2007. 6
The actual scope of this goal, however, is open to a number of i nterpretations. Does 80% refer to the percentage of tax and information returns combined? Or does the goal call for 80% of information returns and 80% of tax returns separately? Does it include both business and individual returns or is the focus solely on individual income tax

4 IRS (2005) Summary for Weighted Averages of the Paper Form 1040, 1040A, 1040 EZ and e

- File Form 1040,

1040A, & 1040 EZ for Submissions Processing Costs Labor costs (FY 2005 IRM 3.30.10)

5 Government Accountability Office (2007) Tax Administration: 2007 Filing Season Continues Trend of

Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 11
6 Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98) For more information about e
- file benefits and filers’ perceptions of the m , see Chapters 4, 5, and 6

.



### The scope of the 80% e
- file goal from RRA98 has various interpretations . F or t he purposes of this report
, it refers to e
- filing individual 1040, 1040A
, and 1040EZ returns and related schedules

. **Contents of Chapter 2**  **:** 2.1 80% E

- file Goal

— Scope, Value
, and Progress
2.2 US Tax System Stakeholders 2.2.1 Relationship with Third Party Partners 2.2.2 Relationship with States 2.2.3 Relationship with Federal Government Organizations
2.3 History of E

- file 2.3.1 E

- file TimelineAdvancing E

- file Study Phase 1 Report 8 E

- file Goal, Stakeholders, and History returns? This Section addresses selected interpretations, provides the interpretation used by this report, and notes the benefit

— regardless of specific interpretation

— of the goal as a motivator.

Interest ingly, as of 2006, combining information returns with tax returns

— for individuals, businesses, and all other filing entities

— yields an overall e

- file rate of 88% 7

. Key stakeholders have offered varying interpretations of the 80% e

- file goal : While the legislation refers to the filing of both tax and information returns, the
sta ff of the Joint Committee on Taxation, in its report General Explanation of Tax Legislation Enacted in 1998 , referred only to tax returns: “The Act states that the policy of Congress is to promote paperless filing, with a long range goal of providing for t he filing of at least 80% of all tax returns in electronic form by the year 2007” 8

. The Electronic Tax Administration Advisory Committee’s (ETAAC) 2007 Annual Report to Congress seems to interpret the goal more broadly. “In 1998 Congress established a goal for the IRS that, by 2007, 80% of all returns are filed electronically” [emphasis ETAAC’s ] 9 . The emphasis on the word “all” implies that the goal includes both tax and informat ion returns. The IRS Oversight Board in its Electronic Filing 2007 : Annual Report to Congress describes the goal with reference to individual returns, stating that its “achievement...has been commonly measured by the number of individual tax returns filed el ectronically” 10

. In the same report, however, the Board recommends extending the goal to 2012 and expanding the scope of the 80%

e

-

file goal to include “individuals, business es and tax exempt organizations ” 11

. For the purpose s of this report, the goal of 80 % refers to the electronic filing of Federal individual income tax returns using 1040, 1040A, or 1040EZ and related schedules. This report’s use of the term “electronic filing” or “e

- filing” refers to the process of submitting a tax return from a taxpayer/ preparer to a tax

- collecting entity in which the return information is transmitted digitally. However, other approaches to filing, such as on paper or by telephone, which may not intuitively be considered electronic filing, can achieve comparable benefits in terms of convenience to the taxpayer and reduced cost and increased efficiency for the IRS. In its November 2007 Tax Administration report, the Government Accountability Office ( GAO ) refers to bar coding as “another option to increase electronic filing” 12 . Because of the ability to achieve benefits similar to those of electronic filing, this report includes a review of a wide range of approaches
, including
paper

- based methods along with the more conventional incentives, mandates, and Internet

- based and ph one

- based options.

7 IRS (2007) Calendar Year Projections of Information and Withholding Documents (2007

- 2015) pp. 3

- 5; IRS

(2007) Calendar Year Return Projections for the United States and IRS Campuses CY 2007

- 2014 pp. 8

- 9
8 Joint Committee on Taxation (1998) General Explanation of Tax Le gislation Enacted in 1998
9 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 1
10 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 5
11 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 24
12 Government Accountability Office (2007) Tax Administration: 2007 Filing Season Continues Tre nd of

Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 15 

### Interestingly, as of 2006, combining information returns with tax returns

— for indiv iduals
, businesses
, and all other filing entities

— yields an overall e

- file rate of 88%

.Advancing E

- file Study Phase 1 Report 9 E

- file Goal, Stakeholders, and History Progress to Date Regardless of its specific scope interpretation, the 80% e

- file goal has been effective in focusing attention on increasing electronic filing. Figure 2

- 1 illustrates Federal individual income tax return preparation and filing figures as of TY 2006, the most recent data available 13

.

Figure 2

- 1 Federal Individual Income Tax Return Preparation and Filing Data ( as of TY 2006)
Whether returns are initiated by taxpayers or preparers, there are a number of ways that tax returns can be prepared and filed using paper or electronic means. Figure 2

- 1 simplifies the complex array of choices in to three main combina tions of preparation and filing of individual tax returns:
Prepared on a computer and filed electronically

— Regarding the 80% e

- file goal , the IRS must maintain, if not grow, this segment. Prepared on a computer , then printed and filed on paper

— The IRS calls these types of filers V

- C oders 14 . R egarding the 80% e

- file goal , the IRS seeks to motivate this segment to transition to e

- file

. Prepared on paper and filed on paper

— Regarding the 80% e

- file goal , the IRS must convince this population to transition to e

- file (as well as automate the
p rocessing of the residual paper).
Given the likelihood that the last category, returns prepared and filed on paper, will never completely disappear, it is worth considering whether the 80% e

- file goal should be revised to explicitly include those options t hat achieve benefits similar to e

- filing or whether including non

- electronic options would detract from commitment to the goal. In his report funded by the IBM Center for the Business of Government, Steven Holden, a former official in the Electronic Tax Administration ( ETA ) at the IRS, noted that the 80% e

- file goal as currently defined “was likely never attainable ... [ because] ...the proportion of users who will not adopt an innovative technology, especially one involving the transmission of their tax data electronically to the IRS, surely exceeds 20%” 15 . The IRS Oversight Board is more optimistic, although cautiously so. According to

13 IRS (2006) Tax Year 2006 Taxpayer Usage Study

14 The term V

- Coders originates from the submission (tax return) processing practice of marking returns with

return processing codes based on characteristics of the return. The l etter V was associated with computer

generated paper returns because it was the next unused letter. See ( IRS (2008) Internal Revenue Manual

- 3.11.3 Individual Income Tax Returns (Cont. 10): Exhibit 3.11 .3

- 3 Return Processing Codes ).
15 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 26 

### It is desirable to convert V

Coders

— those who prepare their return s on a computer but file on paper

— to e
- filing since most of the work has already been done: the data is already digital.Advancing E

- file Study Phase 1 Report 10 E

- file Goal, Stakeholders, and History its 2007 report, “given current progress and strategic planning, the Board believes that the IRS can meet an 80 % e

- file goal by 2012

— but will need the help of the professional tax community and the Congress to do so” 16

.



### 2.2 

## US Tax System **Stakeholders**

The IRS Strategic Plan 2005

– 2009 describes the IRS vision as one that “anticipates a dynamic world filled with new dema nds for service” 17 . In laying out this vision, the IRS also offers a glimpse of the tax landscape within which the IRS strives to continue to provide top

- quality services to America’s taxpayers:
The IRS must be prepared to respond to an increasing and more demanding population, a more global and multi

- lingual environment and an increasing number of taxpayers with complex financial holdings and the means and motive to resist the payment of taxes. In addition, we face frequent tax law changes, more numerous a nd complex tax schemes and, internally, an aging IRS workforce. 18
It is within this context that the IRS faces the challenge of meeting the 80% e

- file goal for electronic filing of individual tax returns.

This Section takes a closer look at this landscape, focusing particularly on the diverse group of stakeholders, including professional, commercial
, and government entities that interact with the IRS and play an important role in the IRS’ s delivery of quality services such as electronic filing. The Section l ooks more closely at three key relationships

— with a wide range of third party partners, with the 42 State s (including the District of Columbia) that administer personal State income taxes, and with other government entities, such as those with legislative and oversight roles. Each of these stakeholders brings a varied set of perspectives and interests that contribute to the overall makeup of the US tax system

.

**2.2.1** 

## Relationship with Third Party Partners
With the passage of RRA98, Congress issued a call for moderniz ation at the IRS, not only establishing the 80% e

- file goal, but also legislating a major restructuring of the organization. According to the IRS, this legislation “prompted the most comprehensive reorganization and modernization of IRS in nearly half a ce ntury,” in which it restructured itself to “closely resemble the private sector model of organizing around customers with similar needs” 19

. For all this internal restructuring, however, the idea of a third party model is not a new concept as it relates to IRS interactions with its various partners in the private sector, community organizations
, and other government entities (especially the State s). In general, the IRS tends to operate on this model, creating the forms that tell people what information is ne eded and in what format to enable them to comply with the tax code
, and then allowing people to comply as they see fit (e.g., on their own, with third party assistance, with third party tools )

.

16 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 6
17 IRS (2004) IRS Strategic Plan 2005

- 2009 p. 4
18 IRS (2004) IRS Strategic Plan 2005

- 2009 p. 4
19 IRS (2008) Today's IRS Organization 

### The complexity of the tax code a nd the use of third parties to help prepare and file taxes have grown in parallel. In 2005, 85% of individual returns were filed with assistance from third parties (professionals and software).Advancing E

- file Study Phase 1 Report 11 E

- file Goal, Stakeholders, and History As the IRS tax code continues to grow in complexity, the role of third part ie s also grows

. In 2005, 58% of individual tax returns were filed by third parties (paid preparers ) . This number increases to 85% if calculations include the number of returns prepared by individuals using third party

– developed tax preparatio n software 20

. Another IRS report tracking returns with a paid preparer signature shows growth over time in use of a preparer (as well as growth in paid preparers’ use of a computer to prepare return s ), as summarized in Table 2

- 1 21

.
Table 2

- 1 Taxpayer Use of Paid Preparer s (1997

– 2006)

T ax Y ear Paid Preparer Returns ( % of All Returns) Computer

- prepared Returns (% of Paid Preparer Returns)

1997 54.68% 86.79%

1998 56.21% 93.14%

1999 56.19% 95.03%

2000 57.51% 96.31%

2001 59.43% 97.03%

2002 60.29% 96.48%

2003 61.98% 97.36%

2004 60.92% 98.03%

2005 62.00% 98.45%

2006 62.79% 98.68%
The notion that taxpayers feel the need for help from the private sector has been a point of contention in discussions of the tax process, but the fact remains that third party partners are a part of the Federal t ax s ystem , and research suggest s that these partners also add value to the overall tax process 22

.

20 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 27
21 IRS (1997) Tax Year 1997 Taxpayer Usage Study; IRS (1998) Tax Year 1998 Taxpay er Usage Study; IRS (1999)

Tax Year 1999 Taxpayer Usage Study; IRS (2000) Tax Year 2000 Taxpayer Usage Study; IRS (2001) Tax Year 2001 Taxpayer Usage Study; IRS (2002) Tax Year 2002 Taxpayer Usage Study; IRS (2003) Tax Year 2003 Taxpayer Usage Study; IRS ( 2004) Tax Year 2004 Taxpayer Usage Study; IRS (2005) Tax Year 2005 Taxpayer Usage Study; IRS (2006) Tax Year 2006 Taxpayer Usage Study
22 For example, research suggests that taxpayers who use third party representation to deal with the IRS for

Earned Income Credit (EIC) cases are more likely to have favorable outcomes. See ( National Taxpayer Advocate (2007) 2007 Annual Report to Congress, Volume Two; Olson, N. E. (2008) The 2008 Tax Return Filing Season, IRS Operati ons, FY 2009 Budget Proposals, and The National Taxpayer Advocate’s 2007 Annual Report to Congress ): Taxpayers who use representatives are nearly twice as likely to be found eligible for the EIC as compared to taxpayers who are not represented during t he audit process.
Over 40 % of all taxpayers with representatives emerged from their audit with their full EIC intact, whereas less than one in four taxpayers without a representative kept their full EIC. The taxpayers without representation were more likel y to end up owing additional tax than taxpayers with representation (41 % versus 23 %).Advancing E

- file Study Phase 1 Report 12 E

- file Goal, Stakeholders, and History **2.2.1.1** 

### Third Parties and E

- filing **: Overview and History**
When it comes to electronically filing individual tax returns with the Federal government, third parties are even more heavily involved than with handling paper. The current environment requires third party involvement with the electronic transmission
proc ess, meaning third party partners play key roles in the process from start (preparation) to finish (filing).
Figure 2

- 2 shows how this works in its most simplified for m. An individual taxpayer uses a preparer , who in turn uses tax software to prepare State and Federal tax forms, or the taxpayer use s tax software to self

- prepare the return s

. The returns are then submitted electronically to a transmitter. The transmitter then sends both returns to the IRS if the State participates in the Fed eral /State (Fed/State) program or sends the Federal return to the IRS and the State return to the State tax authority.

Figure 2

- 2 Roles Performed by Key Stakeholders in Electronic Filing
Here, “transmitter” generically refers to any third party entity that sends returns to the IRS or State s after the return s are prepared. In addition, other third parties may be involved in this process, including Electronic Return Originators (ERO) , which originate the electronic submission of income tax returns to the transmitters, and Intermediate Service Provid ers , which process the tax return information and either forward the information to a transmitter or send the information back to the ERO. To provide these services, t ransmitters, EROs
, and Intermediate Service Providers must complete an application with t he IRS and be registered as authorized IRS e

- file providers

. Other authorized IRS e

- file providers include software developers and reporting agents. 23

23 IRS (2007) Become an Authorized e

- file Provider 

### Third party partners perform key roles in the e
filing process from start to finish.

For more information on key stakeholders’ roles, see Section 2.2.1.2 or the Glossary.Advancing E

- file Study Phase 1 Report 13 E

- file Goal, Stakeholders, and History Today’s third party involvement in electronic filing is shaped by the fact that the demand for e

- filing originated in the preparer community and prompted the development of partnerships between the IRS and preparers. When the electronic filing of tax returns began in 1986, it started with these partn erships. The early program consisted of tax returns e

- filed by a handful of preparers through third party transmitters. At that time, the IRS identified data standards and transmission standards and created a gateway for receiving batch transmissions of re turns, while private sector partners created the external infrastructure consisting of data entry software, origination networks for sending return records to transmitters, and transmission centers where returns were formatted, bundled
, and sent to the IRS in batches over telephone lines. Transmitters also received the acknowledgments from the IRS and distributed the results back to the ERO s. As the program developed, third party roles and offerings grew. Large commercial preparers, commercial software deve lopers
, and the banking industry saw opportunities to create new filing products and introduced a new level of competition to the business of helping taxpayers. Concurrently with individual electronic filing, electronic filing for business started in 1987 using the same third party business model. The IRS has leveraged its relationship with the private sector to advance electronic filing. One of the key strategies in the 2005 document, IRS e

- Strategy for Growth , was to “encourage private sector innovation and competition” 24 . Indeed, the subtitle of this e

Strategy is Expanding e

- Government for Taxpayers and Their Representatives . In discussing the ETA and its interactions with third parties, the IBM Center for the Business of Government study noted:
By worki ng effectively with external stakeholders, the ETA was able to create a powerful “ innovation directive ” for e

- file . It may be somewhat rare among Federal agencies, but the alignment of stakeholders and the IRS to increase e

file adoption was a direct result of the business opportunity from increased e

filing for the stakeholders. The IRS realized that it could use the mutual interest in increasing e

- file adoption to all parties’ benefit instead of working against the stakeholders just because they happened to make money from e

file

. 25
Congress seems to recognize the relationship between the IRS and its third party partners and the value of leveraging that relatio nship in the advancement of e

- filing in the future. As part of the RRA98 description of the 80% e

- file goal , Congress explicitly called on the IRS to “cooperate with and encourage the private sector by encouraging competition to increase electronic filing” 26

. This relationship between third party partners and the IRS, aimed at providing a full range of e

- filing services to taxpayers, is explored as a key theme throughout the rest of this document

— particularly in Chapter 4
, which looks at how the IRS motiva tes and encourages third party partners, and in later Chapters
, which explore, among other considerations, options for the IRS to draw on these partnerships to further advance e

file

. To provide context for continued discussion throughout the remainder of the

24 IRS (2005) IRS e

- Strategy for Growth: Expanding e

- Government for Taxpayers and Their Representatives p. 9
25 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 27
26 Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98) 

### Third party involvement in

e
- file has its roots in the early days of the program and has strengthened as the program has grown. RRA98 calls for continued IRS cooperation with these partners and encourages competition to drive e
- filing volumes.

For more information on the history of e
- filing , see Section 2.3.Advancing E

- file Study Phase 1 Report 14 E

- file Goal, Stakeholders, and History report, the following Section s provide detailed description s of each third party role and the stakeholders fulfilling those roles.

**2.2.1.2** 

### Detailed View of Stakeholders in the Third Party Model
The terms used in this report to describe the categories of third parties have a natural hierarchy in that some terms are broader (more inclusive) than others. Figure 2

- 3 shows the relationship s among the terms used in this report . Note that some organizations may serve more than one role (e.g., H&R Block may function both as a commerci al preparer and a transmitte r).

Figure 2

- 3 Hierarchical Relationship Among Definitions of Third Parties
Definitions for each of these terms are provided in Table 2

- 2 for the reader’s convenience (and appear the Glossary located in the back matter of this report )

.
Table 2

- 2 Definition of Terms Used in Third Party Model

Term Definition Third Party An entity external to the taxpayer

- IRS relationship that helps taxpayer s prepare, file, and/or transmit their return s . Includes preparers, return preparation software vendors, and transmitters.
Preparer Any third party that helps complete a return. I ncludes commercial preparers, practitioners, and community

- based preparers

. Return Preparation Software Vendor An organization that sells self

- assisted software products for tax preparation for individuals and often preparers. These vendors also may provide similar products to certain taxpayer segments for little or no cost.

Transmitter An entity that send s income tax data to the IRS once the return is prepared. Transmitters must have software and hardware that allow them to directly

connec t with IRS computers. Paid Preparer A subset of “p reparer ” that excludes community

- based preparers. Includes practitioners
, and commercial preparers. Community

based Preparer An individual who provides free tax preparation (and filing) services to taxpayers at designated support locations through IRS

- sponsored programs such as Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), the Tax Forms and Outlet Program (TFOP), a nd Low Income Taxpayer Clinics (LITC). Third Party

Preparer Transmitter

Paid Preparer Return Preparation

Software Vendor Community

Based Preparer Commercial

Preparer Practitioner 

### Some tax businesses may fall into more than one stakeholder category (e.g., EROs may be preparers and transmitters)

.Advancing E

- file Study Phase 1 Report 15 E

- file Goal, Stakeholders, and History Term Definition

Practitioner An individual who is paid by taxpayer s to prepare (and file) their return s , is governed by Circular 230, and is authorized to represent taxpayers legally before the IRS. Practitioners include attorneys, certified public accountants, enrolled agents, and enrolled actuaries.
Commercial Preparer An individual who is paid by taxpayer s to prepare (and file) their return s but is not a practitioner. Similar to practitioners
, commercial preparers may be employee s of corporations
, members of partnerships, or self

- employed individuals. Commercial p reparers are not Electronic Return Originators (ERO) but may be member s of an ERO firm.

Table 2

- 3 adds a layer of detail to the roles described in the model above, provi di ng a list of some key stakeholders in the private sector and describing their purpose (i.e., charter) and roles in the tax system 27

.
Table 2

- 3 Selected Third Party Stakeholders in US Tax System

Organization Purpose Role in Tax System

American Institute of Certified Public Accountants (AICPA) Professional organization for all Certified Public Accountants (CPA), which provide s resources, information, and leadership to members to enable them to provide valuable services in the highest professional manner to benefit the public as well as employers and clients. Work s with State CPA organizations and

serve s as national CPA representative s before government bodies. AICPA web site: http://www.aicpa.org

Council for Electronic Revenue Communication Advancement (CERCA) Trade association representing a broad cross

- section of the electronic tax filing, IRS systems modernization, and State electronic revenue communities. Provide s stakeholder input into IRS decision

making.
CERCA web site : http://www.cerca.org

Federation of Tax Administrators (FTA) Orga nization to improve the quality of State tax administration by providing services to State tax authorities and administrators. Serve s as a source of information and expertise for State tax authorities and administrators and others on the workings of State tax agencies/ systems and issues affecting tax policy and administration. Represent s the interests of State tax authorities and administrators before Federal policymakers.
FTA web site : http://www.taxadmin.org

27 American Institute of Certified Public Accountants (2008) The American Institute of Certified Public

Acco untants; Council for Electronic Revenue Communication Advancement (2008) Council for Electronic Revenue Communication Advancement; Federation of Tax Administrators (2008) Federation of Tax Administrators; Free File Alliance (2008) Free File Alliance; IRS ( 2008) Free File Home

- Your Link to Free Federal Online Filing; IRS (2008) Free File: Frequently Asked Questions; National Association of Computerized Tax Processors (2008) National Association of Computerized Tax Processors; National Association of Enroll ed Agents (2008) National Association of Enrolled Agents; National Association of Tax Professionals (2008) National Association of Tax ProfessionalsAdvancing E

- file Study Phase 1 Report 16 E

- file Goal, Stakeholders, and History Organization Purpose Role in Tax System

Free File Alliance (FFA) A group of tax software companies that provide s free commercial online tax preparation and electronic filing services for the IRS. Work s with the IRS to provide free electronic tax filing services

. FFA web site : http://freefilealliance.org/dcs
Free File start page on IRS.gov : http://www.irs.gov/efile/article/0,,id=11898 6,00.html Free File Frequently Asked Questions ( FAQ ) on IRS.gov : http://www.irs.gov/efile/article/0,,id=11899 3,00.html

N ational Association for Computerized Tax Processors (NACTP) Nonprofit association that represents tax processing software and hardware developers, electronic filing processors, tax form publishers, and tax processing service bureaus. Promote s standards in tax processing and efficient, effective tax filing. Provide s expertise in software systems to assist government agencies in implementing new technologies.
NACTP web site : http://www.nactp.org

National Association of Enrolled Agents (NAEA) Association of independent, licensed tax professionals called

“ E nrolled A gents ” (EA) dedicated to helping its members maintain the highest level of knowledge, skills
, and professionalism in all areas of taxation. Foster s the professionalism and growth of

m embers
, serves as an advocate for taxpayer rights
, protect s the interests of its members
, and enhance s the role of the E nrolled A gent among government agencies, other profe ssions
, and the public at large.
NAEA web site : http://www.naea.org

National Association o f Tax Professionals (NATP) Nonprofit professional association serving professionals who work in all areas of tax practice, including practitioners, enrolled agents, accountants, CPAs, attorneys, and financial planners. Provide s advice and answers to questions

on Federal and State taxation and continuing education for tax professionals.
NATP web site : http://www.natptax.com

One way in which the IRS fosters these third party relationships is through the Stakeholder, Partnerships, Education and Communication (SPEC) organization. According to the IRS, the approach SPEC uses to educate taxpayers is as follows :

... join with other or ganizations, combining resources for greater impact in the community. Organizations of all types

— corporate, faith

- based, non

- profit, educational, financial, public service, and government

— join in these community

- based coalitions to educate taxpayers an d provide hands

- on assistance to help them comply w ith their tax responsibilities. 28
The SPEC program was recognized in 2005 as Partner of the Year by Connect America of the Thousand Points of Light Foundation 29

. Other similar IRS organizations include the Stakeholder Liaison (SL) and National Public Liaison (NPL) offices.

28 IRS (2007) Become an IRS Partner to Help in Your Community
29 IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1 p. 17 

### Several organizations in the IRS focus on fostering third party partnerships

.Advancing E

- file Study Phase 1 Report 17 E

- file Goal, Stakeholders, and History **2.2.1.3** 

### Relationship with Free File Alliance

Th e Free File Alliance (FFA) is an important IRS

– third party relationship because it currently provides the only widespread mechanism for electro nically filing Federal (and

some State ) personal income tax returns free of charge to some taxpayers. The FFA is a consortium of tax return preparation software companies that allows eligible taxpayers to electronically prepare and file their returns for f ree through participating return preparation software vendors 30 . Current eligibility rules limit this program to taxpayers with an Adjusted Gross Income (AGI) of $54,000 or less ( as of TY 2007) 31

. The fact that each vendor may have additional eligibility requirements (and these vary by vendor ) further reduce s the number of eligible taxpayers . For example, numerous vendors do not offer Free File to taxpayers over age 50 32 . The FFA estimates that 95 million Americans

— 70% of all taxpayers

— were eligible for Free File in 2007 33

. T he IRS manages the agreement under which FFA vendors

— not F F A itself

— provide
tax return preparation software and filing solutions. The IRS does provide links to these services from the IRS .gov web site. In State s with personal income tax, Free File is generally available, although every vendor may not support every State

. The IBM Center for the Business of Government study describes how the IRS made choices to partner with third party entities such as FFA:
[ Working wi th external stakeholders] allowed the IRS and industry to reach an understanding of sorts about the IRS not offering direct e

- filing for free on its web site. In return for the private sector making this service available for free for millions of taxpayers , the IRS agreed not to compete with the private sector. By not enabling its own direct e

- file channel to taxpayers, the IRS achieved peace in its distribution channel and realized the benefit of increasing volumes through their indirect channel (i.e., tax preparation firms and PC filers)

. 34
This agreement between the IRS and FFA, which contains cl early defined roles for the two entities, has played itself out legally in the public

- private partnership agreements between the IRS and FFA. To date
, there has been one renewal agreement, with another renewal negotiation planned for 2009. The two agreemen ts are as follows : On October 30, 2002, the IRS entered into a 3

- year public

- private partnership agreement with FFA to provide free electronic filing for at least 60% of all taxpayers wh o file an individual tax return 35

. On October 29, 2005, the IRS and FFA reached a new 4

- year agreement to continue the Free File program. The new agreement contained certain consumer protections (e.g., shielding taxpayers from being sold products through the IRS Free File web site) and gave the IRS greater leeway in monitorin g the program. The agreement also changed coverage to 70% AGI (or $54,000 in 2007, to be adjusted each year based on changes in taxpayer

30 IRS (2008) Free File: Frequently Asked Questions
31 IRS (2008) Free File Home

- Your Link to Free Federal Online Filing
32 See IRS web site for list of Free File Alliance Online Tax Preparation Companies and their eligibility

requirement s ( IRS (2008) Free File Alliance Online Tax Preparation Companies )
33 Free File Alliance (2008) Free File Alliance
34 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 27
35 Free File Alliance and IRS (2002) Free On

- Line Electronic T ax Filing Agreement 

### The Free File Alliance provides free preparation and e
- filing of individual tax returns to eligible participants. The agreement between the FFA and the IRS clearly defines roles so that the IRS will not compete with these commercial tax preparation services.Advancing E

- file Study Phase 1 Report 18 E

- file Goal, Stakeholders, and History demographics and income). The FFA agreed to stricter regulation and the IRS agreed not to compete with the FFA in provi ding free online tax return services to taxpayers. 36

This program is not without controversy, however. Due to this program’s reliance on commercial partners , some stakeholders

— such as the Treasury Inspector General for Tax Administration (TIGTA) and the National Taxpayer Advocate (NTA )

— have questioned the role played by the FFA 37

. The 200 6 congressional testimony of TIGTA highlighted the conflict between the IRS’ s goal for the FFA and the business objective of FFA members:
One of the IRS’ principal purposes for establishing the program was to add another avenue for electronic filing with the intent of increasing electronic filing overall. However, Alliance members are businesses that incur a cost to provide free services

.... According to representatives of Alliance member companies that TIGTA interviewed, their primary goal is to keep the Federal Government from entering the tax preparation business. 38

NTA has often re commended that the government make it possible for all taxpayers to prepare and file their returns electronically without incurring fees and has note d the distinction between the government serving those comfortable enough to self

- prepare their returns and professionals serving those who seek greater assistance 39

. In its 2006 assessment of Free File products
, NTA found numerous faults (which may explain in part the Free File adoption rate):
The results of our testing demonstrate that Free File is not an easy service for taxpayers to navigate, and it can even result in inaccurate returns. As currently structured, Free File amounts to a Wild, Wild West of differing eligibility requirements, differing capabilities, differing availability of and fees for add

- on p roducts, and many sites that are difficult to use. 40

36 Free File Alliance and IRS (2005) Free On

- Line Electronic Tax Filing Agreement Amendment; Free File Alliance

and IRS (2008) Third Memorandum of Understan ding on Service Standards and Disputes p. 2
37 George, J. R. (2006) 2006 Tax Return Filing Season And The 2007 Budget Prop osal For The Internal Revenue

Service; Olson, N. E. (2006) Tax Return Preparation Options for Taxpayers
38 George, J. R. (2006) 2006 Tax Re turn Filing Season And The 2007 Budget Proposal For The Internal Revenue

Service
39 see e.g., ( National Taxpayer Advocate (2004) 2004 Annual Report to Congress, Volume One p. 472; Olson, N.

E. (2006) Tax Return Preparation Options for Taxpayers pp. 2, 20 )

40 Olson, N. E. (2006) Tax Return Preparation Options for Taxpayers p. 19 For more information on FFA with regard to advancing e
- file , see Chapter 10

.Advancing E

- file Study Phase 1 Report 19 E

- file Goal, Stakeholders, and History **2.2.2** 

## Relationship with States

State tax administrations and the IRS share some objectives for collecting taxes and for increasing electronic filing in particular ; therefore , the relationship between th e two is important. Table 2

- 4 describes State stakeholders and their roles in the tax system

.
Table 2

- 4 State Stakehold ers in US Tax System

Organization Description Role in Tax System

States’ and US Insular Areas’ Tax Administrations Tax administrations of the 50 States , the District of Colombia, and insular areas (e.g., American Samoa, Guam, Northern Mariana Islands, Puerto Rico, US Virgin Islands, US Minor Outlying Islands) Administer State /local sales, income, and business taxes (e.g., State personal income tax)

The Fed/State electronic filing program is an extension of the third party model described above. In the Fed/State program, the IRS effectively acts as the third party in the taxpayer

– State tax administrator relationship. Through the Fed/State program, taxpayers can satisfy both their F ederal and State tax obligations with a single transmission. The taxpayer files electronically with the IRS
, which is then responsible for separating applicable State return information and making it available to the appropriate State via download. The sam e partnering arrangement between the IRS and the tax industry was maintained in these new offerings because this arrangement applies both to returns coming from a preparer as well as returns filed electronically by an individual taxpayer using approved tax return preparation software that is routed through an ERO. 41

Authorized IRS e

- file providers who participate in the Fed/State program must first register with the IRS and comply with particular State requirements 42

. In Figure 2

- 2 , the Fed/State relationship is illustrated by the arrow from the transmitter to the IRS and the arrow from the IRS to the State s . States that do not participate in the program receive returns directly from the transmitter , as shown by the arrow from the transmitter to States.

The first Fed/State program was piloted in South Carolina in 1990. As of April 2006, 37 of the 42 State s that collect personal income taxes participated in the program. T he remaining five State s receive their returns directly from the transmitter, effectively requiring two transactions. These State s are California, Illinois, Maine, Massachusetts
, and Minnesota. Although Illinois receives most of its returns directly, the S tate also participated in the Fed/State program. 43

41 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? pp. 1

- 2
42 IRS (2007) Become an Authorized e

- file Provider
43 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? pp. 1

- 2 

### The Fed/State program

— involving the IRS and 37 of the 42 States that collect personal income taxes

— is a joint filing effort in which Federal and S tate returns

are submitted to the IRS
, after which the IRS forwards the State returns to the States

.

For more information on e
- file providers, s ee Section 2.2.1.1.

For more information on the relationship between the IRS and the States, see Chapter 7.Advancing E

- file Study Phase 1 Report 20 E

- file Goal, Stakeholders, and History **2.2.3** 

## Relationship with Federal Government Organizations

In the e

- filing landscape, organizations in the Federal g overnment also play key roles. As shown in Table 2

- 5 , these roles are primarily legislative, regulatory
, and/or oversight 44

.
Table 2

- 5 Selected Federal Government Stakeholders in US Tax System

Orga nization Purpose Role in Tax System Congress (Senate and House of Representatives) National legislative body consisting of the Senate and House of Representatives that has the lawmaking power of the United States. Pass tax laws
, require taxpayers to comply with tax laws
, and appropriate money for the IRS. US House of Representatives web site : http://www.house.gov
US Senate web site : http://www.senate.gov Department of the Treasury Executive branch agency that

s erve s the American people and strengthen s national security by managing the Federal
g overnment’s finances effectively, promoting economic growth and stability, and ensuring the safety, soundness, and security of the US and international financial systems. Manag e Federal finances; collect taxes, duties
, and monies paid to and due to the United States ; pay all bills of the U nited S tates ; make currency and coinage; manage government accounts and the public debt; supervise national banks and thrift institutions; adv ise on domestic and international financial, monetary, economic, trade
, and tax policy; enforce Federal finance and tax laws; and investigate and prosecute tax evader s, counterfeiters, and forgers. Department of the Treasury web site : http://www.ustreas.go v
Electronic Tax Administration Advisory Committee (ETAAC) Committee authorized under public law that provides input into the development and implementation of the IRS’ s strategy for electronic tax administration. Provide an organized public forum for discussion of electronic tax administration issues in support of the overriding belief that paperless filing should be the preferred and most convenient method of filing tax and information returns.
ETAAC web site : http://www.irs.gov/newsroom/article/0,,id= 179167,00.html

44 Department of the Treasury (2008) U.S. Department of Treasury; Government Accountability Office (2008)

U.S. Government Accountability Office; IRS (2008) Electronic Tax Administration Advisory Committee Information Sheet; IRS (2008 ) Internal Revenue Service; IRS Oversight Board (2008) IRS Oversight Board; National Taxpayer Advocate (2008) Taxpayer Advocate Service; Office of Management and Budget (2008) Office of Management and Budget; Treasury Inspector General for Tax Administrati on (2008) Treasury Inspector General for Tax Administration; U.S. House of Representatives (2008) United States House of Representatives; U.S. Senate (2008) United States SenateAdvancing E

- file Study Phase 1 Report 21 E

- file Goal, Stakeholders, and History Orga nization Purpose Role in Tax System

Government Accountability Office (GAO) Independent, nonpartisan agency that supports the Congress in meeting its constitutional responsibilities and help s improve the performance and ensure the

acco untability of the Federal government. Provide Congress with timely information that is objectiv e, fact

- based, nonpartisan,

non

- ideological, fair, and balanced.
GAO web site : http://www.gao.gov

Internal Revenue Service (IRS) Agency within the Department of the Treasury that serves America's taxpayers by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Help the large majority of taxpayers who compl y with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share

. IRS web site : http://www.irs.gov

IRS Oversight Board Independent body charged with

oversee ing the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the tax laws. Provide experience, independence, and stability to the IRS so that it can move forward in a cogent, focused direction

. IRS Oversight Board web site : http://www.treas.gov/irsob

Taxpayer Advocate Service Independent organization within the IRS to assist taxpayers who are experiencing economic hardship s , who are seeking help in resolving tax problems, or who believe that an IRS system/ procedure is not working as it should. Protect individua l and business taxpayer rights and reduce taxpayer burden

. NTA web site : http://www.irs.gov/advocate/index.html

Office of Management and Budget (OMB) Office within the Executive Office of the President that

oversees preparation of the Federal budget and supervise s its administration in Executive Branch agencies. Evaluate the effectiveness of agency programs, policies, and procedures ; assess competing funding demands among agencies ; and set funding priorities.
OMB web site : http://www.whitehouse.gov/omb
Treasury Inspector General for Tax Administration (TIGTA) Organization established by RRA98 to p rovide independent oversight of IRS activities. Provide audit and investigative services that promote economy, efficiency
, and integrity in the administration o f tax laws.
TIGTA web site : h ttp://www.treas.gov/tigtaAdvancing E

- file Study Phase 1 Report 22 E

- file Goal, Stakeholders, and History 

### 2.3 

## History of E

- file

The IRS e

- file program for individual and business tax returns officially debuted in 1986. During that year, 25,000 refund

- only returns were accepted via modem from five transmitters in three locations and processed in the Cincinnati Service Center 45

. Electronic filing h as grown substantially since its inception. Twenty years later, more than 73 million or 54% (refund and balance due) individual returns were received electronically 46

. The IRS has also experienced a number of other changes related to or affecting its deliv ery of e

- filing

. Since 1986 , the total number of individual income tax returns received by the IRS has grown by 35%
, from 99,528,900 to 134,421,400 47

. Table 2

- 6 shows the extent of major legislation that has affected the IRS since 1986 48

.
Table 2

- 6 Selected Legislation Affecting the IRS and/or E

- file ( 198 6

– 2008)

# Title

1. Economic Stimulus Act of 2008

2. Tax Increase Prevention Act of 2007

3. Pension Protection Act of 2006

4. Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

5. American Jobs Creation Act of 2004 (AJCA)

6. Working Families Tax Relief Act of 2004 (WFTRA)

7. Medicare Prescription Drug, Improvement, and Modernization Act of 2003

8. Military Family Tax Relief Act of 2003

9. Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

10. Job Creation and Worker Assistance Act of 2002 (JCWA)

11. Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

12. Internal Revenue Service Reform and Restructuring Act of 1998 (RRA98)

1 3

. Taxpayer Relief Act of 1997

14

. [ Revenue Provisions of the ] Health Insurance Portability and Accountability Act of 1996

15

. [ Revenue Provisions of the ] Small Business Job Protection Act of 1996

16

. Taxpayer Bill of Rights 2 of 1996

17

. Omnibus Budget Reconciliation Act of 1993

18

. Tax Extension Act of 1991

19

. Omnibus Budget Reconciliation Act of 1990

20

. Omnibus Budget Reconciliation Act of 1989

21

. Medicare Catastrophic Coverage Repeal Act of 1989

22

. Financial Institutions Reform, Recovery, and Enforcement Act of 1989

45 IRS (2004) e

- file Electron ic Tax Filing: a History
46 IRS (2007) Calendar Year Return Projections for the United States and IRS Campuses CY 2007

- 2014
47 IRS (2006) SOI Bulletin Historical Table 22: Selected Returns and Forms Filed or To Be Filed by Type During

Specified Calendar Years, 1990

- 2007
48 Tax Policy Center (2006) Summary of Major Enac ted Tax Legislation from 1940

- 2006 

### IRS e
- filing has progressed even in the context of tax law changes and system modernization.Advancing E

- file Study Phase 1 Report 23 E

- file Goal, Stakeholders, and History # Title

23

. Technical and Miscellaneous Revenue Act of 1988

24

. Medicare Catastrophic Coverage Act of 1988

25

. Family Security Act of 1988

26

. Continuing Resolution for Fiscal Year 1988

27

. Airport and Airway Trust Fund Extension of 1987

28

. Omnibus Budget Reconciliation Act of 1987

29

. Continuing Resolution for Fiscal Year 1987

30

. Superfund Amendments and Reauthorization Act of 1986

31

. Omnibus Budget Reconciliation Act of 1986

32

. Tax Reform Act of 1986

**2.3.1** 

## E

- file **Timeline**

Since 1986, the IRS e

- file program has been housed in numerous and varied organizations with in the IRS. After starting as a research project in a staff organization without line responsibility for processing tax returns, the program eventually moved to the submission processing organization. However, because the vast majority of processing was st ill on paper, this organization’s focus remained on its responsibility for the paper processing pipelines in the 10 service centers. 49
Management responsibility for the electronic filing program during its initial years was fragmented, and for some time sp lit between operational and product development

areas , with decision

- making influenced by numerous IRS organizations including Criminal Investigation, Information Systems, and General Counsel. The resulting inconsistent policies and uncoordinated actions strained the IRS relationship with a key stakeholder in the program

— the electronic filing industry

— and ultimately led to poor results. Electronic filing rates actually declined in the mid 19 90s. 50

The creation of the ETA in 1998 established a strong source of leadership and a focal point for achieving a clear goal. Although the benefits of filing returns electronically were known long before 1998, RRA98 recognized electronic filing as a strat egic initiative to transform the IRS

. 51

Table 2

- 7 lists some key milestones in the development of e

- filing since electronic filing of tax returns began as a pilot prog ram in 1986
, with the electronic transmission of only 25,000 individual returns from a handful of preparers through third party transmitters 52

.

49 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 12
50 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 12
51 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 15
52 IRS (2004) e

- file Electronic Tax Filing: a History ; IRS (2008) 2008 Filing Season Data

- Ret urns/Refunds for Week Ending: 6/21/2008 

### RRA 98 established the 80%

e
- file goal and created the Electronic Tax Administration within the IRS to manage e
- filing and

serve as a focal point for supporting efforts

.Advancing E

- file Study Phase 1 Report 24 E

- file Goal, Stakeholders, and History Table 2

- 7 Selected Events in the History of IRS E

- file (1986

– 2008)

Year Event

1986 Pilot program transmitted 25,000 refund

- only individual income tax returns from five transmitters in three locations (Cincinnati, Ohio ; Raleigh

- Durham, North Carolina ; and Phoenix, Arizona) to the Cincinnati Service Center via modem to be processed using the existing ZILOG system.

1987 The e

- file system became operational
, and forms 1041, 1065, and 5500C/R were accepted electronically.

1988 Sixteen districts were added to the list of electronic filing areas.

1989 IRS e

- file program participation expanded to 48 out of 66 districts.

1990 Balance due returns were accepted for processing.

1991 The Fed/State electronic filing program began, with the South Carolina State Tax Commission participating in the pilot. By 2003 (and s till today), 37 State s and the District of Columbia offered Fed/State electronic filing

. 1992 Filing from home began with the 1040 Telefile research test
, which processed 125,983 Telefile returns from the State of Ohio.

1994 More than 14 million individual and 1.7 million business returns were filed electronically from more than 39,000 transmitters

— 15.7 million electronic returns in all.

1996 The Electronic Federal Tax Payment System (EFTPS) was implemented . EFTPS was developed by th e IRS and the Department of the Treasury’s Financial Management Service (FMS) to enable taxpayers to pay their Federal taxes online or over the phone.

1997 941TeleFile for Employment Taxes became operational for eligible employers.

1998 Congress passed the Internal Revenue Service Reform and Restructuring Act of 1998 (RRA98 ) , establishing the IRS Electronic Tax Administration (ETA) to coordinate e

- file and related services and setting the 80% e

- file goal.

1999 The electronic payment program was expanded
, and an electronic funds withdrawal (direct debit) payment option was included in tax software, allowing taxpayers to electronically file balance due returns and pay at the same time. The credit card payment option was also introduced
, allowing taxpayers to either e

- file balance due returns and pay by credit card at the same time or pay separately by phone or Internet.

2001 The IRS introduced a new Telefile feature that allowed taxpayers to request an automatic extension of time to file their individual tax return s until August 15. In 2002, 636,215 taxpayers filed extensions over the telephone.

2002 Fed/State Telefile: 296,692 taxpayers filed their State and Federal tax returns with a single phone call. In 2003, eligible taxpayers in seven State s could u se the Fed/State Telefile system.
2003 More than 53 million individual returns were filed electronically ; nearly 37 million were filed by t ax p rofessionals

. 2004 Modernized e

- F ile (MeF) was launched. This new
, improved, award

- winning e

- file program enab led the electronic filing of some returns from corporations and exempt organizations.

2005 IRS discontinued the Telefile program (see Chapter 13 for detailed history)

. 200 8 More than 8 7 million individual tax returns were filed electronically, a 60 % e

- file rate

.Advancing E

- file Study Phase 1 Report 25 I RS E

- file and Technology Adoption 

# 3. 

# IRS E

- file **and Technology Adoption**

This Chapter introduces technology adoption theory and defines its implications for e
- file

. It defines how technologies are generally adopted, provides data on historic and projected IRS e
- file adoption rates , and compa res IRS figures with adoption rates for personal computers (PC)
, Internet use , online banking, and online bill pay

— all of which function in the larger context of technology adoption

. Them es identified in this Chapter include the following :
E

-

filing is fundamentally driven by individuals’ motivations, concerns, and their position on the technology adoption curve

. Now that IRS e
- file adoption has surpassed 50%
, adoption will slow at an incre asing rate due to the very nature of technology adoption

. What has worked to date for advancing e
- file will become increasingly less effective in the future because those most willing to convert have already done so

.



### 3.1 

## User Adoption of Technology

It is helpf ul to review the history of and projections for the IRS e

- file program in the broader context of technology adoption theory and practice. This Section discuss es how users generally adopt technology, introduce s the concept of segmentation based on how quick ly users adopt technology, and describe s how the distribution of users leads to an S

- curve relationship between adoption and time/cost (diminishing returns later in the adoption cycle).

**3.1.1** 

## Diffusion of Innovation **s** A number of people have written on technolog y adoption trends. Foremost is Everett Rogers, whose Diffusion of Innovations is based on research by Joe Bohlen and George Beal 53 . Rogers describes the adoption or acceptance of a new product or innovation according to the demographic and psychological characteristics of defined adopter groups. The distribution of users against the acceptance rate of new ideas and technologies resem bles a classical normal distribution or bell curve (see Figure 3

- 1 ).

53 Bohlen, J. M. & Beal, G. M. (1957) T he Diffusion Process (Special Report No. 18); Rogers, E. M. (2003) Diffusion of Innovations, Fifth Edition **Contents of Chapter 3**  **:** 3.1 User Adoption of Technology 3.1.1 Diffusion of Innovations
3.2 IRS E

- file Adoption: History and Projections
3.3 Related Technology Adoption Trends 3.3.1 E

- file Compared with Online Banking and Online Bill Pay



### The profile of Early Adopter s of technology is different from even the E arly M ajority that follow s them. Because each group’s motivators and concerns

var y by type and degree, a tailored marketing approach is required to reach and affect each group.Advancing E

- file Study Phase 1 Report 26 I RS E

- file and Technology Adoption Figure 3

- 1 Technology Adoption User Segments
Rogers’ model describes five user segments and their attributes as follows 54 :

Innovators

— Approximately 2.5% of the population, these users are well

informed risk

- takers who are willing to try an unproven product. Early Adopters

— Approximately 13.5% of t he population, these users tend to be educated opinion leaders. Early Majority

— Approximately 34% of the population, these users are careful consumers who tend to avoid risk. Late Majority

— Approximately 34% of the population, these users are somewhat sk eptical consumers who acquire a product after it has become commonplace. Laggards

— Approximately 16% of the population, these users are those who avoid change and may not adopt a new product until traditional alternatives

are no longer available.
Rogers notes that a different marketing approach is needed to target each unique adoption group. In fact, the entire marketing strategy may need to be tailored to get the next group to adopt the technology or product. Others have updated and refined this

m odel (e.g., Geoffrey Moore proposes a chasm between the Early Adopters and Early Majority 55 ), but the core principle has stood the test of time. 56
Beyond the marketing implications of technology adoption segments, the other key idea of Rogers’ model defines the relationship between increasing adoption and increasing time. The direct statistical outcome of plotting the normally distributed technology adoption user segment on the basis of cumulative adoption over time is that the graph resembles an S

- curve and exhibits the principle of diminishing returns in the latter half of the adoption cycle (see Figure 3

- 2 ).

54 Rogers, E. M. (2003) Diffusion of Innovations, Fifth Edition
55 Moore, G. (2002) Crossing the Chasm
56 Rogers, E. M. (2003) Diffusion of Inn ovations, Fifth Edition For m ore information about marketing and education, see Chapter 10.Advancing E

- file Study Phase 1 Report 27 I RS E

- file and Technology Adoption Figure 3

- 2 Technology Adoption Plotted Cumulatively Against Time (S

- Curve )

As shown in Figure 3

- 2 , after a slow start, there is a period of r elatively rapid growth, followed by a cooling off period. This latter period exhibits the principle of diminishing
returns

— effectively requiring an increasingly greater per

- unit investment in time/cost/effort to get the same payoff in adoption. For examp le, if it took 52 units ( e.g., of time) to move users from 40% to 60% adoption, reinvesting that same 52 units at the 60% mark would only return a 78% adoption rate, and the payoffs decrease even more dramatically as the adoption curve progresses . Stated a nother way, in the latter half of the adoption curve, the unit cost of achieving equivalent adoption gains increases quasi

- exponentially. For IRS e

- file , this means that what has worked to date will be increasingly less effective in pursuing higher adoptio n rates

.Increasing Adoption►

Increasing Time ► Cumulative Adoption "S

- Curve"



### The technology adoption S

curve shows a slow start
, followed by a period of faster growth
, followed by a period in which adoption increasingly slows down. The IRS is experiencing th is expected slowing of e
- file adoption ; new methods for achieving additional growth will be required.Advancing E

- file Study Phase 1 Report 28 I RS E

- file and Technology Adoption 

### 3.2 

## IRS E

- file **Adoption: History and Projections**

Since the passage of RRA98, the rate of e

- filing has increased significantly. Table 3

- 1 shows the growth in e

- fil ed individual ta x returns between 1990 and 2006 57

. Figure 3

- 3 illustrates thi s increase in electronic filing in comparison with the 80% e

- file goal.

Table 3

- 1 Historic Filing of Individual Tax Returns (1990

– 2008)

Tax Year Total Returns 80% E

- file Goal E

- file # E

- file % Paper # Paper %

1990 112,305,000 89,844,000 4,204,200 3.7% 108,100,900 96.3%

1995 116,059,700 92,847,760 11,806,900 10.2% 104,252,800 89.8%

1998 122,546,900 98,037,520 24,580,300 20.1% 97,966,600 79.9%

1999 124,887,100 99,909,680 29,329,500 23.5% 95,557,600 76.5%

2000 127,097,200 101,677,760 35,402,200 27.9% 91,695,100 72.1%

2001 129,444,900 103,555,920 40,206,800 31.1% 89,238,100 68.9%

2002 130,341,200 104,272,960 46,836,100 35.9% 83,505,100 64.1%

2003 130,134,300 104,107,440 52,869,000 40.6% 77,265,300 59.4%

2004 130,576,900 104,461,520 61,428,300 47.0% 69,148,600 53.0%

2005 132,275,800 105,820,640 68,463,900 51.8% 63,811,900 48.2%

2006 134,421,400 107,537,120 73,239,500 54.5% 61,181,900 45.5%

2007 a 137,725,325 110,180,260 79,862,083 58.0% 57,863,242 42.0%

2008 b 145,625,000 116,500,000 87,104,000 59.8% 58,521,000 40.2%

Notes: (a) 2007 data includes returns submitted to obtain the Telephone Excise Tax Refund. (b) 2008 data as of 25 April 2008 and includes returns submitted to obtain the Economic Stimulus Payment

. The historical e

- file adoption rate s follow the technology adoption curve. The almost triple increase in e

- filing since 1998 has been noted as “remarkable” and compares favorably to adoption of other technologie s , as discussed in Section 3.2.3 58

. H owever, consistent with the Diffusion of Innovations model, t he IRS

- projected growth rate for electronic filing is slowing and is not projected to reach the 80% e

- file goal, even by 2014 , as shown in Table 3

- 2 and Figure 3

- 3 59

.

57 IRS (2006) SOI Bulletin Historical Table 22: Selected Returns and Forms Filed or To Be Filed by Type During

Specified Calendar Years, 1990

- 2007; IRS (2008) 2008 Filing Season Data

- Returns/Refunds for Week Ending: 6/21/2008; IRS (2008) IRS Master File Data on Total and e

- filed Individual Returns CY2007 and Q1 CY2008
58 Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned from the IRS e

- file Program p. 26
59 IRS (2007) Calendar Year Return Projections for the United States and IRS Campuses CY 2007

- 2014Advancing E

- file Study Phase 1 Report 29 I RS E

- file and Technology Adoption Table 3

- 2 Projected Filing of Individual Tax Returns (as of December 2007)

Year Total Returns 80% e - file goal E

- file # E

- file % Paper # Pape r %

2009 138,951,600 111,161,280 90,210,800 65% 48,740,800 35%

2010 140,420,600 112,336,480 94,630,300 67% 45,790,300 33%

2011 141,875,100 113,500,080 98,478,200 69% 43,396,900 31%

2012 143,309,400 114,647,520 101,904,300 71% 41,405,100 29%

2013 144,717,000 115 , 773 , 600 104,872,500 72% 39,844,600 28%

2014 146,108,600 116 , 886 , 880 107,440,700 74% 38,667,900 26%

Figure 3

- 3 combines the actual to

- date data from Table 3

- 1 with the projected data from Table 3

- 2 into a chart and includes a reference line showing the 80% e

- fil e goal established by RRA 98. The IRS e

- filing trend closely tracks the technology adoption S

curve discussed in Section 3.1.1 and illustrated in Figure 3

- 2

.

Figure 3

- 3 . Actual and Projected E

- file Adoption (1990

– 201 4 )

The IRS utilizes the technology adoption curve (i.e., Diffusion of Innovation m odel) in its methodology for calculating these projections 60 : In general, [adoption] rates were projected using the diffusion of innovation model. These curves capture the growth patterns typically associated with the introduction of new technology

- related products.
The electronic projections do not account for pending legislation or ten tative administrative plans. Consequently, the long

- run e

- file projections generally represent baseline projections and should not be interpreted as precluding an alternative e

- file future.

60 IRS (2008) Statement of Methodology: SOI e

- file Projections 0 20 40 60 80 100 120

1990 1995 2000 2005 2010Adoption (Millions of returns) Adoption of Federal Individual E

- filing

n 1040/A/EZ

— 80% E

- file Goal

- - - Trend

actual ƒ

„ projected 

### Unless there is a change to the IRS e
- file approach, the 80% e
- file goal is unlikely to be reached by 2012. Those most willing to convert already have, and the rest of the population will be more difficult to convince

.Advancing E

- file Study Phase 1 Report 30 I RS E

- file and Technology Adoption The recently released IRS Oversight Board Electronic Filing 2007 : Annual Report to Congress recommends that the 80% e

- fil e goal deadline be extended to 2012 61

. However, IRS projections show that
, given current methods, a 2012 deadline is unlikely to be reached (though the IRS may eventually reach the 80% e

- file goal ). Thi s is largely due to the nature of technology adoption and existing constraints (see Section 3.2 for additional detail s ). Some have questioned whether the 80% e

- file goal is attainable 62

. The discussion of technology adoption in Section 3.3 show s that those most willing to convert to electronic filing have already converted and those who have not converted will be more difficult to convince.



### 3.3 

## Related Technology Adoption Trends

Among other things, self

- prepared e

- filing depends on access to a computer and Internet connectivity. Figure 3

- 4 shows the adoption trends for PCs and the Internet at home 63

. The adoption rates of b oth these e

- file

– enabling technologies illustrate the classic technology adoption S

- curve.

Figure 3

- 4 Household Adoption of P C s and Internet (1984

– 2010)
The adoption trends for PCs and the Internet in US households also track closely to the S

- curve described previously. One implication of th ese trend s is that a significant number of households will not have a computer or Internet access in the foreseeable future, because both technologies show signs of entering the period of diminishing
returns.

61 IRS Oversight Board (2008 ) Electronic Filing 2007: Annual Report to Congress
62 see e.g., ( Holden, S. H. (2006) A Model for Increasing Innovation Adoption: Lessons Learned fro m the IRS e

file Program pp. 15, 26 )
63 Census (2003) Computer and Internet Use in the United States: 2003; Forrester Research (2007) The State Of

Consumers And Technology: Benchmark 2007 0 10 20 30 40 50 60 70 80 90 100

1980 1985 1990 1995 2000 2005 2010Adoption Rate (%) Cumulative Adoption of PCs, Internet

u PCs 

### l Internet

- - - Trend 

### As many as 65 million adults will not have a computer or Inter net for the foreseeable future

.

The term “personal computer (PC)
, ” as used in this report, refers to computers running any operating system.Advancing E

- file Study Phase 1 Report 31 I RS E

- file and Technology Adoption It is also worthwhile to consider the effect of Internet and PC adoption on e

- filing . For self

- filers (those who do not use preparers ), the availability of these technologies establishes an explicit ceiling for those who can file online. In its 2007 survey, the Pew Internet & American Life Project found that about 29% of US adults do not use the Internet and 27% do not use a computer at all. The degree to which computer and Internet use are presently intertwined is demonstrated by the finding that only 2% of adults have a computer but do not use the Internet on it. Relatively few (4%) adults use the Internet outside their home s ( work and other locations such as libraries are equally represented )

. 64

Because about 65 million adults do not access the Internet, they must use a preparer ( paid or volunteer ) if they want to file their return s electronically 65 . If member s of this group want to self

- prepare their return s , they must file on paper, because electronic filing channels other than the Internet

— such as the defunct Telefile (see Chapter 11) and potential future mobile phone

- based options like those used in other countries (see Section 5.1)

— are not currently available.

**3.3.1** 

## E

- file **Compared with**  **Online Banking and Online Bill Pay** 
It is useful to consider analogues to e

- filing
, such as online banking and online bill pay. This Section presents the similarities between e

- file and these offerings ; point s out the differences between the IRS and the banking industry ; discusses factors that motivate or concern potential adopters that are paralleled in the IRS studies discussed in Chapter s 4, 5, and 6 ; and illustrate s that
, despite operating constraints and limitations, the IRS e

- file adoption rate is comparable to or greater than the adoption rate for online banking and online bill pay. Online banking refers to the use of the Internet as a delivery channel for banking services such as balance inquiry, statement printing, funds transfer, and bill payment through the banking institution. Online bill pay expands this service to include bill payment not only with one’s banking institution but also with billers (via their web site s ) and through bill payment portals.

There are a number of similarities among e

- filing
, online banking
, and online bill pay

. All experienced early adoption in the late 1990s and require the following :

A sufficiently capable PC in the household.
A sufficiently fast Internet connection.
A certain level of computer and Internet proficiency.
A certain level of financial literacy.
The sharing of users’ sensitive financial and personal information online.
Differences include the relative frequency of interaction (i.e., annually versus monthly or more frequently) and potentially the nature of interaction (e.g., informational
, such as balance lookup versus transactional
, such as paying bills and filing taxes)

. Banks are also

64 Pew Internet & American Life Project (2007) Home Broadband Adoption 2007 p. 3
65 Calculation based on taking 29% (Pew figure of those who do not use Internet) of U.S. adult population from

( Census (2008) Table 2: Annual Estimates of the Population by Selected Age Groups and Sex for the United States: April 1, 2000 to July 1 , 2006 )

. 

### Despite fewer resources and less flexibility, t he IRS has

seen e
- file adopted at a greater rate to date compared with online banking and online bill pay. For more inf ormation on Telefile use, see Chapter 7 (for States) and Chapter 8 (for foreign countries). A new approach to e
- filing by telephone is described as an option in Chapter 14.Advancing E

- file Study Phase 1 Report 32 I RS E

- file and Technology Adoption constantly introducing new financial prod ucts, services, and marketing campaigns, which have a net positive effect on their adoption rate

. In addition, online banking requires one to have a bank account, and online bill pay requires one to have some form of personal financial instrument (e.g., a bank account or credit card) 66

. Although a bank account is not necessary to e

- file , it makes the direct deposit of a refund easier. It is also worthwhile to note operating differences between the IRS and the banking industry, because this speaks to the rela tive ability of each group to draw on resources to motivate behaviors:

The IRS operates with a much smaller budget over which it has less control in setting and less discretion in executing against (i.e., certain functions and services are mandated by law )

. The IRS is limited in the incentives it can offer because of its relatively limited budget.
The IRS by law is precluded from directing or mandating e

- filing behavior of taxpayers, whereas banks have more leeway in defining the nature of their business model s and customer interaction s , as illustrated by some online

- only banks. Although both the banking industry and the IRS are bound by non

discrimination laws, the IRS cannot choose its customers and must serve all taxpayers, whereas banks may select thei r customers and/or provide different levels or types of services to different groups.

**3.3.1.1** 

### Adoption of Online Banking
In the review of literature on adopti on of online banking, two firms were notable in their coverage: the Pew Research Center and Forrester Research. Since 1998, the Pew Research Center has been asking Internet users if they “ever paid bills or banked online” 67

. This broad question includes inf ormational interactions (e.g., check ing account balance s ) as well as transactional interactions (e.g., transfer ring money)

. The more appropriate and likely less frequent analogues to e

- filing are transactional interactions. Forrester Research has tracked s imilar information and defines online banking customers as those who have done one or more of the following activities at their banks ’ web site in the past 90 days: checked balances, viewed transaction history
, and/or transferred funds. Figure 3

- 5 shows the results of this research on online banking adoption 68

.

66 For 2004, the most recent year of data available, Census reports that 91.3% of families had transaction

accounts including checking, savings, and money market deposit accounts, money market mutual funds, and call accounts at brokerages ( Census (2008) Statistical Abstract of the United States 2008: Section 25: Banking, Finance, and Insurance p. 727 ) . The online banking adop tion figures should thus be mentally reduced about 9% to more accurately extrapolate them to the whole U.S. population.
67 Pew Internet & American Life Project (2006) Online Banking 2006: Surfing to the Bank
68 Forrester Research (2007) US Online Banking: Five

- Year Forecast; Pew Internet & American Life Project

(2006) Online Banking 200 6: Surfing to the Bank 

### Though the adoption rate for online banking is approaching 50%, it is showing signs of slowing growth

.Advancing E

- file Study Phase 1 Report 33 I RS E

- file and Technology Adoption Figure 3

- 5 Cumulative Adoption of Online Banking (1998

– 2005)

As shown in Figure 3

- 5 , though the adoption rate for online banking is approaching 50%, it is showing signs of slowing growth. Pew noted that “online banking is holdi ng steady as a mainstream Internet activity, growing along with Internet use generally, though not accelerating as have some other forms of online activities” 69 . This may be due in part to the “trust gap” and security concerns

. The Tower Group noted, “Onlin e banking adoption has stalled because consumers are still concerned about security, despite the fact that e

- security measures in place at most financial institutions are really very good” 70

. A s lowing annual growth rate for online banking adoption is consi stent with the position of that technology on the adoption S

- curve. Forrester’s report on online banking closely matched Pew’s historical figures on a percentage basis, but because Forrester sampled a different Internet population, its adoption figures may lag Pew’s if normalized to the same larger population 71

. One finding that parallels the generational differences in e

- filing noted in Section 4.2 is that the youngest consumers will account for the largest growth in online banking : in 2011, young consumers will account for 59% of all online banking custo mers 72

.

**3.3.1.2** 

### Adoption of Online Bill Pay
Forrester publishes separate analyses of online bill pay and online banking, although the populations that use these technologies overlap (i.e., those who pay bills through their banking institution s are common to both st udies). As noted previously, the primarily transactional nature of bill payment makes it analogous to filing electronically, though the process of filing a return is more complicated than executing an online bill payment.

69 Pew Internet & American Life Project (2006) Online Banking 2006: Surfing to the Bank p. 2
70 Weeks, R. (2003) Speak to Concerns, Not Just to Benefits
71 Forrester Research (2007) US Online Banking: Five

- Year Forecast p. 3
72 Forrester Research (2007) US Online Banking: Five

- Year Forecast p. 4 0 10 20 30 40 50 60 70 80 90 100

1998 1999 2000 2001 2002 2003 2004 2005Adoption Rate (%) Adoption of Online Banking p Pew Ç Forrester

- - - Trend

For more information about generational differences in filing behavior, see Section 4.2.Advancing E

- file Study Phase 1 Report 34 I RS E

- file and Technology Adoption Forrester defined online bill pay ers as those who paid bills online anywhere ( at a bank

or biller ’s web site
, through a portal , or a combination of these ) in the past 90 days. Regardless of how users pay their bills online, Forrester noted the overall actual and projected trend illustrate d in Figure 3

- 6 as well as a generally slowing annual growth rate in later years 73

.

Figure 3

- 6 Actual and Projected Adoption of Online Bill Pay (1999

– 2011)
The following highlights from Forrester’s research on non

- adopters of online bill pay parallel the studies of filer motivators and concerns addressed in Chapters 4, 5, and 6

. Forrester segment ed those who do not use online bill pay into three groups and

su rveyed the reasons why Holdouts and Fence

- sitters do not use it 74 :
Holdouts

— 71% of non

- adopters aligned with the statement “no, and I do not intend to pay bills online in th e future.”
Fence

- sitters

— 23% of non

- adopters aligned with the statement “no, but I plan to in th e future.” Quitters

— 6% of non

- adopters aligned with the statement “no, but I used to

. ”
When the results are population

- corrected based on the total population of non

adopter respondents, an interesting pattern emerged as to why non

- users do not pay bills online (see Figure 3

- 7 ) 75

.

73 Forrester Research (2007) EBPP Forecast: 2006 To 2011 p. 5
74 Forrester Research (2007) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitter s, And Quitters p. 5
75 Forrester Research (2007) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitters, And

Quitters p. 5 0 10 20 30 40 50 60 70 80 90 100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Adoption Rate (%) Adoption of Online Bill Pay

¬ Forrester

- - - Trend



### Non

- user s of online bill pay find paper easier to use, need paper for their records, or are more comfortable with paper, and do not want money deducted from their
accounts before it is due

.Advancing E

- file Study Phase 1 Report 35 I RS E

- file and Technology Adoption Figure 3

- 7 Population

- Corrected Reasons Users Did Not Use Online Bill Pay
The top three reasons spoke directly to non

- users’ comfort with paper on the basis of ease of use, being used to paper , and interestingly, the nee d to retain paper bills for their record s . Concerns about security and privacy rounded out the top five. The existence of three separate questions about security, privacy, and phishing and fraud may have inadvertently diluted the importance of this categor y of concern; together these accumulated 60% of responses. The largest shared concern (21% of Fence

- sitters and 20% of Holdouts , non

- population

- corrected ) was not wanting to have the money deducted from their account s before bill s are due

— highlighting th e importance of holding onto one’s money as long as possible and the perception that the online bill pay
process undermines this goal. About half of the Quitters could be convinced to use online bill pay again

. E liminating and reducing cost represent the t wo top motivators for this group to return to online bill pay (online security guarantees were next to last). 76
Interestingly, Forrester also found that banks with free online bill pay increased their active online bill payers 150% more than fee

- charging b anks 77

.

**3.3.1.3** 

### Technology Adoption and E

- filing

T he adoption rates for e

- filing , online banking, and online bill pay are comparable, particularly given the relative advantage of the banking industry in its flexibility to shape its market and to offer incentives. Figure 3

- 8 overlays the adoption rates for household PCs, household Internet, e

- filing , online banking, and online bill pay into a single chart. E

-

file adoption rates fall right in the middle

— below PC and Internet (which are, in

76 Forrester Research (2007) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitters, And

Quitters pp. 4

- 8
77 Forrester Research (2007) EBPP Forecast: 2006 To 2011 p. 2 3.0% 9.8% 16.6% 15.1% 14.4% 18.1% 18.9% 18.9% 21.9% 22.7%

7.3% 3.2% 2.9% 5.1% 6.9% 3.2%

3.2% 3.4% 3.2% 3.2%

Haven't gotten to it yet Rather auto

- debit from checking

Worried about phishing/fraud Don't want to pay before due

Prefer to pay at biller's site

Concerned about privacy

Worried about security Used to paper Need paper bills for records Easier to write checks Population

- Corrected Reasons Offered for Not Using Online Bill Pay Holdouts Fence

- sitters



### Banks that offer a zero cost solution have 150% more online bill payers than banks that charge for it.Advancing E

- file Study Phase 1 Report 36 I RS E

- file and Technology Adoption effect, a ceiling to this computer

- and Internet

- dependent technology) and above online banking and online bill pay 78

.

Figure 3

- 8 Comparison of PC, Internet, E

- file , Online Banking, and Online Bill Pay Adoption (1984

– 2014)
All five technologies in Figure 3

- 8 show an adoption trend consistent with technology adoption theory. Based on that theory, all appear to be near or in the latter half of the adoption cycle, where the cost (in time and/or resources) required to achieve equivalent adoption gains continually increases. This phase of increasing costs underscores the challenge the IRS faces in driving up e

- file adoption: efforts that have succeeded to date will offer ever

- diminishing returns in the future . This condition will hold unless the e

- file approach itself changes significantly (i.e., results in a new and different adoption curve because the technology offering itself

— and the related motivators and concerns

— is new and different) . The next Chapter will carry forward this theme of tec hnology adoption as a primarily behavioral issue (versus, as some assert, a technology

- or solution

- driven issue) by discussing studies of filer behaviors and motivators.

78 Census (2003) Comp uter and Internet Use in the United States: 2003; Forrester Research (2007) EBPP

Forecast: 2006 To 2011; Forrester Research (2007) The State Of Consumers And Technology: Benchmark 2007; Forrester Research (2007) US Online Banking: Five

- Year Forecast; IRS ( 2006) SOI Bulletin Historical Table 22: Selected Returns and Forms Filed or To Be Filed by Type During Specified Calendar Years, 1990

- 2007; IRS (2007) Calendar Year Return Projections for the United States and IRS Campuses CY 2007

- 2014; Pew Internet & Amer ican Life Project (2006) Online Banking 2006: Surfing to the Bank 0 10 20 30 40 50 60 70 80 90 100

1980 1985 1990 1995 2000 2005 2010Adoption Rate (%) Cumulative Adoption Trends PC Internet e

- file Online Banking Online Bill Pay



### IRS e
- file adoption rates compare favorably to online banking and online bill pay. Adoption of e
- file

— or any other technology

— is fundamentally an issue of motivating behavior . W hat has worked to date to attract e
- file users will be come less and less effective in the future.Advancing E

- file Study Phase 1 Report 37 I ntroduction to Research on Filer Motivators 

# 4. 

# Introduction to **Research on Filer**  **Motivat o**  **r s**  **and Concerns**

This Chapter provides an overvie w of many of the research efforts conducted over the past decade and highlights findings from those efforts regarding motivators and concerns for both taxpayers and preparers regarding e
- file

. While this Chapter is organized around studies, Chapters 5 and 6 present key findings from these studies and other efforts thematically. These findings on influencing behavior directly relate to the options discussed in Chapters 10 through 1 4 because they inform the likely perception and adoption of the options. Themes identified in this Chapter include the following : Although there is considerable research at present, additional and more up
- to

- date research may be required to move the analysis of options t o the next step.

The compl e mentary techniques of p rimary research and statistical analysis of data sets provide insights into filer motivators and

concerns

. It can be difficult to compare studies year to year or study to study due to changes in methodology or definition

.



### 4.1 

## Overview
Assumptions about filer behavior are subjective; research and analyses are critical to understanding the actual reasons for choosing e

- file over paper. This Section provides an overview of the most relevant IRS e

- file research studies conducted in recent years and highlights findings from those studies regarding historical behavior in both taxpayers and preparers. Several of the key factors that influence and motivat e that behavior are then examined as potential opportunities for e

- file mandates and incentives. In his 2003 remarks before the IRS Oversight Board, the chairman of ETAAC stated, “The key challenge to increasing e

- filing is to stimulate demand by taxpayer s and tax preparers” 79 . The IRS spent between $2 million and $10 million dollars on communications in past filing seasons 80

. The IRS has conducted a great deal of research into the concerns and motivations of taxpayers and preparer s, both primary research ( telephone surveys and focus groups) and detailed analyses of IRS data on the flow of returns through the filing season. Among the major research efforts are the following:

79 Belden, K. (2003) The Future Direction of Electronic Tax Administration p. 1
80 The IRS spent $6.1 million in 200 2

- 03 tax season, $10.6 million in 20 03

- 04, $5.9 million in 20 04

- 05; see IRS

(2005) Findings From The 2004

- 05 Taxpayer Communications Tracking Study

. 

### T

he key to understanding motivators is research

. **Contents of Chapter 4**  **:** 4.1 Overview
4.2 Taxpayer Assistance Blueprint
4.3 Taxpayer Communications Tracking Studies
4.4 Taxpayer Attitudinal Trackin g Studies
4.5 Taxpayer Satisfaction Studies
4.6 ETA Full Year Database Analyses
4.7 Practitioner Business Impact Studies
4.8 One

- on
- One e
- file Research Among Taxpayers and Preparers
4.9 e
- file Practitioner Attitudinal StudyAdvancing E

- file Study Phase 1 Report 38 I ntroduction to Research on Filer Motivators Taxpayer Assistance Blueprint (TAB)

. Taxpayer Communications Tracking Studies

. Taxpa yer Attitudinal Tracking Studies

. Taxpayer Satisfaction Studies

. ETA Full Year Database Analyses. Practitioner Business Impact Studies

. One

- on

- One e

- file Research Among Taxpayers and Preparers

. E

-

file Practitioner Attitudinal Tracking Studies

. Recognizing the nature of technology adoption and the pace of change, research of this nature will need to be ongoing and regular. In addition, data on actual taxpayer and
prepare r behaviors (versus self

- reported data or surveyed preferences) may yield actionable insights for strategies to meet the 80% e

- file goal. Chapter 15 describes potential research opportunities for future consideration.

The References located in the back mat ter of the report provides bibliographic information for these studies and the many other sources cited in this report . The purpose of th is Chapter is to introduce this research and provide selected summaries or key findings from each study. The next two C hapters

— Chapter 5 for taxpayers and Chapter 6 for preparers

— discuss in greater depth the findings from these studies, but are organized by the major categories of motivators and concerns.



### 4.2 

## Taxpayer Assistance Blueprint

A major study in two parts, the Taxpayer Assistance Blueprint (TAB) resulted from a July 2005 congressional mandate that the IRS address taxpayer needs and IRS service delivery while ensuring that decisions are informed by research and stakeholder engagement. Published in 2006 and 2007, the TAB examined individual taxpayer filing preferences around service and a ssistance. 81
Following are definitions of the taxpayer segmentation framework defined in the TAB1 report, including four income segments and four generational segments : Income Segments:

o Low Income

— AGI less than $36,000.

o Moderate Income

— AGI between $3 6,000 and $62,500

.
o Moderate High Income

— AGI between $62,500 and $100,000

.
o High Income

— AGI greater than $100,000

. Generational Segments :

o Millennial

— Coming of age 1995 and beyond ( ages 0 to 29)

.
o Generation X

— Coming of age 1984 to 1994 ( ages 30 to 40)

.
o Baby Boomers

— Coming of age 1963 to 1983 ( ages 41 to 60)

.
o Seniors

— Coming of age 1908 to 1962 ( ages 61 to 116)

.

81 IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1; IRS (2007) The 2007 Taxpayer Assistance

Blueprint, Phase 2 For more information regarding the need for future research, see Chapter 15.



### The TAB shows a positive correlation between use of a preparer and e
- filing

.Advancing E

- file Study Phase 1 Report 39 I ntroduction to Research on Filer Motivators The TAB also defined two additional population segments that span all income and generational segments: limited English prof iciency and disa bled taxpayers.

Related to e

- filing specifically, the TAB considered five filing characteristics across the income and generational segments: number of returns filed, percent age of electronically filed returns , percent age of returns prepared by a paid prep arer, percent age of refund returns, and percent age of simple returns (1040EZ, Telefile, 1040A with no schedules [ can have Earned Income Tax Credit ( EITC ) but no form attached ] , or 1040 with no schedules).

Table 4

- 1 shows the data gathered in the TAB report for the five filing characteristics across the generational and income segments 82

.
Table 4

- 1 Five Filing Characteristics by Income and Generational Segment (as of TY 2003 )

Segment Filing Data AGI Under $36,000 AGI $36,000 to $62,500 AGI $62,500 to $100,000 AGI Over $100,000 Totals

Seniors Ages 61

– 116 # Returns 14,998,000 5,176,000 3,617,000 2,646,000 26,437,000

% e - filed 32% 33% 32% 26% 31%

% Preparer 69% 70% 69% 76% 70%

% Refunds 83% 69% 69% 62% 76%

% Simple 36% 22% 11% 2% 26%

Boomers Ages 41

– 60 # Returns 19,952,000 11,681,000 9,173,000 6,874,000 47,680,000

% e - filed 48% 47% 47% 38% 46%

% Preparer 63% 60% 59% 63% 61%

% Refunds 87% 83% 81% 69% 82%

% Simple 31% 30% 11% 2% 23%
Generation X Ages 30

– 40 # Returns 14,753,000 6,406,000 3,610,000 1,704,000 26,473 ,000

% e - filed 60% 58% 58% 47% 58%

% Preparer 61% 56% 55% 61% 59%

% Refunds 92% 88% 87% 75% 89%

% Simple 33% 38% 15% 3% 30%
Millennial Ages 0

– 29 # Returns 24,487,000 1,629,000 317,000 60,000 26,493,000

% e - filed 45% 57% 58% 41% 46%

% Preparer 49% 53% 55% 70% 49%

% Refunds 92% 87% 82% 68% 91%

% Simple 63% 49% 23% 7% 62%
Totals # Returns 74,191,000 24,982,000 16,716,000 11,285,000 127,084,000

% e - filed 46% 47% 46% 37% 45%

% Preparer 59% 61% 60% 66% 60%

% Refunds 89% 82% 80% 68% 81%

% Simple 43% 32% 12% 2% 33%

82 IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1 pp. 115

- 116 

### E

- filing is least prevalent in the highest income group, which has the most complex returns and the lowest percentage of refund
returns

.Advancing E

- file Study Phase 1 Report 40 I ntroduction to Research on Filer Motivators Some key findings from this study follow :

E

-

filing is least prevalent among the highest income group, which has the most complex returns and the lowes t percentage of refund returns.
E

-

filing is least prevalent among Seniors and most prevalent among Generation X.



### 4.3 

## Taxpayer Communications Tracking Stud **ies**

Launched in 2003

– 20 04 and repeated in 2004

– 20 05, the Taxpayer Communications Tracking Study combined two separate tracking studies used between 1997 and 2003 (Taxpayer e

- file Ad Tracking Study and an Attitudinal Tracking Study) and evaluated the impact of each new communications pr ogram on taxpayer awareness of, and disposition toward, e

- file . The study consisted of two parts: a “ pre

- wave ” conducted prior to the start of each new communications campaign and a “ post

- wave ” conducted after the end of each campaign to measure the e

- file program’s impact. 83
The study analyzed taxpayer segments in several dimensions ( E

- file Usage, Return Type, and Filing Behavior) as defined below:

E

- file Usage

o Users

— Used e

- file in the past year

.
o Quitters

— Used e

- file in the past but said they would not consider using it again

.
o Non

- Triers

— Never used e

- file

.
o Lapsed Users

— Used e

- file in the past (but not the past tax season)

. Return Type

o Self

- Prepared Return

— No paid

- preparer identification number
appear s on the return.

o Paid

- Preparer Return

— A paid

- preparer identification number
appear s on the return.

o Simple

— Form 1040EZ and Form 1040 or Form 1040A without any schedules.

o Complex

— Form 1040 with Schedules C, E, F , or other schedules and all other specific Forms 1040 ( e.g. , 1040 PR )

. Filing Beha vior

o “As Soon As I Get My W

- 2 For ms”

o “When I Get Around To It”

o “Late As Possible But Not Last

- Minute”

o “At The Last Minute Possible”
The findings based on these definitio ns are shown in Table 4

- 2 84

.

83 IRS (2005) Findings From The 2004

- 05 Taxpayer Communications Tracking Study; IRS (2005) Findings From

The Pre

- Wave Of The 2004

- 05 Taxpay er Communications Tracking Study
84 IRS (2005) Findings From The 2004

- 05 Taxpayer Communications Tracking Study; IRS (2005) Findings From

The Pre

- Wave Of The 2004

- 05 Taxpayer Communications Tracking Study 

### Outreach and communications can improve e
- filing rates and decrease V

- Coding

.Advancing E

- file Study Phase 1 Report 41 I ntroduction to Research on Filer Motivators Table 4

- 2 Attributes of E

- file Usage Segments (as of 2004)

Attribute Users Quitters Non

- Triers Lapsed Users
Taxpayers in Segment 51% / 54% 3% / 2% 32% / 31% 12% / 13%
Use a Preparer 58% / 68% 71% / 69% 57% / 52% 58% / 48%
Offered E

- file by Preparer 91% / 96% 65% / 49% 33% / 31% 65% / 57%

V

- Coders n/a 71% / 71% 53% / 52% 73% / 55%

Get Refund 79% / 85% 67% / 68% 66% / 64% 73% / 68%

Have Balance Due 16% / 11% 29% / 32% 26% / 24% 19% / 26%

File As Soon As Possible 55% / 52% 63% / 37% 36% / 37% 42% / 37%

File When Get Around To It 28% / 32% 25% / 23% 35% / 32% 38% / 23%

File Late But Not Last 7% / 7% 0% / 5% 9% / 12% 9% / 5%

File At Last Possible Minute 6% / 8% 13% / 19% 16% / 15% 9% / 19%

Claim Tax Credits 63% / 61% 33% / 56% 38% / 42% 58% / 43%
Age 43 / 43 51 / 43 49 / 48 45 / 45 Sex (% male) 49% / 49% 50% / 66% 47% / 52% 52% / 42%

Income Level $62K / $63K $60K / $81K $66K / $62K $69K / $66K

Note: Pre

- wave data is separated by a slash (/) from post

- wave data following it (pre

- wave/post

- wave)

.

Some key points that can be drawn from the da ta on taxpayer usage are as follows : Outreach and communications can improve e

- filing rates and decrease V

Coding , especially among Lapsed Users

. The largest percentage of non
– e

- file Users are the ones who have never tried it, and they are the least likely to be offered e

- filing by their preparer s

. The 2005 Taxpayer Communications Tracking Study also looked at tax returns by complexity (simple, complex) and use of a paid preparer in four categories
, as shown in Table 4

- 3 85 . The study also introduced a new complexity category of Intermediate (Form 1040A with Schedule 1, Child Tax Credit or Education Credit, or Earned Income Credit [ EIC ] ; or Form 1040 with Sched ules A, B, or D , Child Tax Credit or Education Credit
, or EIC) but did not perform much analysis around this new category.

85 IRS (2005) Findings From The 2004

- 05 Taxpayer Communications Tracking Study; IRS (2005) Findings From

The Pre

- Wave O f The 2004

- 05 Taxpayer Communications Tracking Study 

### N on
- Triers of e
- file are the least likely group to be offered e
- filing by their preparer s.Advancing E

- file Study Phase 1 Report 42 I ntroduction to Research on Filer Motivators Table 4

- 3 Attributes of Filers Based on Return Complexity and Use of Preparer (as of 2005)

Attribute Self

- Simple Self

- Complex Paid

- Simple Paid

- Complex

Returns in Segment 18% / 21% 22% / 15% 24% / 26% 28% / 32%

E

-

filed Returns 46% / 41% 53% / 47% 54% / 67% 46% / 57%

V

- Coded Returns 17% / 12% 17% / 23% 31% / 25% 42% / 36%
Offered E

- file by Preparer n/a n/a 74% / 80% 59% / 70%

Get Refund 83% / 77% 70% / 74% 79% / 88% 67% / 66%

Have Balance Due 14% / 16% 25% / 24% 13% / 6% 27% / 26%

File As Soon As Possible 48% / 52% 29% / 36% 65% / 62% 34% / 43%

File When Get Around To It 33% / 36% 38% / 29% 24% / 31% 38% / 33%

File Late But Not Last 8% / 5% 11% / 15% 6% / 1% 12% / 10%

File Last Possible Minute 9% / 7% 18% / 17% 3% / 3% 14% / 11%

Claim Tax Credits 47% / 41% 52% / 51% 60% / 59% 53% / 55%
Age 41 / 43 47 / 46 43 / 41 48 / 47 Sex (% male) 46% / 43% 50% / 53% 50% / 47% 54% / 55%

Income $49K / $52K $77K / $81K $49K / $46K $76K / $76K College Educat ed 70% / 62% 83% / 79% 49% / 36% 67% / 71%

Married 44% / 42% 70% / 77% 52% / 57% 73% / 74%

Note: Pre

- wave data separated by a slash (/) from post

- wave data following it (pre

- wave/post

- wave).

Some key findings follow : Outreach can increase the number of preparers who e

- fil e and decrease the number of V

- Cod e rs (those who prepare returns on a computer but file on paper) ; however, this is not borne out for self

- preparers. The highest post

- wave e

- filing rate is for simple returns done by a preparer, followed by complex returns done by a paid preparer. This indica tes again that preparers provide a key role in increasing e

- filing

. The study also compared V

- Code rs to e

- file Users an d paper filers and found that 86 :

V

- Coder s’ use of a preparer is higher than other groups (76% for V

- Code rs

versus 58% for e

- filer s and 28% for others). Only 44% of V

- Code rs indicated that their preparer s offered them e

- file
, compared with 91% of e

- filer s. Most V

- Code rs (61%) have never tried e

- file
, although the 31% of V

- Code rs who

are lapsed e

- filer s would consider trying it again.

In short , many taxpayers who do not e

- file have never tried it and likely have not been offered it by their preparer s

.

86 IRS (2005) Findings From The 2004

- 05 Taxpayer Communications Tracking Study; IRS (2005) Findings From

The Pre

- Wave Of The 2004

- 05 Taxpayer Communications Tracking Study 

### Many paper fi lers have not been offered the option to e
file by their preparer s.Advancing E

- file Study Phase 1 Report 4 3 I ntroduction to Research on Filer Motivators 

### 4.4 

## Taxpayer Attitudinal Tracking Stud **ies**

Until 2003, the IRS conducted annual studies to update its understanding of taxpayers’ attitudes and how those attitudes relate to adoption of electronic filing

. These studies have since been folded into the Taxpayer Communications Tracking Study (see Section 4.3 ). In additio n to looking at the segments such as e

- file usage, return type, filing behavior, and V

- Code rs, this study also analyzed taxpayers according to the following
tec hnology acceptance segmentation 87 :
Tech Leaders

— Comprising 44% of taxpayers , this group is the most comfortable with using technology. Tech Leaders tend to be the first to try new technology and trust technology and wish they could do more of their dealings by computer.
Tech Followers

— Comprising 25% of taxpayers
, this group is fairly comfortable

w ith technology, but not the first to try new technology, and generally not comfortable putting financial information on a computer. Tech Laggards

— Comprising 32% of taxpayers
, this group is the least comfortable with technology, is sometimes scared of com puters, and would definitely not put financial information on a computer.

Table 4

- 4 shows past e

- file usage trends for Tech Leader s, Tech Follow ers, and Tech Laggard s across some of the usage categories seen in other studies, including Non

Trier s, Lapsed User s, and Quitters 88

.
Table 4

- 4 E

- file Usage Rates Among Technology Acceptance Segments (as of 2003)

Segment Never Used Ever Used Used in Past Year Lapsed Users Quitters

Tech Laggards 53% 47% 34% 11% 3%
Tech Followers 45% 55% 34% 17% 4%
Tech Leaders 36% 64% 46% 16% 2%

Not surprisingly, the TAB technology acceptance segments correlated closely with the filing usage behaviors indicated by technology adoption theory (i.e., Tech Laggard s were much less likely to use or have used e

- file , whereas Tech Leader s were more likely to have recently used e

- file ).

87 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Atti tudinal Tracking Study
88 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study 

### Adoption of e
- file mirrors taxpayer segmentations by technology adoption group

.

Similar user segments are described in technology adoption theory; see Section 3.1.1.Advancing E

- file Study Phase 1 Report 44 I ntroduction to Research on Filer Motivators 

### 4.5 

## Taxpayer Satisfaction **St ud**  **ies**

T he IRS conducts customer satisfaction research among taxpayers to gauge their satisfaction with various e

- filing options, understand non

- user interest in e

- fil e , and understand taxpayer satisfaction with IRS instructions and communication s

. Following

are some findings from the 2005 study 89 :

Current e

- file Users are very satisfied wit h e

- filing (both commercial software and Free File ) , but satisfaction with preparer e

- filing is on a bit of a downward trend. Two main reasons for lack of adoption by Non

- Trier s and Lapsed User s include lack of belief in the products (concerns about ease of use, accuracy, and privacy/security) and preparer s not offering e

- file to their clients. Cost was also listed as a key reason for non

- use of e

- filing

.



### 4.6 

## ETA Full Year Database Analys **e s** 
The ETA conducts an annual nationwide analysis of individual taxpayers. The most current study available is for P Y2006 . This study segmented returns based on relative complexity of the returns and use of a preparer and introduced the intermediate level of complexity 90 :
Self

- Prepared Return

— No paid

- preparer identification number appears on the
return. Paid

- Preparer Return

— A paid

- preparer identification number appears on the
return. Simple

— Form 1040EZ and Form 1040 or Form 1040A without any schedules.
Intermediate

— Form 1040A with Schedule 1, Child Tax Credit or Education Credit, or EIC ; or Form 1040 with Schedules A, B, or D, Child Tax Credit or Education Credit, or EIC. Complex

— Form 1040 wit h Schedules C, E, F , or other schedules and all other specific Forms 1040 ( e.g., 1040 PR )

. Figure 4

- 1 shows the number of returns in each of these segments for full TY 2005 91

.

89 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study
90 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 7
91 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 9 

### Prepare rs make a considerable contribution to the e
- file rate. Non e
- file users do not believe in e
- file’s benefits, and likely are not offered e
file by their preparer s.Advancing E

- file Study Phase 1 Report 45 I ntroduction to Research on Filer Motivators Figure 4

- 1 Returns by Method, Filer, and Complexity (as of 2005)

The study shows the differences in taxpayers’ profiles in each of the six market segments using descriptive statistics including age, AGI, unpaid balance due, and filing method. Some key findings follow : Although the paid preparer community has made great strides i n moving returns away from paper and V

- Coding and toward e

- filing
, about one

- third of paid

- preparer returns are V

- Code d.

“ S tates with electronic filing mandates, on average, have a higher percentage of electronically filed returns and a lower percentage o f V

- Code d returns when compared to all State s as a whole” 92

.



### 4.7 

## Practitioner Business Impact Studies
The IRS conducted Practitioner Business Impact (PBI) research to “examine how e

- file impacts the Practitioner business model” 93

. As of July 2005, there were 3 PBI studies:

PBI

- 1 , conducted in July 2004 , studied e

- file ’s impact on Committed V

- Code rs, preparer s who V

- Code at least 75% of their returns

. PBI

- 2 , conducted in June 2005, broadened the range of preparer s being studied
to preparer s who V

- Code at least 25 % of their returns and studied how these
preparers compare to the Committed V

- Coders of the PBI

- 1 study

. PBI

- 3 , conducted in June 2005 , revisited the impact of e

- file on the PBI

- 1 preparer s 1 year later

.

92 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis
93 IRS (2005) Findings From Pract itioner Business Impact Research PBI

- 2 and PBI

- 3 p. 2 10 4 8

4 5 9

3 4 4

1 5 12

1 7 23

1 14 17

# Paper # V

- Coded

# e

- filed Returns By Method, Filer, and Complexity (in Millions)
Self Simple Self Intermediate Self Complex Paid Simple Paid Intermediate Paid Complex

73 total

38 total

19 total



### One major difference between preparers who avoid e
- file versus those who embrace e
- file appears to be lack of knowledge about and belief in the benefits extolled by committed e
- filers

.Advancing E

- file Study Phase 1 Report 46 I ntroduction to Research on Filer Motivators The PBI

- 1 study produced the following key findings 94 :

V

- Coding preparers had suggestions for making e

- file implementation easier: the IRS should provide more training, information
, and promotion ; change the program (e.g., make it mandatory) ; and provide incentives to use it

. V

- Coding preparers seem ed to lack knowledge about e

- file : how it works, what benefits it brings, and what effect it will have on their business and their clients.
V

- Coding preparers are not necessarily averse to change; they are interested in business growth.
V

- Coding preparers ’ resistance to e

- file is mainly an issue of perception : they see it as a hassle
, and they discount or do not recognize the benefits.

The PBI

- 2 study produced the following key findings 95 :
53% of all preparer s who file d at least 100 returns V

- Code d at least 25% of their
returns. The preparer s indicated that lack of demand and lack of good software stop ped them from e

- filing more returns , but the study determined that lack of demand was something the Committed V

- Code rs overcame through taxpayer educa tion and that the IRS was working with the software development community to meet software needs. Preparers V

- Coding at least 25% of their returns did not have the same level of knowledge, understanding, or belief expressed by the Committed e

- file Users

re garding e

- file
, who saw an increase in clients and profits and recognized the appropriateness of e

- file to more complex returns. The 25% V

- Coder group also believed that e

- file will cause a greater increase in client fees than actually experienced by Commi tted e

- file Users

. The 25% V

- Coder group also lacked the belief and acceptance of the Committed e

- file Users related to e

- file benefits to their business es , their job satisfaction, and their clients. Communications campaigns targeted at increasing preparer understanding of the benefits of e

- filing may help but are unlikely to address all the knowledge and belief issues.

The PBI

- 3 study found the following differences in the Committed V

- Code r group from 2004 to 2005 96 : 29% migrated from V

- Coding to e

- filing

. The move to e

- filing seems to be related to an improved attitude toward e

filing and an increased belief in its benefits
, such as faster refunds, paper/cost saving s , ease of use, accuracy, efficiency, and greater acceptance among clients.

94 IRS (2004) Final Report, Practitioner Business Impact Study: Committed e

- file Users vs. Committed V

- Coders
95 IRS (2005) Findings From Practitioner Business Impact R esearch PBI

- 2 and PBI

- 3
96 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3Advancing E

- file Study Phase 1 Report 47 I ntroduction to Research on Filer Motivators 

### 4.8 

## One

**- on**  **- One**  e - fi le **Research Among Taxpayers and Preparers** 

In 2003 , a study consisting of 375 in

- depth telephone interviews of “high opportunity” taxpayers and pre parers segmented interviewees as follows 97 : “High opportunity” taxpayers were t axpayers who were offered e

- file by their preparers but did not choose to use it. ”High opportunity” preparers included the following segments of preparers: those who did not cu rrently e

- file , those who e

- file d less than 50% of their
returns , and those who e

- file d more than 50% of their returns

. Taxpayers who chose not to e

- file when they were offered it by their preparer s were older, with predominantly complex returns. They had preconceived notions about e

- file
, including the following 98 :

Resistance to the additional cost of e

- file

. Concerns about e

- file security. Strong preference for tried

- and

- true paper filing.
Belief that e

- file is mainly for those seeking a quick refund (whic h they generally were not).
Additional findings are as follows : Preparers who did not use e

- file perceive d it as involving more time and work for them, and even though 89% said that their clients ask about e

- file , they
turn ed back inquiries and figure d tha t taxpayers could “go elsewhere if they [wanted to] e

- file ” 99

. The lower

- usage preparers view ed e

- file as more appropriate for certain taxpayers

— those with refund returns, those with simple returns
, and those who express ed an interest in e

- file 100

. Higher

- usage preparers thought about e

- file “differently
, ” were “far greater believers in e

- file
, ” and were “far more likely to recognize its benefits” 101

.

97 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers pp. 4

- 6
98 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 9
99 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 10
100 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 11
101 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 11 

### Higher

- usage preparers are far more likely to recognize the benefits of e
- file than lower

- usage preparers

.Advancing E

- file Study Phase 1 Report 48 I ntroduction to Research on Filer Motivators 

### 4.9 

## E

- file **Practitioner Attitudinal Tracking**  **Study**

This study was conducted in 2003 to better understand preparer s who file 100 or more returns per year, what motivates them, and how best to communicate with them as the IRS continues to work toward its 80% e

- fil e goal. The demographics of preparer s who file 100 or more returns a year were identified as follows 102 : Typically male, in their early 50s. Most (76%) approach ed tax preparation as an occupation (i.e., were not seasonal workers ) and had about 20 ye ars of experience.
Two

- thirds work ed in firms that had been in business an average of 32 years and where tax prep aration was the primary service. They file d a median of 225 returns per year ; 79% were individual returns, and 46% of these were e

- filed

. In sh ort, these preparers we re older, more experienced preparers who we re very focused on tax preparation. When asked about key benefits of e

- filing
, preparer s focused on speed, with less recognition of accuracy and ease of use as e

- file benefits. Non

– e

- file pr eparers (accounting for 29% of filing volumes) were identified as “older, more Male

- skewed, more likely to be Independents or in smaller firms, and more likely to be involved in AICPA and State trade groups. They also have far less belief in main e

file benefits of Speed, Accuracy, and Ease of Use” 103

. Low

- volume e

- file preparers , who

e

-

file less than 50% of their returns and account for 19% of filing volumes, indicated that they did not e

- file more bec ause “clients don’t ask for it” 104

.

102 IRS (2003) Findings From The 2003 e

- file Practitioner Attitudinal Tracking Study
103 IRS (2003) Findings From The 2003 e

- file Practitioner Attitu dinal Tracking Study p. 11
104 IRS (2003) Findings From The 2003 e

- file Practitioner Attitudinal Tracking Study p. 11 

### C haracteristics of practitioners merit updating
to include richer demographic and motivational insights.Advancing E

- file Study Phase 1 Report 49 Taxpayer Motivators and Concerns 

# 5. 

# Taxpayer Motivators and Concerns

This Chapter discusses taxpayer motivators and concerns in a thematic framework. After an overview of taxpayer motivators and concerns, this Chapter specifically discusses Awareness, Availability, Accuracy, Security and Privacy, Ease and Convenience, Cost, T axpayer Demand , Fear of Audit, Recordkeeping and Acknowledgments, and Perceived Benefits. The points of lever age for influencing behavior directly relate to the options discussed in Chapters 10 through 1 4 as they inform the likely perception and adoption of the options. Themes identified in this Chapter include the following :
Motivators and concerns drive or hind er adoption of e
- file

— the challenge to advance e
- file is motivational , not technological.

E

-

file holdouts

— whether individuals or preparers

— are generally unconvinced of the marketed and/or studied benefits of e
- file

. Multiple factors influence the dec ision to e
- file , including accuracy, cost, ease of use, and security/privacy . In each case
, it is difficult to determine whether the benefit is actually derived from computer preparation or e
- filing itself.
Research

- based findings of filer motivations do not always support popula r assumptions.



### 5.1 

## Overview

This Chapter will look at taxpayers’ perceptions of and motivations to file el ectronically
, with an emphasis on self

- preparers

. As of TY2006 , 37 % of individual returns were self

prepared ( whether manually or through use of computer software ) 105

. The other 63 % of
returns were prepared by a paid preparer. I n addition to their own perceptions and motivations, taxpayers who use a paid preparer are strongly influenced by their
preparer s . Preparer motivators and their influence on taxpayers are discussed further in Chapter 6. T h is Chapter will cover the following items related to taxpayer motivations and concerns:

Awareness

— Are taxpayers aware of e

- file ? Availability

— Is e

- filing available to and appropriate for taxpayer s ? Accuracy

— Is e

- file perceived to produce an accurat e return? Security and Privacy

— Is e

- file perceived to provide security and privacy?
Ease and Convenience

— Is e

- file perceived to be easy to use?
Cost

— What is the cost of e

- filing and its effect on adoption ? Taxpayer Demand

— How do es owing a balance or getting a refund affect the perceived need to e

- file ? Fear of Audit

— How does fear of being audited affect e

- filing ?

105 IRS (2006) Tax Year 2006 Taxpayer Usage Study 

### Taxpayers increasingly rely

on preparers to prepare and/or file their returns and
trust their guidance on whether to e
- file . Chapter 6 provides an in

- depth look at preparers’ influence. **Contents of Chapter 5**  **:** 5.1 Overview 5.2 Awareness 5.3 Availability
5.4 Accuracy 5.5 Security and Privacy 5.6 Ease and Convenience
5.7 Cost 5.8 T axpayer Deman d
5.9 Fear of Audit
5.10 Recordkeeping and Acknowledgment s 5.11 Perceived BenefitsAdvancing E

- file Study Phase 1 Report 50 Taxpayer Motivators and Concerns Record k eeping and Acknowledgment

— How do perceived requirements for recordkeeping affect e

- filing ?
Perceived Benefits

— How do taxpayers perceive the benefits of e

- filing ?

This Section is organized in terms of these issues, rather than by taxpayer segment, although where an issue relates primarily to specific segments, those segments are identified. The discussion focuses on taxpayers’ perceptions of the issue s. In this context, for example, it is important to consider whether taxpayers perceive e

- file to be accurate and secure, rather than whether it is accurate and secure by some external measure. In addition, the discussion focuses particularly on the percep tions of non

- users of e

- file
, because overcoming their negative perceptions is critical to achieving the 80%

e

-

file goal. Some information on what motivates e

- file rs is also presented because this

m a y help determine how to motivate non

– e

- filer s. Note that when this document discusses the approximately 42% (as of TY2005) of self

preparers who filed electronically
, it is often challenging to distinguish their perceptions of the tax preparation process and software used from their perceptions of the actual process of e

- filing
, because all used tax return preparation software to e

- file 106

.



### 5.2 

## Awareness
Awareness appears to be a necessary but not sufficient condition of electronic filing. A 2003 IRS study looked at awareness of e

- file by technology acceptance segments (see Section 4.4 for more explanation of these segments and this study) and found high levels of awareness even among taxpayers who are generally not accepting of new technologies, as shown in Table 5

- 1 107 . However, awareness among Spanish speakers in the survey was somewhat lower than for the survey population as a whole; the Spanish language taxpayer unaided awareness level was 64%, an d the aided awareness level was 92% 108

.
Table 5

- 1 E

- file Awareness by Technology Acceptance Segment (as of 2003)

Segment Tech Leaders Tech Followers Tech Laggards

Unaided Awareness 89% 92% 75%
Aided Awareness 100% 99% 98%

E

-

filed in the Past Year 46% 34% 34%

As Table 5

- 1 shows, while awareness is absolutely necessary for e

- filing , it does not guarantee a high correlation with acceptance. Even in the Tech Leader segment (the

m ost likely segment to adopt a technological solution), only 46% of taxpayers e

- filed in the previous year, even though they were at least 89% aware of the option to e

- file . It should also be noted that awareness differ s from understanding, much less accept ance

. Further research is required to assess how many paper filers actually understand e

- file and how that understanding promotes or inhibits their potential acceptance of e

- file

.

106 Calculated from IRS (2007) ETA Tax Year 2005 Full Y ear Database Analysis p. 17
107 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study pp. 31,32
108 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study p. 8 8 

### While awareness is necessary for e
- filing , it does not guarantee adoption.

Additional research is required on how many paper filers understand

e
-

file and how that relates to their potential acceptance of e
- file

. This Chapter uses the definitions introduced in Section 2.3.1.3 (see also the G lossary), though in cases where a study uses a particular term to refer to a particular group, we preserve that nomenclature.Advancing E

- file Study Phase 1 Report 51 Taxpayer Motivators and Concerns 

### 5.3 

## Availability

While some factors that inhibit availability remain, they are largely outside the control of the IRS. All current e

- file methods require both a computer and access to the Internet, either by the taxpayer directly or by the taxpayer’s preparer . Access is primarily an issue for self

- preparers, because it is assumed that virtually all paid
preparer s who process any significant volume of returns (e.g., more than 100 per year) are likely to have a computer and Internet access 109

. Many individual taxpayers, however, do lack access, at least at home. The Census Bureau in 2003 estimated that 38.2% of all households did not have computers and 45.3% did not have Internet access in the home 110 . Of course, these percentages have decreased in recent years as home computers and Internet access have become more pervasive. For example, the Pew Internet & American Li fe Project reported that in April 2006 , 73% of adults had Internet access, although not necessarily at home 111 . This implies that 27% still did not have access to technologies necessary for individuals to e

file . The Pew study also reported that Internet usa ge is strongly affected by income: “Just 53% of adults living in households with less than $30,000 in annual income go online, versus 80% of those whose in come is between $30,000

- 50,000” 112 . Some taxpayers may think that high

- speed, as opposed to dial

- up, ac cess to the Internet is required to be able to e

- file , a perception that may be an inhibitor. Pew reports that, as of June 2007 , about 4 7 % of adults had high

- speed Internet access from home 113 . Even taxpayers with home computers may not be able to use them t o prepare their returns due to technical or usability issues with the software or hardware. Taxpayers without computers and/or Internet access at home may choose to use computers elsewhere in order to e

- file , though the data indicates this is a relatively infrequent occurrence . Self

- preparers may visit IRS Taxpayer Assistance Centers (TAC) or VITA locations or may utilize computers that are available to them at work or a public library. IRS Publication 17, Your Federal Income Tax
, states, “Many VITA sites o ffer free electronic filing” 114 . However, taxpayers may view TACs and VITA as being primarily oriented to providing preparation assistance; those who feel that they are able to prepare their own returns may not consider using these facilities simply to e

- fil e

. Furthermore, Pew reports that only 4% of adults use the Internet outside their home s (including work location s ) 115 . Some of the impediments to use of computers at work or in a public library include the following:
Employers may restrict the use of compute rs for personal business or limit access to Internet sites. Public libraries and Internet cafes may limit the amount of time a user can spend on a computer.

109 When practitioners were asked why they did not use e

- file , lack of availability was not mentioned, although 3% said they “Don’t like computers” ( IRS (2004) Final Report Practitioner Business Impact Study: Committed

e

-

file Users vs. Committed V

- Coders p. 30 )

. 110 Census (2003) Computer and Internet Use in the United States: 2003
111 Pew Internet & American Life Project (2006) Internet Penetration and Impact April 2006 p. 3
112 Pew Internet & American Life Project (2006) Internet Penetration and Impact April 2006 p. 4
113 Pew Internet & American Life Project (2007) Home Broadband Adoption 2007 p. 1
114 IRS (2007) Your Federal Income Tax p. 10
115 Pew Internet & American Life Project (2007) Home Broadband Adoption 2007 p. 3 

### Availability of e
- file for taxpayers may depend on many fact ors , including access to a computer, access to the Internet, and a tax situation supported by the IRS e
- file program and/or their return preparation software.Advancing E

- file Study Phase 1 Report 52 Taxpayer Motivators and Concerns Privacy may be a concern to taxpayers working on their tax returns in a public location. Employers and locations outside the home may bar installation of software. Taxpayers may be uncertain about whether traces of personal tax information remain in a public computer’s memory, available for retrieval by unknown parties. Public computers are open to exp loitation (e.g., infection with malware, keystroke recorders
, and background programs that transmit interactions to a hostile site). Taxpayers may consider using locations outside the home inconvenient or impossible to do logistically due to factors such a s the additional travel time involved, availability of public transportation, the hours of availability overlapping with their work schedule s , and the possibility that they might fail to bring a needed piece of information and need to return again.

Access to a PC and the Internet are necessary but not sufficient to e

- file

. O ther constraints exist that may preclude someone from being able to e

- file . Currently, the IRS supports most

— but not all

— of the 1040 family of forms and schedules. Tax return preparation software vendors may choose to support only a subset of the forms the IRS supports based on their determination of which forms provide sufficient business value

. The result is that the primary means of return preparation

— on a computer using third party software

— does not support all forms an individual may need. Another example of system constraints precluding e

- filing among certain users is that the IRS does not support e

- filing extensions . A 2007 study by Gallant et al. found “Not Al lowed to e

- file ” and “Extension Needed” as the third and distant fifth top reasons why taxpayers did not

e

-

file 116

.



### 5.4 

## Accuracy
While accuracy seems to be another necessary but insufficient condition for taxpayers to file electronically, it is difficult to positively correlate taxpayers’ perceptions of accuracy with incentive to file electronically.

Bec ause there is no way to e

- file without using return preparation software, it is difficult to separate taxpayers’ attitudes toward the accuracy of e

- filing itself (i.e., the accurate transmission of return information to the IRS ) from attitudes concerning the preparation software used to create an accurate return. Accuracy can be interpreted in several

senses: Accurately applying the law

— in particular, properly applying provisions that are to the taxpayer’s benefit in reducing t he amount of tax owed. Accurate computations. Accurate transmission of return information to the IRS.
As noted previously, the TAB reported that accuracy in the first two senses is among the most important factors influencing taxpayers’ choice s among retur n preparation options.

116 Gallant, L. M. et al. (2007) Why People e

- File (or Don’t e

- File) Their Income Taxes 

### While accuracy is noted as a primary e
- file benefit, it is difficult to untangle the accuracy inherent in computer preparation fro m the accuracy of e
- filing

.Advancing E

- file Study Phase 1 Report 53 Taxpayer Motivators and Concerns However, n on

- users of e

- file are not convinced of its accuracy. As noted in the 2005 Taxpayer Satisfaction Study , only 27% of Resisters and 69% of Potential Acceptors viewed e

- file as accurate 117 . In contrast, among Current e

- file Use rs , 82% considered e

file an accurate way to file 118

. T he same study also found that accuracy was the number one factor (beating, in descending order, privacy / security , ease of use, cost, speed of filing, and speed of refund) across the segments of Current U sers, Lapsed Users, and Non

- Triers and that accuracy, privacy/security, and ease of use had the greatest gaps between importance and acceptance 119

. The IRS list of e

- file benefits includes “IRS computers quickly and automatically check for errors or other missing information” 120 . However, taxpayers may consider the fact that
return preparation software performs calculation and logic checks regardless of whether they e

- file (and in fact, end

- user software does provide some level of quality control)

. Therefore, the incremental value of the IRS checks may be perceived as of little importance or conflated with their software’s capab ilities. Concerns over accuracy of transmission may at least partially explain why many taxpayers use preparation software but then choose to print out and mail their returns rather than e

- file

. Additional research is required to categorize and quantify th e reasons why taxpayer s who are comfortable using a computer to prepare their return s detour at the final step of using it to file their return s ; this research should ideally address actual practices and behaviors rather than self

- reported reasons.



### 5.5 

## Securit**y and Privacy**

Security and privacy are related concepts that many people think of as tightly intertwined . Security is about protecting the integrity of information

— making sure it is
not lost, changed
, or corrupted and that it is available only to parties it i s supposed to be available to and when it i s supposed to be available to them . Privacy is about ensuring that personally identifiable information is controlled, only disclosed to those authorized to see it, and only used for agreed

- on purposes. Security and privacy may be key considerations for some taxpayers in deciding whether to file electronicall y, but taxpayers’ perceptions of security are linked to their overall acceptance of advanced technology and perceptions of security and privacy on the Internet. In a 2002 study, “perceived credibility” (e.g., “Using the electronic tax

- filing systems would not divulge my personal information”) had a stronger influence on the intention to use electronic systems than “perceived usefulness” or “perceived ease

- of

- use” 121

. A 2005 s tudy showed that Current e

- file Users , Lapsed e

- file Users, and Non

- Triers all agreed on the importance of security /privacy (it was a top

- three concern along with accuracy and ease of use) but disagreed about the extent to which e

- file provides the security they demand, as shown in Table 5

- 2 122

.

117 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 14
118 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 6
119 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 22
120 IRS (2007) Your Federal Income Tax p. 9
121 Wang, Y.

- S. (2002) The Adoption of Electronic Tax Filing Systems: an Empirical Study p. 345
122 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 22 

### Security and privacy are common concerns but are hard to distinguish from general concerns regarding

use of the Internet versus e
file specifically

. Additional research is required on why taxpayers using a computer to prepare their returns actually
revert to paper to file them.Advancing E

- file Study Phase 1 Report 54 Taxpayer Motivators and Concerns Table 5

- 2 Importance of Security (as of 2005)

Item Current Users Lapsed Users Non

Triers

Rated assurance that return is private/secure “Really Important” 92% 92% 87%

Said assurance that return is private/secure describes e

- file completely 55% 34% 26%

Taxpayers’ perceptions of e

- file security appear to be linked to their overall acceptance of advanced technology. In a 2003 s tudy , 78% of Tech Leaders agreed that “e file is a private and secure way to file Federal income taxes,” whereas only 51% of Tech Followers and 41% of Tech Laggards agreed with this statement 123 . It is interesting to note that these statistics run contrary to other research; for example, the 2002 s tudy found that technical sophistication (“computer self

- efficacy”) tended to lower respondents’ perception of security (“perceived credibility”) rather than increase it 124

. Although the IRS emphasizes the security of e

- file in its communications, the existe nce of fraudulent web sites may cause some taxpayers concern. In recent years, the IRS has found it necessary to caution the taxpaying community about fraudulent web sites that have posed as legitimate preparers and obtained personal information from taxpa yers or even intercepted their refunds and redirected their refunds to the fraudsters ’ own bank account s 125 . The more taxpayers hear about insecure transactions over the Internet, the more concern they are likely to have about any transaction over the Intern et. A 2003 IRS study surveyed trust as a facet of security and found that taxpayers who rejected their preparer’s offer to e

- file noted “I don’t trust it/don’t trust the system” as the third of four security concerns, any of which were a perceived disincen tive to e

- file 126

. In a 2005 IRS s tudy
, Current e

- file Users expressed less confidence in the security of software

- based solutions, in which their information was kept on their own PCs , than in online solutions (including Free File), in which their information was stored with a commercial service provider. When asked whether they were satisfied with their e

- file product s “being private and secure,” 75% of users of software

- based solutions were “very satisfied,” compared with 88% of Free File users an d 77% of users of online commercial software 127 . Moreover, although non
– Current Users were concerned about software, concern about commercial third parties having access to their information was not identified specifically 128

.

123 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study p. 38
124 Wang, Y.

- S. (2002) The Adoption of Electronic Tax Filing Systems: an Empirical Study p. 346
125 IRS (2007) IRS Urges Caution about Internet Sites that Resemble the Official IRS Site
126 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 38
127 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 15
128 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 15Advancing E

- file Study Phase 1 Report 55 Taxpayer Motivators and Concerns 

### 5.6 

## Ease and Convenience

When it co mes to e

- filin g , measuring opinions about e ase and convenience is far from straightforward , partly becaus e it is difficult to untangle perceptions of preparing online and filing online. This Section focuses not on those who find e

- file easy and convenient nor on whether e

- filing is in fact easy or convenient, but rather on several groups that may not obviously perceive it to be so. Complex Returns

Self

- preparers with complex returns may require forms that are not accepted by e

- file

. Because they have to file a portion of their return on paper anyway, they may find it easier to simply print and mail th e entire return, rather than split it between e

- file and
paper. Complex returns may also push people to seek the assistance of a paid preparer. Using a preparer, their decision about e

- filing may be influenced by their preparer’s preferences (see Chapter 6 ). Complicated Processes
Having completed their returns on a computer or online, self

- preparers may find it easier to simply print out and sign their returns, attach their Form W

- 2, and mail the
returns. (Most taxpayers will presumably print out their ret urns anyway for their records; see discussion of Recordkeeping in Section 5.10 .) In 2007, 90% of all returns were prepared on a computer, but only two

- thirds of the se were subsequently e

- filed 129

. A senior vice president of Intuit pointed to the ratio of preparation time to filing time in discussing e

- file convenience:

As modern software tools have reduced the time it takes to self

- prepare a simple return down to a half hour, the process of electronic filing commonly takes another 50% of that time, or an additional fifteen minutes, just to transmit the return. 130
The process of electronically sign ing a return and authenticating one’s identity are not necessarily conve nient and may lead some self

- preparers to use a paper signature alternative (Form 8453OL) or to simply print out and mail the entire return. The IRS requires electronically signed returns use a Self

- Selected Personal Identification Number (SSP) as the sign ature and the AGI or SSP from last year’s return as the means of authentication

. 97% of taxpayers keep a copy of last year’s return (which contains at least the AGI if not the SSP ) and 86% claim easy access to it if needed, though 27% do not have access to it when they actually file their current return 131

. Given that the vast majority do have access to (or can get) the information necessary to sign and authenticate their e

- filed return, t he IRS plans to discontinue For m 8453OL in 2009

. O ne of the top two reasons for rejection of e

- filed returns is a mismatch between what the taxpayer enters as their previous year's AGI or PIN versus the IRS ’s records 132

.

129 IR S Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 26
130 Smith, B. (2005) Fiscal 2006 Budget: IRS
131 IRS (2008) Findings From e

- Signature Shared Secrets Research p. 6
132 IRS (2007) Electronic Return File Specifications for Individual Income Tax Returns

- Tax Year 2007: Part 1,

Attachments 1

- 11; IRS (2007) Service Center Error Reject Codes Report; Smith, B. (2005) Fiscal 2006 Budget: IRS 

### It can be difficult to distinguish taxpayers’ perceptions of the ease and convenience of e
- filing from the ease and convenience of tax preparation.Advancing E

- file Study Phase 1 Report 56 Taxpayer Motivators and Concerns However, 84% of taxpayers who have their return rejected for this reason are able to

c orrect it without resorting to the Form 8453OL 133

. Comfort and Habit Habit (i.e., familiarity or comfort with mailing a paper return and the associated level of effort) may be a reason why e

- fil ing is perceived by some to be less convenient. A 2003 IRS stu dy found that habit (“prefer my old/regular/traditional paper method”) and inconvenience (“process is longer/more detailed”) were the third and fifth reasons why taxpayers did not e

- file (cost, lack of need, and security were the first, second, and fourth reasons) 134 . A 2005 IRS study found similar results, with “prefer the traditional/paper method” behind “no access to a PC” and “prefer a tax preparer/accountant” as the top reasons not to e

- file 135

. A 2005 IRS study reported that only 20% to 37% of Current e

- file Users in various categories related to the mode of e

- filing volunteered that they liked the product because it was easy/convenient 136 . A 2007 survey of customers of one tax return preparation software company found that taxpayers who e

- file d actually perceived e

- file to be significantly less convenient than did taxpayers who did not e

- file and that this was one of only two statistically significant factors in discriminating e

- file non

- users from users (cost was the other) 137 . One interpretation of this result is that taxpayers who e

file discover it to be less convenient than they thought it would be, though other benefits drive the decision. For a certain group of self

- preparers
— those who prepare their returns manually

— ingrained behavior ar ound paper may affect their adoption of technology overall. In a 2007 Forrester Research study, the belief that “writing paper checks is easier” was among the top three reasons holding back 71% of those who did not pay bills online at their bank s or credit union s 138

. Taxpayers’ perceptions of the convenience of e

- filing are likely to be strongly colored by their attitudes toward preparation software and even computer usage in general. Taxpayers who are comfortable preparing returns, especially simple ones, wi th nothing more than a pencil and a calculator may be inhibited by the process of selecting and using a preparation package. For example:
Taxpayers must choose a package from a large number of vendors, most of which offer a variety of packages with differe nt features at different prices. In some cases, selection of a particular version may preclude e

- filing. As with any software purchase, the taxpayer must carefully check whether the package supports their computer, operating system, browser, etc.

133 IRS (2008) Analysis of Findings from e

- Signature Shared Secrets Research
134 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 37
135 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 15
136 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study pp. 5

- 9
137 Gallant, L. M. et al. (2007) Why People e

- File (or Don’t e

- File) Their Income Taxes p. 3
138 Forrester Research (2007) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitters, And

Quitters p. 8Advancing E

- file Study Phase 1 Report 57 Taxpayer Motivators and Concerns Taxpaye rs must be able to predict their situation s accurately. If taxpayers prepare a paper return themselves and discover the need for an additional form or schedule, the form and associated instructions can be readily obtained from the IRS. With preparation sof tware, an upgrade or purchase of a higher

level package may be necessary to obtain the form. If using a PC

- based solution, the taxpayer must install the software on their own computer. If using a web

- based solution, taxpayers must have Internet connectivi ty. Taxpayers must navigate a series of information

- gathering screens, some of which may appear to be superfluous. For example, software packages typically require taxpayers to enter all the fields from Form W

- 2, rather than the two or three fields that m ust be copied onto a paper return.



### 5.7 

## Cost
Cost is commonly held to be a leading factor in taxpayer reluctance to e

- file , but the available research suggests the effect of cost

— while significant

— cannot fully explain filer behavior. It should be noted that the IRS does not charge a fee to e

- file : The IRS does not charge a fee for electronic filing. Some Authorized IRS e

- file Providers (EROs) charge a fee for providing this service to their clients while others may offer it free of charge. However, this fee cannot be based on any figure from the tax return. Fees vary depending upon the tax professional you choose and the specific services you request. 139

The fact that third parties charge taxpaye rs to e

- file

— to cover their operating costs and profit margin

— may be a de

- motivator. From an economic perspective, consumers react differently to products that have a cost ( and to varying price points) and to those that do not. Marketers, economists, a nd business people have studied the psychological effect of cost and its opposite concept

— free

— on adoption and market share. To a
consumer, ...there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business, one of clawing and scratching for every customer.... zero is one market and any other price is another. In many cases, that’s the difference between a great market and none at all. 140
For the IRS, the concept of a market maps to e

- file adoption and the population of taxpayers who are

— at least in the case of a fee to e

- file

— price sensitive. Products offered through the Free File program, as well as products from selected vendors that offer return preparation software for free outside that program, are examples of attempts to serve this population. It should also be noted that the return preparation software industry is trending toward bundling previously separate e

- file fees into the total cost of the product, masking but not eliminating this charge.

A 2003 IRS study found that cost was one of four “general barriers” to e

- filing along with the lack of demand (e.g., “I wasn’t in a hurry to receive refund
, ” “I owe the IRS/don’t

139 IRS (2008) Authorized IRS e

- file Providers for Individuals: Is There a Fee for IRS e

- file?
140 Anderson, C. (2008) Free! Why $0.00 Is the Future of Business 

### The actual cost per return incurred by third parties to

e
- file is unknown, though the nature of Internet commerce points to small incremental costs after the initial investment. Cost as an e
- file inhibitor may have greater mindshare than it deserves, but it is a factor.Advancing E

- file Study Phase 1 Report 58 Taxpayer Motivators and Concerns expect/never get a refu nd”), paper preference, and security 141 . Another 2003 IRS study found that 39% of e

- file Skeptics and 40% of Tech Laggards believed e

- file was inexpensive, a more negative attitude than that held by other segments. A 2005 study only found cost as an inhibito r for e

- filing with a preparer; for self

- prepared online filing and free filing, cost was not among the top reasons listed for why taxpayers did not use

e

-

file 142 . A 2007 study by Gallant et al. found that cost (along with convenience) was one of two statist ically significant discriminators between those who e

- file and those who do not, though their study had limitations 143 . A 2007 IRS study listed cost (along with “Chance of getting it done right”) as a fairly distant second behind “Paying the least amount of taxes under the law” 144

. In their study of online bill pay, Forrester Research found that the two top motivators for Quitters (those who previously paid bills online but no longer do so) to return to online bill pay were eliminating and reducing cost . In a ddition, a separate Forrester study found that banks with free online bill pay increased their active online bill payers 150% more than the fee

- charging banks 145

. Taxpayers, especially those who self

- prepare, may find it difficult to distinguish the cost of e

- filing from the total cost of the software package or online service. Regardless of whether electronic filing fees are priced separately, pricing for tax retur n preparation software can be confusing.
One major tax return preparation software product is offered in eight versions at list prices that range from $19.95 to almost $100. The PC

- based software is available from merchants at a wide variety of prices, and the online version can be offered at a discount through banks, financial services firms, and employers. Options such as State return preparation and e

- filing further complicate the price structure. Consumers who prepare more than one Federal return ( e.g., for themselves and for a family member) need to trade off the typically higher cost of PC

- based software, which may allow up to five returns to be prepared, against the lower cost of an online service, which usually covers only one Federal return. Higher

- end products often bundle related software (e.g., Quicken, Microsoft Money) or offer discounts on other products and services, further complicating the picture.

Online services tend to bundle Federal e

- filing into the base price of the service. The two le ading tax return preparation software products, Intuit TurboTax and H&R Block Tax Cut, both bundle e

- file in their online versions. On the other hand, PC

- based products tend to charge separately for e

- file , either by offering software versions with and wit hout e

- file support (e.g., Tax Cut 2007, at a difference of $30 between e

- file and non
–
e

-

file versions , for one Federal and one State return ) or by charging a fee for e

- file at the time of submission (e.g., TurboTax 2007, at $17.95 per return for Federal e

- file and $17.95 additional per return for State e

- file ) 146 . In the case of Tax Cut and other packages that bundle the cost of e

- file , consumers may focus on the relative prices of the packages, rather than the cost of e

- filing . They may not consider it worthwhile to

141 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 38
142 IRS (2005) Findings From The 2005 Taxpa yer Satisfaction Study p. 15
143 Gallant, L. M. et al. (2007 ) Why People e

- File (or Don’t e

- File) Their Income Taxes p. 3
144 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 29
145 Forrester Research (20 07) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitters, And

Quitters p. 8
146 H&R Block (2008) H&R Block; Intuit (2008) Intuit 

### The cost of preparation

versus e
- filing can be confusing and complicated

.Advancing E

- file Study Phase 1 Report 59 Taxpayer Motivators and Concerns buy a version of the product that supports e

- file at a cost 67% higher than the version without e

- file 147

. While the cost of electronic filing is a major concern for a large number of taxpayers, the adoption of Free File suggests that low cost (in this case, free) is another necessary but insufficient condition. One IRS analysis notes that four times more taxpayers use commercial tax software to prepare their return s and e

- file than use the free preparation and filing solutions offered by the FFA 148

. Section 10.2.2.9 discusses Free File adoption in greater detail.



### 5.8 

## T **axpayer Demand** 

Pocketbook decisions also drive demand for e

- file . For example, a pproximately 20% of taxpayers owe a balance, and the misperception that electronic filing requires concurrent payment could be a hindrance to this group adopting e

- file 149 . In fact, taxpayers have the option of having a balanc e due taken directly from their bank
account s on any date they specify up to the filing deadline. It is not clear from IRS studies how many taxpayers do not know this or for how many it is a disincentive, or an outright obstacle, to e

- file . However, it see ms likely to be a concern.

A 2003 IRS study found that owing a balance or not getting a refund was the most popular single reason given

— in the category of lack of need to e

- file

— not to e

- file 150

. A 2007 study by Gallant et al. found that owing a balance was the fourth ranked reason
not to e

- file behind cost, problems using or understanding it, and not being allowed to use it 151

. In a 2007 Forrester Research study of online bill pay, the largest shared concern among two user segments (21% of Fence

- sitters, 20% of Holdouts) was not wanting to have money deducted from their account s before the bill is due

— highlighting the importance to users of holding onto one’s money as long as possible and their perception that the online process undermine s this goal 152

. While the promise of a faster refund offers no benefit to the projected (2008 through 2010) 20% of individuals who will not receive one , e

- file should appeal to the majority expecting money back from the IRS 153 . In fact, speed of refund is the number one (tied) perception of e

- file among Potential Acceptors and a top four reason (of eight) among Resisters 154 . Taxpayers often want to get their refund s as soon as possible. (It is interesting that the same individuals who are willing to defer a cons tant stream of cash during the tax year in favor of a large refund in the future

— even without compensating interest for the time value of their money

— often exhibit a preference for receiving that large sum without delay when it becomes apparent that th e sum is due, even at some cost.) The preponderance of refund returns early in the filing season

147 H&R Block (2008) H&R Block
148 IRS (2008) Potential Free File Population Is Much Smaller than the Total Number of Eligible Taxpayers
149 Smith, B. (2005) Fiscal 2006 Budget: IRS
150 IRS ( 2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 37
151 Gallant, L. M. et al. (2007) Why People e

- File (or Don’t e

- File) Their Income Taxes p. 6
152 Forrester Research (2007) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitters, And

Quitters p. 8
153 IRS (2007) Calendar Year Projections of Individual Returns by Major Processing Categories p. 5
154 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 14 

### Although cost is often cited as an inhibitor for e
- filing
, the low adoption of Free File suggests that cos t alone cannot explain taxpayer behavior

.

Taxpayers may want to pay balances as late as possible, and receive refunds as early as possible, but do not necessarily understand the ways in which e
- file, electronic payment, and direct deposit can help them

.Advancing E

- file Study Phase 1 Report 60 Taxpayer Motivators and Concerns demonstrates this propensity. For example, in 2007, 48% of refund returns were filed by March 9 compared with only 44% of all returns 155

. However, it is less cl ear that taxpayers are highly motivated to e

- file in order to get their refund s sooner. On an index indicating overall importance ranging from 1 to 100, taxpayers in the TAB2 focus group interviews rated “waiting time for refund” at a 6

— the lowest score on the index 156 . One study segmenting taxpayers as e

- file Believers and

e

-

file Skeptics shows a stark difference between these groups about the statement “ e

file is a faster way to get your Federal tax refund”

— 87% of the Believers agree with the statement while only 49% of Skeptics do 157

. Those not convinced by e

- filing may feel that they do not have enough information to assess the benefit of a faster refund. The IRS makes no promises about how long a refund wi ll actually take; the benefits mention a minimum (“as little as 10 days”) but not a maximum 158 . IRS Publication 2043 , IRS e

- file 2008 Refund Cycle Chart
, provides information on when refunds will be sent (if using direct deposit) or mailed based on the week the return was e

- filed but does not “guarantee a specific date” nor offer similar information for paper

- filed returns 159 . In one IRS report to Congress, it was noted that using e

- file and d irect d eposit decreased the average length of time for receiving a

re fund by 75%, from 40 days to 10 days 160

. The motivational value of an early refund is especially problematic for taxpayers who have to pay a fee (or similarly, buy a higher

- priced software package to get its bundled

e

-

file capability) in order to e

- file

.



### 5.9 

## Fear of Audit

The IRS assures taxpayers that e

- filing does not increase the ir chance s of being audited. IRS Publication 17, Your Federal Income Tax , states, “The chance of being audited does not differ whether you e

- file or file a paper tax return” 161

. However, this report did not find any research related to this assertion.

T axpayers may be uneasy about giving the IRS their returns in electronic form out of apprehension that this may make an audit more likely, per haps because they believe such returns might be easier to scrutinize or because they make more data available to the IRS. Because the method of selection of a return for audit is necessarily opaque, such fears may be hard to dispel. Suspicious taxpayers ca n easily find apparently credible web sites or blogs to confirm their fears. This report’s review of existing information on fear of audit found no relevant research on the actual comparative frequency of audits for e

- filed versus paper

- filed returns, nor the perceived extent to which taxpayers view this as a concern for e

- filing

.

155 IRS (2007) 2007 Filing Season S tatistics

- Table 13
156 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 29
157 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study p. 59
158 IRS (2007) Your Federal Income Tax p. 9
159 IRS (2008) 2008 IRS e

- file Refund Cycle Chart
160 IRS (2006) Report to Congress on Uses of the Debt Indicator Tool

— and Whether it Facilitates the Use of

Refund Anticipation Loans (RALs)

— the Debt Collection Offset Practice, the Use of RALs, and Evaluations of RAL Alte rnatives, and Use of Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax Refunds More Quickly
161 IRS (2 007) Your Federal Income Tax p. 9 

### Despite the IRS stating that

e
- filers do not face a greater risk of audit compared with their paper filing peers, anecdotally, concerns exist

.

Given the la ck of information on b oth the perception and reality of

e
-

file audit probabilities, this topic requires research.Advancing E

- file Study Phase 1 Report 61 Taxpayer Motivators and Concerns 

### 5.10 

## Recordkeeping **and Acknowledgment s** 
Concerns over keeping appropriate tax records may impede taxpayers’ willingness to e

file . Until there are clear statements about which form of record for e

- filed returns is sufficient, taxpayers may continue to experience confusion regarding this asp ect of e

filing

. The taxpayer can receive printed versions of the forms submitted to the IRS from any of the electronic preparation sources (brick

- and

- mortar preparation firms, PC software, online sites) but may wonder what constitutes a legal record for purposes of review and litigation, especially if the preparation is done by an online site where the electronic information does not reside on the taxpayer’s own equipment. Finding reliable methods to keep computerized records secure and readable over the long term is also a significant challenge 162

. IRS Publication 552, Recordkeeping for Individuals , discusses which kind of records must be kept but does not address the matter of electronic records, especially in the case of the online preparation web site 163

. There does not appear to be any specific guidance with regard to which records are considered authoritative in the electronic filing regime
among hard copy, forms on the taxpayer’s own equipment, and information in some form on equipment belonging to a preparer or online preparation site.

Forrester noted in its study of online bill pay that retaining paper bills for record keeping was among the top three reasons holding back 71% who did not pay bills online 164

. On a related topic, one key difference between e

- filed and paper

- filed returns relates to acknowledgment that the return was f iled. Paper filers must use registered or certified mail (and pay extra for these services beyond first class postage) as proof of submission

. However, they do not get confirmation beyond this delivery notification for the envelope (not its contents). That is, even for paper filers using a tracked delivery method, the IRS does not provide a formal acknowledgment of receipt o r acceptance of the return; the delivery notification is at best a p roxy for receipt acknowledgment . On the other hand, e

- file rs get an e

- mail acknowledgment that their actual return s have been delivered and accepted (typically within 48 hours of submission). This is potentially a significant peace

- of

- mind benefit regarding recordkeeping that is unavailable for paper returns. Data on the awareness or importance of acknowledgment as an e

- file benefit are scarce , however.

162 For example, AIIM, the ECM Association, notes three digital preservation problems: storage media

obsolescence, media degradation, and format obsolescence ( Association for Information and Image Management (2006) ECM Certificate Program: Concepts Module 5: Preserve )

163 IRS (2005) Recordkeeping for Individuals
164 Forrester Research (2007) Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence

- Sitters, And

Quitters p. 8 

### Until there is clear guidance regarding recordkeeping for

e
- filing and reliable digital preservation solutions, this may be a concern for e
- f ile

.

Additional research is needed on how e
- file acknowledgments are pe rceived. 

### The fact that e
- file provides acknowledgment s of receipt and acceptance may be perceived as a benefit over paper filing.Advancing E

- file Study Phase 1 Report 62 Taxpayer Motivators and Concerns 

### 5.11 

## Perceived **Benefits**

Doubts about the benefits of e

- file are most marked among taxpayers who are resistant
to e

- file

. A 2003 IRS study noted:

The differences between the two segments [ e

- file Believers and e

- file Skeptics ]

on e

- filing versus paper filing are stark

.... Note that they share only one attitude

— “ tax filing is something nobody likes, but everyone has to do ”

. 165
A majority of Skeptics agreed with only one positive statement about e

- file , “ e

- file is a faster way to get your Federal income tax return to the IRS” 166 . However, taxpayers may not see any benefit to themselves in getting their return s to the IRS quickly. In the same study , 68% of Skeptics agreed with the statement, “Mailing in your Federal return is still safer, more reliable,” and 60% agreed with “I’m used to doing my taxes on paper and see no reason to change” 167

. Taxpayer studies also raise the benefits of e

- mailed proof of receipt and accuracy.
More recently, the 2005 Taxpayer Satisfaction Study reported that among e

- file Resisters (participants who identified themselves as “not very/not at all likely” to use one of three e

- file products they were presented with: practitioner e

- file , online fili ng, and Free File), the majority rejected all benefits associated with e

- file with regard to online filing (including both PC

- based and browser

- based e

- file ) and almost all the proposed benefits with regard to free filing 168 . Potential Acceptors (those who a re “very/somewhat likely to use” e

- file ) were somewhat more positive; nevertheless, only 37% thought that e

- file using commercial software would be “easy to use/little hassle” and only 33% regarded e

- file using commercial software as a “private and secure way to file” 169

. Table 5

- 3 summarizes these findings 170

.
Table 5

- 3 E

- file Attitudes of Non

- Users (as of 2005)

Agree Completely that Product Practitioner E

-

file Online Filing Free File Would be a way to file return quickly 48% / 67% 44% / 78% 52% / 81% Would be a way to get refund faster 52% / 68% 42% / 78% 42% / 77% Would be able to pay electronically 55% / 60% 49% / 64% 49% / 74% Would be an accurate way to file 31% / 58% 27% / 68% 27% / 67% Would be an inexpensive way to file 15% / 43% 21% / 50% 55% / 77% Would be easy to use/little hassle 31% / 54% 13% / 37% 25% / 52% Would be a private and secure way to file 30% / 50% 13% / 33% 13% / 66% Would be better than other filing methods 10% / 35% 9% / 28% 5% / 44%

Note: Data on Resisters separated with a slash from data on Potential Acceptors (Resisters/Potential Acceptors )

.

165 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study p. 59
166 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study p. 59
167 IRS (2003) Findings From The 2003 Wave Of The e

- file Taxpayer Attitudinal Tracking Study p. 59
168 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 14
169 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 14
170 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 14 

### E

- file holdouts have not been convinced by marketing messages on e
- file benefits.Advancing E

- file Study Phase 1 Report 63 Taxpayer Motivators and Concerns Some of these perceptions may be based on misunderstandings that could be addressed through improved communication between the IRS and the taxpayer community. For example, only 49% of the Resistors knew that they would be able to pay any tax due electronic ally.

The 2005 Taxpayer Satisfaction Study also analyzed taxpayers by whether they were Current Users , Lapsed Users , or Non

- Triers of e

- file . With respect to the latter two segments, it was noted, “These segments [ Lapsed Users and Non

- Triers ] have not got ten the message of e

- file being Private/Secure, Easy, or Accurate

— and these are the attributes of a filing method that they value most” 171

. The TAB reports reasons taxpayers gave for their choice of return preparation options (see Tab le 5

- 4 ) 172

.
Table 5

- 4 Taxpayer Reasons for Their Choice of Return Preparation Options (as of 2007)

Reason for Choosing Preparation Option Index of Importance Paying the least amount of taxes under the law 38

Cost 22 Chance of getting it done right 22 Return preparation time 11 Waiting time for refund 6

As shown in Table 5

- 4 , at least as far as return preparation is concerned, taxpayers are influenced primarily by paying the least amount of taxes under the law and secondarily by cost and getting it done right. It is interesting to note that taxpayers rated the waiting time for a refund, which is a heavily promoted benefit of e

- file , as least important.
In Publication 17, Your Federal Income Tax , the IRS identifies the following benefits for

e

-

filing 173 :
Free File allows qualified taxpayers to prepare and e

- file their own tax returns for free. Free File is available in English and Spanish. Free File is available online 24 hours a day, 7 days a week. Get your refund faster than paper filers do, in as little as 10 day s with direct deposit. Sign electronically and file a completely paperless return.
Receive an e

- mailed proof of receipt within 48 hours after the IRS receives your
return. If you owe, you can e

- file and authorize an electronic funds withdrawal or pay by cr edit card. If you e

- file before April 15, 2008, you can schedule an electronic funds withdrawal from your checking or savings account as late as April 15, 2008.

171 IRS (2005) Findings From The 2005 Taxpayer Satisfaction Study p. 24
172 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 29
173 IRS (2007) Your Federal Income Tax p. 9Advancing E

- file Study Phase 1 Report 64 Taxpayer Motivators and Concerns Prepare and file your Federal and State returns together and save time. IRS computers quickly a nd automatically check for errors or other missing information. The chance of being audited does not differ whether you e

- file or file a paper
tax return. Regarding this published list of benefits for e

- filing : The faster refund bullet offers a clear and unambiguous benefit that would seem to appeal to the majority of taxpayers. The first three bullets speak specifically to Free File , which while technically under the umbrella of the e

- file program, is a distinct solution with its own eligibility criteria. The benefit of preparing Federal and State returns together speaks more to the benefit of tax return preparation software than e

- file per se. T he bullets on no increased chance of audit and e

- mailed proof of receipt speak to allaying taxpayers’ concerns about e

- file , rather than offering positive reasons why e

- file is in a taxpayer’s interest. Furthermore, this report found no research on the act ual risk of audit from e

- filing nor on taxpayers’ perception of this as a concern.
The list does not reflect all of the messages that resonate with taxpayers in the studies discussed in this Chapter

. More research is required on the perception and effect of IRS

marketed benefits on e
- file holdout s.Advancing E

- file Study Phase 1 Report 65 Preparer Motivators and Concerns 

# 6. 

# Preparer **Motivators and Concerns** 

This Chapter discusses preparer motivators and concerns in a thematic framework. It covers these topics using a similar organization as in Chapter 5 on taxpayer motivations

. Following an ove rview of preparers and their influence on taxpayers, this Chapter specifically discusses preparers ’ motivators and concerns in the categories of awareness, availability, accuracy, security and privacy, ease and convenience, cost, preparer influence and client demand, and perceived benefits

. The points of leverage for influencing preparer behavior directly relate to the options discussed in Chapters 10 through 14 because they inform the likely perception and adoption of the options. Themes identified in this Chapter include the following : Motivators and concerns are what drive or hinder adoption of e
- file among holdouts

— the challenge is psychological and behavioral, not technological.

E

-

file holdouts

— whether individuals or preparers

— are generally unconvinced of the marketed and/or studied benefits of e
- file

. Preparers exert significant influence on their clients’ decisions to e
file , and taxpayers are increasingly turning to third parties for prepar ation and filing assistance.



### 6.1 

## Overview
Taxpayers look to a variety of sources for assistance in preparing their return s
— practitioners, commercial preparers, return preparation software vendors
, community

based preparers , even friends and relatives. T his Section focuses on the perceptions and behavior s of the two principal preparer categories

— practitioners and commercial preparers. For purposes of this report, these two groups together are referred to as paid
preparer s. The majority of taxpayers rely on a paid preparer , and this use of paid preparers continues to increase. Between TY 2000 and T Y 2005 , the number of returns filed by a paid preparer increased from 56% to 61% 174 . This is good news for the IRS because a
return

— no matter what its level of complexity

— is more likely to be filed electronically when completed by a paid preparer 175

. Nearly 99% of income tax returns filed by tax professionals are computer

- prepared, and about 67% of these are e

- filed 176

. Growth in electronic filing rates for paid preparers is outpacing that for self

- preparers year after year. In 2003, paid preparers filed 54.9 % of taxpayer returns electronically. This number grew to 60.4% in 2004 and to 65.3% in 2005 177 . Self

- preparers, in the same time period, went from 38.5% in 2003 to 42.2% in 2004 and dropped to 41.8% in

174 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 8
175 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 17
176 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 26
177 IRS (2007 ) ETA Tax Year 2005 Full Year Database Analysis p. 19 **Contents of Chapter 6**  **:** 6.1 Overview
6.2 Awareness
6.3 Availability
6.4 Accuracy 6.5 Security and Privacy
6.6 Ease and Convenience
6.7 Cos t 6.8 Preparer Influence and Client Demand
6.9 Perceived Benefits



### Because preparers are the primary driver for tax

related decisions, understanding their motivations, inhibitors, and business context is important

.Advancing E

- file Study Phase 1 Report 66 Preparer Motivators and Concerns 2005 178 . The drop in 2005 self

- prepared e

- filer s has been partially attributed to the elimination of the IRS Telefile program around that time, which is believed to have caused approximately half of the 3 million previously Telefiled returns be submitted on paper in 2005 179

. As of 2007, 85% of returns were prepared and filed using third party assistance ; this figure break s down into 58% from preparers and 27% from individuals self

- preparing using third party tax return preparation software 180

. Among preparers , there are varying roles, business models, and clie nt preferences that influence behavior in different ways. Regardless of those variations, the preparer has an influential role in taxpayer filing decisions

. The IRS has explored the “unusually close business relationship” between taxpayers and their income tax return preparers 181

. Because of the high levels of trust taxpayers place in them, preparers “have a strong role in decision

- making in the relationship” 182 . Another IRS study showed that “Practitioners command high loyalty and reliance from Individual and Business Taxpayers, and thus offer a strong opportunity for expanding the use of e

- file

— if they perceive e

- file to be in their and their clients’ best interests” 183

. Between TY 1998 and TY 2005, the percentage of returns filed on paper by paid preparers drop ped from about 34% to about 15%

— these paper filers are a targeted group for influencing behavior 184

. This Chapter will look at what motivates preparers to e

- file

— or not. It will also address the following items related to preparer motivation:

Awareness

— Are preparers aware of e

- file ? Availability

— Is e

- filing available to and appropriate for preparer s ? Accuracy

— Is e

- file perceived to produce an accurate return? Security and Privacy

— Is e

- file perceived to be secure and private ?
Ease and Convenience

— Is e

- file perceived to be easy to use?
Cost

— What is the cost of e

- filing and the business model that supports it ? Preparer Influence and Client Demand

— How do preparers influence taxpayers to e

- file and vice versa?
Perceived Benefits

— How do preparers perceive the benefits of e

- filing ?
In discussing these issues, this Chapter will focus on preparers’ perceptions of the issues. In addition, this Chapter w ill emphasize the perceptions of non

- and low

- users of e

- file
, because changing their behavior is essential to achieving the 80% e

- file goal.

178 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 19
179 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 73
180 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 27
181 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 12
182 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p . 12
183 IRS (2004) Final Report, Practitioner Business Impact Study: Committed e

- file Users vs. Committed V

- Coders p. 3
184 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 35 

### Preparers’ motivators and concerns overlap with taxpayers’

.Advancing E

- file Study Phase 1 Report 67 Preparer Motivators and Concerns 

### 6.2 

## Awareness

It is difficult to imagine that any paid preparer s still in possession of clients are not aware of electronic filing as a means of transmitting returns to the IRS (though they may not choose to use it). A more intriguing question is
, to what extent do they understand the details of e

- filing and its potential benefits ? In surveys of 750 preparer s performed both before and after a communications campaign, 73% of preparer s in November 2004 were aware of e

- file communications, and after the communicati ons campaign, in April and May 2005, 83% of preparer s were aware of e

- file communications 185 . Of those preparer s aware of the campaign, 59% took action as a result of the campaign 186 . Their actions consisted of telling their clients about

e

-

file (40%), discuss ing e

- file with friends and colleagues (29%), visiting IRS.gov (23%), starting or increasing use of e

- file (9%), visiting the communications campaign web site aboute

- file.com (6%), and other actions (7%) 187

. However, as seen when discussing taxpayer awarenes s of e

- file , awareness of e

- file is not enough to ensure e

- filing . Although 73% of preparer s were aware of e

- file in November 2004 and 83% in April 2005, only 60.4% of paid preparer returns were e

- filed in 2004 and 65.3% in 2005 188

. Training and education may be the next step required to motivate preparers who are e

file holdouts. A 2005 IRS study of Committed V

- Coder preparers found support for the suggestion that the IRS should offer special seminars/workshops /training for preparer s in how to e

- file 189 . P repare r s who V

- Coded 25% or more of their returns shared this view and ranked training highest in the category of providing more training, information, and promotion, which was itself a top three suggestion to make e

- file easier 190

. A 2 005 IRS study comparing preparers who e

- file and V

- Code also found that providing training was a priority for Committed V

- Coders 191

. However, it is not clear exactly what additional training on e

- filing is required or why they need it, as most preparers alre ady e

- file the remainder of their (non

– V

- Coded) returns.
In summarizing the findings from a 2005 IRS study , what seem to be the actual barriers for V

- Coding preparer s are a lack of knowledge about e

- file and a lack of belief and acceptance of the benefits of e

- filing . V

- Coding preparer s underestimate the growth in clients and profits that e

- filing preparers have seen, and they overestimate the increase in client fees. 192

185 IRS (2005) Findings From The 2004

- 05 Practitioner Communications Tracking Study p. 6
186 IRS (2005) Findings From The 2004

- 05 Practitioner Communications Tracking Study p. 6
187 IRS (2005) Findings From The 2004

- 05 Practitioner Communications Tracking Stu dy p. 13
188 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 19
189 IRS (2005) Findings From Practition er Business Impact Research PBI

- 2 and PBI

- 3 p. 24
190 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 7
191 IRS (2004) Final Report, Practitioner Business Im pact Study: Committed e

- file Users vs. Committed V

- Coders p. 16
192 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 2 

### The majority of preparers is aware of e
- file , but that is just the first step to understanding and action.Advancing E

- file Study Phase 1 Report 68 Preparer Motivators and Concerns 

### 6.3 

## Availability

For taxpayers, availability consists of having the means to e

- file . Conceptually, paid
preparer s have the same core requirements (e.g., computer and Internet access ), though the nature of their business means they may have additional needs related to other electronic tax services and specific tax situations (e.g., less common forms) . This Section focuses on preparer s’ perceptions of the availability of these resources and is organized as follows:
Availability of Organizational Resources

. Availability of IRS Resources

. Availability of Support for Complex Returns

.

**6.3.1** 

## Availability of Organizational Resources
For both taxpayers and paid preparer s, those with more resources and well

- established

e lectronic channels of communication are thought to be better prepared

— and hence more likely

— to file tax returns electronically on their own behalf or on the behalf of others.

A 2005 survey by Anderson of 277 preparer s showed that “respondents with larger practices were more likely to e

- file than those with smaller practices” 193 . Also illuminating was the relative percentage of e

- filing firms by geographic region, in that it correlated with practice size: “Respondents with practices in the Midwest, Wes t, and Southwest were more likely to e

- file than those in the Northeast or Southeast” 194

. Smaller practices were more abundant in the Northeast and Southwest (71% of firms had 5 or fewer employees versus 57% elsewhere) and were more likely to be among

non
– e

- filer s 195

. In a 2004 IRS study
, preparer s reported that the main difficulties in implementing e

- file were not having the right hardware or software and not realizing that there was less room for error with e

- file 196

. Those who did not have the right hardware or software (56%) were able to overcome this issue by buying what was needed to enable e

- fil ing 197

.

**6.3.2** 

## Availability of IRS Resources
The 2005 survey by Anderson indicated that preparers felt that the IRS should provide assistance in helping them implement e

- file 198

, and they sought help from the IRS in providing training, information, and promotion of e

- file ; making changes to the program itself (i.e., making e

- f

ile mandatory) ; and providing incentives to use e

- file and ease the cost burden of e

- filing 199

. In a 2005 IRS study , a list of suggestions from the previous year’s study was used to ask participants which suggestions were most important for making e

- filing easier.

193 Anderson, T. et al. (2005) History and Trends in E

- filing: A Survey of CP A Practitioners
194 Anderson, T. et al. (2005) History and Trends in E

- filing: A Survey of CPA Practitioners
195 Anderson, T. et al. (2005) History and Trends in E

- filing: A Survey of CPA Practitioners
196 IRS (2005) Findings From Prac titioner Business Impact Research PBI

- 2 and PBI

- 3 p. 6
197 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 6
198 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 24
199 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 7 

### Among paid prepare rs, larger practices are more likely to e
- file than smaller practices.

IRS provides a number of free products and services specifically to support preparers in e
- filing

.Advancing E

- file Study Phase 1 Report 69 Preparer Motivators and Concerns Respondents selected the following as their top two most important suggestions : “IRS should give practitioners who e

- file some customer service incentives to use e

- file ” (top 33% agreed) and “IRS should work with software industry to improve e

- file for all business tax and information returns” (next 30%) 200

. The IRS has worked hard to provide preparer s with the tools they need to establish an e

file capability at their practice s . One example is the IRS e

- file Logo and Marketing Tool Kit , which contain s everything from e

- file logo decals for storefronts to marketing materials to hand out to clients 201 . The materials are available in both English and Spanish. Many of the materials are provided free of charge to preparer s. The IRS also provides all registered preparer s with unlimited access to three incentive products: Disclosure Authorization (DA), Electronic Account Resolution (EAR), and Transcript Delivery System (TDS). These products, along with the basic e

- services, round out an e

file package w here no paper is required at all. 202
Paper can be reduced or eliminated on the incoming side for preparer s as well. Becoming an “Authorized IRS e

- file provider” provides additional advantages to
preparer s because they are better able to stay informed about t he tax code and tax practice s through use of direct electronic channels 203

. Communicating electronically with paid preparer s has the benefit of being faster and less expensive than direct mail.

**6.3.3** 

## Availability of Support for Complex Returns
When thinking about preparer habits, it is important to remember that nearly 99% of income tax returns filed by tax professionals are prepared electronically 204 . The preparers possess the necessities for e

- filing , but other factors come into the picture when it comes time to transmit ting the return s . A major factor appears to be the complexity of the return.
Currently, IRS e

- file supports most

— but not all

— of the 1040 family of forms and schedules (tax return preparation software vendors may only support a subset of these), necessitating paper filing for more complex returns for which these unsupported form s and schedules are used 205 . Furthermore, not all return preparation software vendors support the full subset of IRS forms that can be e

- filed
, because they must make business decisions about which forms provide the required cost/benefit . The net result is t hat most but not all required forms and schedules are available to preparers in their return preparation software products. The numbers of paid preparer returns by method of filing for TY 2005 indicate that a paid preparer is more likely to V

- Code a complex return than a simple or intermediate return ; Table 6

- 1 summarizes the proportion of simple, intermediate, and complex returns by method of filing 206 :

200 IRS (2005) Findings From Practitioner Business I mpact Research PBI

- 2 and PBI

- 3 p. 7
201 IRS (200 7) IRS e

- file Logo and Marketing Tool Kit
202 IRS (2008) Circular 230 FAQs for e

- Services Access
203 IRS (2008) e

- file Made Easy

- A Tax Professional's One

- Stop e

- file & e

- Pay Shop
204 IRS O versight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 26
205 IRS (2008) 1040 Forms that Cannot be e

- filed or Submitted as an Attachment to Fo rm 8453, U.S. Individual Income Tax Transmittal for an IRS e

- file Return, for TY 2007
206 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 26 

### The relatively h igh rate of

non

– e
- filing of complex returns may be attributed to the lack of system support for the full range of forms and schedules required.Advancing E

- file Study Phase 1 Report 70 Preparer Motivators and Concerns Table 6

- 1 Paid

- Preparer Returns by Complexity and Filing Method ( as of 2006 )

Method of Filing Simple Returns Intermediate Returns Complex Returns
Electronic 68% 76% 54% Paper (V

- Coded) 29% 22% 43% Paper 3% 2% 3%
Some paid preparers have attributed this to the inability of the current e

- file solution to handle the range of (sometimes specialized) forms and schedules that complex returns require; rather than e

- filing part of the return and mailing the rest, most elect to just print out the entire return. A similar trend shows up in self

- prepared returns
, as shown in Table 6

- 2 ; the more complex the return, the more likely it was V

- Coded 207

.
Table 6

- 2 Self

- Prepare d Returns by Complexity and Filing Method (as of 2006)

Method of Filing Simple Returns Intermediate Returns Complex Returns
Electronic 35% 52% 39% Paper (V

- Coded) 20% 25% 37% Paper 45% 23% 24%
However, the percentage of V

- Coded returns by paid preparers for all return types has fallen over time from 62% in 1998 to 31% in 2005, with an average annual drop of 4.3%. Interestingly, V

- Coding among self

- preparers grew in that same time pe riod from 19% in 1998 to 27% in 2005, with an average annual increase of 1.2%. 208
These findings derived from actual usage data align with self

- reported statements from a 2005 IRS study of preparers who V

- Code d 25% or more returns . These preparers noted that e

- file was not appropriate for more complex returns 209

.



### 6.4 

## Accura **cy**

For many preparers, accuracy is less important than speed (and sometimes other benefits) as a benefit of e

- filing

. A 2003 IRS study found that V

- Coding preparers in particular place d accuracy as a distant third to speed and behind e

- file being paperless 210 . A 2004 IR S study found that Committed e

- file Users (preparers) rated the importance of accuracy as third behind e

- file saving paper and yielding faster refunds 211

. The same study found Committed V

- Coders (preparers) rated the benefit of “Greater Accuracy/Fewer Problems” behind “Increased Productivity” and “It’s Paperless/Saves Paper” 212

. Whether preparers are more likely than taxpayers to discriminate between

207 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 30
208 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 32
209 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 13
210 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 72
211 IRS (2004) Final Report, Practitioner Business Impact Study: Committed e

- file Users vs. Committed V

- Coders p. 11
212 IRS (2004) Final Report, Practitioner Business Impact Study: Committed e

- file Users vs. Committed V

- Coders p. 23 

### In contrast to taxpayers who generally rate accuracy as a primary motivator to e
- file
, preparers place it behind other factors, though it remains relevant.Advancing E

- file Study Phase 1 Report 71 Preparer Motivators and Concerns the accuracy inherent in a particular preparation method (e.g., on a computer using specialized tax return preparation software) and the accuracy of e

- filing itself is unclear. The flip side of the accuracy associated with e

- file is that it can be a concern among non

adop ters. The accuracy required to e

- file appears to dissuade approximately 16% of
preparer s from using it because they feel this is a disadvantage of e

- file 213 . The relative structure and stringency of the e

- file process (e.g., high rejection rate [errors on e

- filed returns are flagged earlier and corrected earlier than for paper returns, which actually have a higher overall error rate due to the lack of these upfront checks] ) is noted as a barrier to usage among preparers who V

- Code, though this category of con cern rates a distant third behind lack of demand and paper preference 214

.



### 6.5 

## Securit**y and Privacy**

Security and privacy does not seem to be prevalent in the minds of preparer s when they think about e

- file , though it is increasingly a concern . In a 2003 IRS study (relatively dated given recent developments in identity theft and phishing on the Internet) , lack of confidence in the security (including privacy) of e

- file was cited as a disincentive to using

e

-

file by 24% of V

- Coding Non

- User Preparers, 8% of Lower e

- file Usage Preparers, and 20% of Higher e

- file Usage Preparers 215

. However, s ecurity concerns was not the most prevalent response of the preparer s surveyed. The study found that 41% of V

- Code rs and 40% of Higher e

- file Usage Preparers were more concerned with the difficulty of e

filing , while 33% of Lower e

- file Usage Preparers were more concerned with the cost 216

. In fact, 16 % of Lower e

- file Usage Preparers and 35% of Higher e

- file Usage Preparers mention ed security as a benefit when they talk ed to their clients about the benefits of

e

-

file 217 . Security was cited as a benefit by 11% of the preparers in this study, in last place behind speed, accuracy, paperless, ease of use, and no postage required 218

. The issue of trust is often associated with security and privacy. A 2005 IRS study found that preparers who V

- Code d 25% or more of their returns rated “Clients don’t trust [ e

file ] yet” as the third most common reason they did not e

- file 219

. The same study also found that Committed V

- Coders shared this attitude 220

.



### 6.6 

## Ease and Convenience

In 2007 , almost 99 % of paid preparer returns were computer prepared , indicating that regardless of the filing method, the work processes almost always involve d software to prepare the tax return 221

. H owever, only approximately two

- thirds of these returns were then e

- filed 222 . Decisions were clearly made by some not to e

- file when the return was ready to be submitted to the IRS . T he V

- Coding process entails printing and mailing the

213 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and P BI

- 3 p. 6
214 IRS (2004) Final Report, Practitioner Business Impact Study: Committed e

- file Users vs. Committed V

- Coders p. 30
215 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 60
216 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 60
217 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 71
218 IRS (2003) Findings From One

- On

- One e

- file Resea rch Among Taxpayers & Preparers p. 72
219 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 13
220 IRS (2005) Findings From Practitioner Business Impact R esearch PBI

- 2 and PBI

- 3 p. 28
221 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 26
222 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 26 

### Paid preparers generally find

e
- file to be secure, and some even tout its security as a benefit

.

As their clients defer to their advice on tax matters, it is practitioners’ own attitudes toward e
- file that chiefly d et ermine whether clients will e
- file

. Issues with perceived accuracy requirements dissuade some preparers from using e
- file

.Advancing E

- file Study Phase 1 Report 72 Preparer Motivators and Concerns return, while the e

- filing process entails simply pressing a button to transmit the return electronically. This Section will address questions such as these : What barriers do V

Coding preparers face? What drives the decision to e

- file or not? When preparers switch from V

- C oding to e

- file , what motivates them to switch?
In a 2003 IRS study, w hen V

- Coding Non

- User Preparers were asked why they had not moved to e

- file usage when “they [had] the filing tools already in place to do e

- file ,” they responded that they “ perceive[d] e

- file as involving more time/work for them” 223

. Among V

- Coding Non

- User Preparers, 41% noted that they did not adopt e

- file because it was too time consuming or too difficult 224 . These preparers cited their already enormous workload, with 33% of the responden ts working from morning to midnight 7 days a week during filing season 225 . In comparison, Lower e

- file Usage Preparers and Higher e

- file Usage Preparers in the same study reported working from morning to midnight 7 days a week only 19% and 17% of the time, r espectively 226 . Lack of confidence in computers, security, or reliability was cited as a roadblock to e

- file adoption by 27% of the V

- Coding respondents, while unwillingness to take on extra costs was cited by 21% of the V

- Coding respondents 227

. A 2005 IRS study found a number of motivators and issues related to preparer s printing and mailing returns prepared by software (i.e., V

- Coders). The study found that 53% of all preparers ( those who filed 100 or more returns) V

- Coded at least 25% of their returns. This group was more likely to be accountants/CPAs and tend ed to work in older, smaller firms, and their companies tend ed to have less focus on tax prepa ration and more focus on other accounting or financial services. When asked why they did not

use e

- file , these V

- Coders tend ed to cite two reasons : lack of demand from their customers and lack of software to support e

- filing . As noted previously , the prepa rer ultimately drives the method of filing, and there are many tax return preparation software applications at many price points. 228

Particulars of the e

- file process (that do not hold for paper filing) also influence preparers’ perceptions of e

- filing ease and convenience. For example, issues with the signature form and electronic signatures are noted in a 2003 IRS study as a concern of both V

- Coding Non

- User Preparers and Lower e

- file Usage Preparers 229 . Registering as

an e

- file provider was also noted as an issue among V

- Coding Non

- User Preparers 230

. These concerns that the e

- file process is too stringent were shared by V

- Coding preparers in a 2004 IRS study 231

.

223 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 10
224 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 60
225 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 5 0
226 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 50
227 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 60
228 IRS (2005) Findings From Practitione r Business Impact Research PBI

- 2 and PBI

- 3
229 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 61
230 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 61
231 IRS (2004) Final Report, Practitioner Business Impact Study: Committed e

- file Users vs. Committed V

- Coders p. 30 

### V

- Coding preparers tend to underestimate the benefits of

e
- file and overestimate the costs of e
- filing

.Advancing E

- file Study Phase 1 Report 73 Preparer Motivators and Concerns 

### 6.7 

## Cost

Preparers note cost as a consideration but not necessarily an inhibitor to e

- filing . A 2004 IRS study found that among preparer s who V

- Code d at least 25% of their returns, 15% indicated that it cost too muc h when asked why they did not e

- file more 232

. A 2005 IRS study explored several aspects of cost with preparer s. Among the 62% of preparer s who V

- Code d at least 25% of their returns, only 6% had heard from other preparer s that price/cost was a drawback of ele ctronic filing 233 . Furthermore, only 12% of the preparers who V

- Coded 25% or more of their returns and expect ed e

- file implementation to be “Less than very easy” had a perception that the software and added cost to e

- file would be too expensive 234

. However, cost cannot be dismissed entirely: a 2003 IRS study found that 33% of Lower e

- file Usage Preparers chose not to e

- file because of concerns about costs either to them or to the taxpayer and that this was the second highest ranked reason behind lack of client demand, which garnered 60% 235

. The same study found that cost dissuaded 21% of V

- Coding Non

- User Preparers (behind 41% who had difficulty with e

- filing and 27% who lack ed confidence in e

- filing ) 236

. The relative scarcity of preparers’ perceptions of cost, specifically their perceptions of the costs of moving to an e

- file practice, merits further research.



### 6.8 

## Preparer Influence and **Client Demand**

Just as client s make pocketbook decisions to e

- file when self

- preparing, they make similar decisions regarding whether they need to e

- file when using a preparer, though the preparer exerts a significant influence on this decision.
In a 2005 IRS study, V

- Coding preparer s reported that the greatest difficulty in implementing e

- file was “lack of client demand” 237 . However, another study uncovered what may be the actual reason behind preparer s V

- Coding: even though they recognize d that e

- file could provide a greater speed of f iling, the V

- Coding preparers simply did not find it in their best interest s to upset their client relations hips with a filing method that they were not wholly convinced was easy, uncomplicated, and affordable 238

. That same 2005 IRS study found that many of the V

- Coding respondents continue d to resist e

- file mainly because they “dominate [d] the filing method decision for their clients,” they had their clients’ complete trust (at 61%, the highest of the three segments in the study 239 ), and they found it easy to deflect the questions of the 89% of clients who ask ed about e

- file 240 . When asked who made the decision on filing method, 65% of V

- Coding Non

- User Preparers said they did, compared with 9% of Lower e

- file Usage Preparers and 19% of Higher e

- file Usage Prepa rers 241 . V

- Coding preparer s were also more likely to always file via paper regardless of what the client want ed , with 55%

232 IRS (2005) Findings From The 2004

- 05 Practitioner Communications Tracking Study p. 17
233 IRS (2005) Findings Fr om Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 4
234 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 6
235 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 60
236 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 60
237 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 6
238 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 10
239 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 59
240 IRS (2003) Findings From One

- On

- One e

- file Resear ch Among Taxpayers & Preparers p. 10
241 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 58 

### The cost of e
- filing does not appear to be an inhibitor to preparers.

More research is required to evaluate the cost s and benefits of preparers adopting an e
- filing business model (beyond the cost to

e
-

file a return).



### Consistent with taxpayers’ attitudes
, the majority reason Lower e
- file Usage Preparers noted for not e
filing was when the client owed money or had to mail a check

.Advancing E

- file Study Phase 1 Report 74 Preparer Motivators and Concerns of V

- Coders stating this, compared with 4% for Lower e

- file Usage Preparers (32% of whom allow ed their clients to decide the filing meth od) and 3% of Higher e

- file Usage Preparers (24% of whom left the decision up to the client) 242

. A category of preparers identified in a 2003 IRS study may provide insight into the motivating factors for preparers using or not using e

- file . Existing in the s pectrum between e

- file resistors and full e

- file adopters, preparers in the Lower e

- file Usage Preparers segment decide d for themselves when they would or would not e

- file a return. The only barriers to full e

- file adoption, according to Lower e

- file Usage Preparers, were lack of client demand and apprehension regarding their ability or the ability of their clients to cover the additional costs. 243
This segment, categorized as “the least pro

- active preparer segment in this study,” reported that it base d its decisions mainly on client demand for e

- file 244

. The study found that 60% of Lower e

- file Usage Preparers reported that their clients did not ask for e

- file or did not have confidence in it 245 . Lower e

- file Usage Preparers felt confident in using e

- file f or refund returns, for simple returns, and when their clients express ed an interest in e

- file 246 . The majority reason (28%) for not e

- filing a return was the client did
not want to e

- file a return when they owed money and/or had to mail a check 247

. The study also found that 12% of Lower e

- file Usage Preparers (compared with immeasurably low responses from the other two segments) stated that they were “just learning how to do [ e

- file ]” or that it was their first time working with e

- file , a finding that aligns w ith technology adoption theory related to Early Adopters 248 . A very low percentage of respondents found e

- file difficult (they had the most confidence in e

- file across the segments), and only 1% of them cite d “lack of access” to software as a reason for not e

- filing more 249

. When considering the e

- file habits of Higher e

- file Usage Preparers, the primary reason this segment used e

- file so extensively was simply because “they [thought] about it differently” 250 . Higher e

- file Usage Preparers believe d in e

- file
, knew the benefits that e

file could bring them, and were more likely to offer its use to clients 251

. The study found that 97% o f Higher e

- file Usage Preparers told their clients about the positive aspects of

e

-

file 252 . A very low percentage of Higher e

- file Usage Preparers report ed that their clients were not interested in e

- filing 253 . When asked why they chose not to e

- file in certai n cases, Higher e

- file Usage Preparers cite d as reasons that a balance was due (15%) or that the return was too complex (15%) 254

.

242 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 58
243 IRS (2 003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers pp. 60, 69
244 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 11
245 IRS (2003) Findings From One

- On

- One e

- file Research Among Tax payers & Preparers p. 61
246 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 10
247 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 69
248 IRS (2003) Findings Fro m One

- On

- One e

- file Research Among Taxpayers & Preparers p. 61
249 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers pp. 60

- 61
250 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Prepar ers p. 11
251 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 11
252 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 71
253 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 69
254 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 69 

### The majority reason Higher

e
- file Usage Preparers noted for not e
- filing was that the client owed money or had a complex return

.Advancing E

- file Study Phase 1 Report 75 Preparer Motivators and Concerns 

### 6.9 

## Perceived **Benefits**

This Section considers preparers’ perceptions of not only e

- file benefits marketed by the IRS, but also those benefits spread by word of mouth among preparers. The studies of paid preparers focus less on understanding perceptions of e

- file benefits than the studies of taxpayers ; ther efore , less data is available on preparer perceptions

. A 2003 IRS study examined the perceived benefits of e

- file by preparer segment , as shown in Table 6

- 3 255

.
Table 6

- 3 Perceived Benefits of e
- file by Preparer Segment (as of 2003)

Leading Benefits of e - file 100+ Volume Practitioners E

- file Users E

- fi

le Non

Users 50

- 99 Volume Practitioners Speed/Faster 71% 77% 60% 68% Accuracy 39% 45% 25% 36%
Ease of Use 29% 35% 18% 23% Paperless Filing Using a PIN 15% 17% 10% 19%

Clients Like It 5% 6% 4% 3%

More in

- depth interviews with preparer s in a 2003 IRS study found similar results. In this study, 87% of preparers cited Speed as a benefit, 45% of preparers cited Accuracy, 42% of preparers were pleased that it was Paperless, and 36% of preparers cited Ease of Use as a benefit 256

. Other studies had findin gs pertinent to preparers ’ perceptions of e

- file benefits. A 2005 IRS study found that V

- Coding preparers understood that the main advantages of e

- file

we re that it is simpler, easier, and faster 257

. A 2004 IRS study found that t he top four positive aspects of e

- file that Higher e

- file Usage Preparers impress ed upon their clients

we re, in order of prevalence, speed (76%), security (35%), ease or convenience (32%), and accuracy (31%) 258

. In a 2003 IRS study using in

- depth interviews of 225 preparers, when respo ndents were asked what it would take for the IRS to convince them to e

- file more, 23% of Lower e

- file Usage Preparers and 29% of Higher e

- file Usage Preparers stated that the IRS should provide benefits and incentives to adopting e

- file 259 . While this was th e majority opinion among Higher e

- file Usage Preparers, it was second in importance to the 28% of Lower

e

-

file Usage Preparers who stated that the IRS needed to convince the taxpayer, thereby driving client demand 260 . Higher e

- file Usage Preparers cited as s econd in importance (27%) that the IRS should have more advertising, promotion, and education about e

file 261 . Among V

- Coding Non

- User Preparer s, 36% wanted the IRS to make e

- file easier and less complicated, 20% state d that they would move to e

- file when th e IRS stops accepting paper returns and mandates e

- file use , 12% wanted the IRS to reduce the cost

255 IRS (2003) Findings From The 2003 e

- file Practitioner Attitudinal Tracking Study p. 30
256 IR S (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 72
257 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 24
258 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 71
259 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 70
260 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 70
261 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 70 

### Speed is the most commonly recognized benefit of e
- file among preparers.Advancing E

- file Study Phase 1 Report 76 Preparer Motivators and Concerns or even make e

- file free, 11% wanted to see proof that e

- file was safe, 9% needed client demand for e

- file
, and 7% demanded that the IRS pay preparer s to e

- file 262

. Regardless of the volume of use or non

- use of e

- file , the majority of preparer s cite d speed as the primary benefit of e

- file

. The benefits of a ccuracy, ease of use, and e

- file being pap erless were given “far less acknowledgment ,” especially amon g non

- users 263

. Preparer s who V

- Code d also tend ed to underestimate the positive effect on their business (growth, productivity, accuracy, ease of use), themselves (more job satisfaction with less work and less stress), and their clients (more accuracy, ease of use, and customer satisfaction). 264

A 2005 IRS study contacted Committed V

- Coders from 2004 to see how their behaviors had changed in 2005. The study found that 29% of the 2004 Committed V

- Coders had moved to e

- file , and this change seemed to be based on them learning more about the benefits of e

- file , especially fast refunds, paper/cost savings, ease of use, accuracy, efficiency to their practice s , and greater acceptance among clients. 265

262 IRS (2003) Findings From One

- On

- One e

- file Research Among Taxpayers & Preparers p. 65
263 IRS (2003) Findings From The 2003 e

- file Practitione r Attitudinal Tracking Study p. 30
264 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 pp. 8

- 12
265 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 20Advancing E

- file Study Phase 1 Report 77 State Electronic Filing Experiences 

# 7. 

# State **Electronic Filing E**  **xperience s** 

The purpose of this Chapter is to provide a high

- level overview of electronic filing experiences in government entities other than the Federal government

— specifically the tax authorities of State governments

. T h is Chapter begins with a description of the IRS

- State relationship
, with a focus on the interconnectedness of Federal and State electronic filing programs; provides a statistical snapshot of the different options in use at the State level; and concludes with a discussion of the growth of electronic filing for State returns and the effect of the technology adoption curve. This Chapter is designed to set the stage for a more detailed description of State experiences
, with each of the options considered in Chapte rs 10 through 14

. Themes identified in this Chapter include the following : On the whole, States have employed a range of electronic filing options on par with the ones being explored by the IR S for e
- filing Federal returns ; of those, preparer
- filed returns are dominant. P reparer
- filed returns represent the largest percentage of electronically filed returns for States overall

. The technology adoption theory applies at the State level. Although States offer electronic filing insights, it is important to recog nize the variability in the different systems.



### 7.1 

## IRS

**- State Relationship for Electronic Filing** 

As described in Chapter 2, within the electronic filing arena, the relationship between the IRS and the various State tax administrations is complex

— balancing the shared objective of increasing electronic fil ing for individual State and Federal returns with the diversity of each State ’s context and independence in choosing how to best meet that objective. These complexities are apparent in looking at overall State experiences with
an eye on how these experiences may or may not apply in the Federal setting. The experiences of the States are important to the IRS e

- file efforts for number of reasons, including the following :
What the States have tried to date serves to inform the discussion on electronic filing and may provide lessons learned as the IRS moves forward with Federal e

file efforts. The path that the IRS chooses to pursue to increase Federal e

- filing rates may affect State efforts.
The choices that States make concerning increasing State electronic filing rates may ultimately affect the Federal goal of reaching 80% e

- file participation.

This Section provides an overview of the many methods States have implemented regarding electronic filing to date. Given the variability among State s regarding their tax systems, it is not surprising that the States have tried a wide range of electronic filing solutions and met with varying degrees of success. This overview sets the stage for more detailed consideration of State experiences within eac h of the option categories in the 

### Although Federal and S tate governments share the objective of increasing electronic filing, their approaches and context s differ . W hat has worked in the States may or may not apply in the Federal setting

. **Contents of Chapter 7**  **:** 7.1 IRS

- State Relationship for Electronic Filing
7.2 Electronic Filing Methods for State Returns
7.3 Electron ic Filing Growth for State ReturnsAdvancing E

- file Study Phase 1 Report 78 State Electronic Filing Experiences Chapter s that follow

— incentives, mandates, Internet

- based options (comparable to States ’ experiences with online filing and I

- File ), paper

- based options (comparable to States ’ experiences with 2D barcoding), and Telefile

. States vary widely in tax policy as well as in their reporting methods, and current information about State returns can be difficult to obtain. As the lead organization of State tax authorities and administrators, the Federation of Tax Administrators ( FTA ) faces the challenge of compiling and making sense of a vast amount of information. Current and authoritative data on State filing programs is difficult to validate, and published reports comparing one State ’s information with another’s can sometimes be
op aque about the definitions of terms being compared. Additional research to clarify and confirm State information will be an important part of future efforts

. Note that because TY2007 data wa s just becoming available as this report wa s produced, it was gene rally not incorporated.



### 7.2 

## Electronic Filing **Methods for State Returns**

According to the FTA, “each of the forty

- one S tates with a broad

- based income ta x and the District of Columbia [42 total] provide one or more avenues for the [ electronic] filing of individual income tax returns” 266 . The FTA categorizes and describes State electronic filing programs/ approaches for electronic filing as shown in Table 7

- 1 267 . Also included in this table is a breakout of methods used to file State returns (taken as a whole) from 2005. Note that for overall State returns, 52.5 % were filed on paper

— the rest of th e returns were filed electronically according to the methods described in the table.

Table 7

- 1 State Approaches to Electronic Filing (as of 2005)

Approach Description % of All State Returns Preparer Filing Though Fed/State Program Third party files both Federal and State returns with the IRS in a single transmission. The IRS separates State information and makes it available for download ing by the State

. 35.5% (Includes Fed/State and Direct Filing Combined ) Preparer Filing with the State Third party files by two separate transmissions

— Federal return to the IRS and State return to the State

. Online Filing Programs Program for electronic filing of returns by individual taxpayers using personal computers and approved commercial software routed through transmitters

. The path through which returns are transmitted depends on the State ’s participation in the Fed/State or Direct File program. 8.3%

Telefile Programs State

- operated
, independent Telefile program s in which the individual taxpayer enters return information using a touch

tone telephone. 1.8%

Direct Internet Filing ( I

- File ) Programs State programs that allow individual taxpayers to file State income tax returns directly with the State through a State

developed and administered web site. 1.9%

266 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 1
267 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It?; Federation of Tax Administrators (2008) State

Electronic Commerce Programs: State EC Snapshots Updated March 13, 2008; IRS (2006) States’ Experience with Tax Return Bar Code Techn ology; IRS (2008) State E

- file Analysis 

### States have tried a range of approaches to increase electronic filing and have met with success overall

. Many challenges exist with the availability, currency, and validity of information on State filing programs; more research and analysis is required to obtain current and valid State data.Advancing E

- file Study Phase 1 Report 79 State Electronic Filing Experiences Approach Description % of All State Returns

2D Bar c ode Programs State programs that allow computer

- produced returns that are filed on pap er where the return data is captured and printed in a machine

- readable 2

- dimensional (2D) barcode. 8.6%

State Mandates State programs in which certain preparers are required to electronically file the returns they prepare. a N/A

Total E

- filed b 47.5 %

Notes: (a) P rogram details , including preparer thresholds
, vary by State

. (b) Excludes use of 2D barcodes because this is not an electronic filing method , though it is a means of automating the processing of paper
returns

. Consistent with Federal trends, the largest percentage of electronically filed returns came from preparers . Note also that the percentage of returns filed electronically as a direct effect of manda tes are not explicitly called out in Table 7

- 1 ; however, the overall

e ffect of mandates on that preparer population is discussed in Chapter 11

. Table 7

- 2 provides more detailed information about State participation in each of these programs using FTA
, State , and IRS data compiled by the IRS 268 . To understand Table 7

- 2 , the following definitions and notes are helpful: Fed/State Program

— If “Yes
, ” the State functions as a part of the Fed/State
pr ogram , and filings are prepared/processed by EROs and sent to the IRS
, which returns them to the State . If “Ind

. ,” the State functions independently of the Fed/State program, and filings are prepared/processed by EROs and sent directly to the State

. If “Bo th,” the State is both a member of the Fed/State program and accepts some returns independently.
Online Filing

— Fed/State filings are prepared using vendor software (on the vendor’s web site or offline), sent to the IRS, and then forwarded to the State

. I

- File

— Filings are prepared and filed by individual taxpayers on the State server (or on a vendor server and fo rwarded to a State w eb portal).
Telefile

— Filings are prepared via a touch

- tone telephone interface ( State or vendor maintained) and sent to th e State

. 2D Barcode

— V

- Coded returns must have a 2D barcode.
Mandate

— A State m andate (typically on preparers) to electronically file is in place. The presence of a year in a cell indicates when the State started a program. The presence of yes/no without a year indicates that the start year is unavailable.

268 Fe deration of Tax Administrators (2008) State Electronic Commerce Programs: State EC Snapshots Updated

March 13, 2008; IRS (2006) States’ Experience with Tax Return Bar Code Technology; IRS (2008) State E

- file Analysis; IRS (2008) Summary of State Mandates for Individual Tax Returns 

### Preparer programs are responsible for 75% of

e lectronically filed state
returns

.Advancing E

- file Study Phase 1 Report 80 State Electronic Filing Experiences Table 7

- 2 State Participation in Filing Programs (as of 2008)

State Fed/State Program Online Filing I

- File Telefile 2D Barcode Mandate

Alabama Yes, 1997 1998 Yes 2005
Alaska No tax

Arizona Yes, 1997 2000 Yes
Arkansas Yes, 1994 1999
California Both, 1994 1997 2002 No 2004
Colorado Yes, 1993 1998 1999 Yes Yes

Connecticut Yes, 1993 1997 2001 Yes Yes 2006
Delaware Yes, 1993 1997 1998 Yes

D.C. Yes, 1996 1999 2001 Yes
Florida No tax Georgia Yes, 1994 1999 Yes

Hawaii Yes, 2001 2001 Yes
Idaho Yes, 1993 1997 2001 a Yes
Illinois Both, 1995 1999 1998 Yes
Indiana Yes, 1992 1999 1997 Yes 2008

Iowa Yes, 1993 1997 2001 a Yes

Kansas Yes, 1991 1997 1999 Yes Kentucky Yes, 1992 2000 Yes

Louisiana Yes, 1992 1998 2001 Yes 2008

Maine Ind., 2000 2000 2000 1996 Yes 2008 Maryland Yes, 1995 1999 2000 Yes
Massachusetts Ind., 1992 1996 Yes a Yes Yes 2005 Michigan Yes, 1992 1997 Yes 2003

Minnesota Ind., 1989 1998 2001 Mississippi Yes, 1992 1998

Missouri Yes, 1993 1997 2000 a Yes

Montana Yes, 1994 1997 2000
Nebraska Yes, 1993 1999 2001 Yes Yes
Nevada No tax New Hampshire No tax New Jersey Yes, 1994 1999 2000 Yes 2005

New Mexico Yes, 1992 1998 1998 Yes 2008
New York Both, 1992 1999 Yes 2006
North Carolina Yes, 1991 1998
North Dakota Yes, 1999 1999 Yes
Ohio Yes, 1999 1999 2003 Yes YesAdvancing E

- file Study Phase 1 Report 81 State Electronic Filing Experiences State Fed/State Program Online Filing I

- File Telefile 2D Barcode Mandate

Oklahoma Yes, 1992 1999 Yes 2003 Oregon Yes, 1993 1998 Yes 2007 b
Pennsylvania Yes, 1995 1998 2000 Yes Yes
Rhode Island Yes, 1994 1999 Yes 2003 b

South Carolina Yes, 1990 1997 1999 2008
South Dakota No tax

Tennessee No tax

Texas No tax
Utah Yes, 1992 1999 2003 Yes 2006

Vermont Yes, 2001 2001 Virginia Yes, 1994 1998 2001 Yes 2005 Washington No tax West Virginia Yes, 1991 1998 2004 a 2007

Wisconsin Yes, 1991 1998 2001 Yes Yes 2003 Wyoming No tax
Totals 38 ( Yes ) 41 27 9 3 2 1 8 b

Notes: 2D barcode data is as of 2006 (excepting California, which is 2008)

. (a) I

- File may be discontinued

. ( b ) Updated based on 2008 data. In addition to the 18 States with preparer mandates, Oregon and Rhode Island have electronic filing mandates on tax return preparation software vendors but not preparers.
While Table 7

- 2 shows the considerable variability in the particulars of States ’ filin g programs, there are some notable observations:

The Fed/State program is the dominant model based on the number of States

. Most States provide online as well as Internet filing. Preparer mandates can be used alone or in conjunc tion with any other option

. The following data maps ( Figure 7

- 1 , Figure 7

- 2 , Figure 7

- 3 , Figure 7

- 4 , and Figure 7

- 5 ) are provided as a visualization of the State

- based information sourced above.Advancing E

- file Study Phase 1 Report 82 State Electronic Filing Experiences Figure 7

- 1 States Participating in the Fed/State Program (as of 2008)

Figure 7

- 2 States with Electronic Filing Mandates (as of 2008) For more information on the Fed/State program, see Section 2.2.2.

For more information on States with electronic filing mandates, see Chapter 11.Advancing E

- file Study Phase 1 Report 83 State Electronic Filing Experiences Figure 7

- 3 States with I

- File Programs (as of 2008)

Figure 7

- 4 States Using 2D Barcodes on V

- Coded Returns (as of 2006) For more information about I

- File and related systems, see C hapter 12.

For more information about 2D barcodes and methods of automating paper return processing, see Chapter 14.Advancing E

- file Study Phase 1 Report 84 State Electronic Filing Experiences Figure 7

- 5 States with Telefile Programs (as of 2008)



### 7.3 

## Electronic Filing **Growth for State Returns**

Table 7

- 3 shows the growth of State electronic filing overall 269 . Referring to this data, FTA points out that by 2005 the volume of State electronically filed returns “nearly quintupled” the volume of 1998, compared with Federal returns that saw approximately 2.8 times the volume over the same period.

269 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 3 For more information about phone

- based electronic filing methods, see Chapter 13.



### States are currently showing faster electronic filing growth than the IRS , but this trend is slowing
, which is expected given their position on the technology adoption

curve.Advancing E

- file Study Phase 1 Report 85 State Electronic Filing Experiences Table 7

- 3 Growth of State Electronic Fili ng (as of 2005)

Year # Federal Electronic Returns # State Electronic Returns Federal Annual Growth State Annual Growth E

- file as % of All Federal Returns E

- File as % of All State Returns

1998 24.6 10.1 19.7% 12.0%

1999 29.4 14.3 19.5% 48.3% 23.1% 16.6%

2000 35.4 18.1 20.5% 30.1% 27.3% 19.5%

2001 40.2 23.8 13.6% 34.4% 30.9% 23.5%

2002 46.9 29.4 19.2% 28.3% 36.0% 28.7%

2003 52.9 35.5 14.5% 24.3% 40.6% 34.2%

2004 61.4 43.3 18.0% 25.1% 46.8% 41.6%

2005 68.5 49.8 11.5% 14.9% 51.6% 47.5%

Of the States included in this aggregated total, in 2005 FTA noted :
...four of the five States with the highest proportion of electronic total returns have an electronic filing mandate in place... Other factors that seem to influence the higher proportion of electron ic filing are the number of options for electronic filing that a State offers. These do not explain all the differences

across States , and some disparate results must be attributed to the nature of the taxpaying population and the complexity of their tax a ffairs. 270
This growth trend for State electronic filing is slowing down
, which is “not necessarily unexpected, given the maturation of the programs and the fact that most early filers are already electronic filers” 271 . According to the FTA, for all types of r eturns , the growth
rate in 2006 was an estimated 7.7% (Telefile returns dropped by half and other forms of State electronic filing were up only 10%, compared with 15% in 2005 and more than 20% in previous years) 272

. Figure 7

- 6 shows the proportion of all State returns filed electronically in 2005 273

.

270 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? pp. 3

- 4
271 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 6
272 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 6
273 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 16Advancing E

- file Study Phase 1 Report 86 State Electronic Filing Experiences Figure 7

- 6 Proportion of State Returns Filed Electronically (as of 2005) T he option Chapters that follow include a Section on S tate experiences relevant to each option.Advancing E

- file Study Phase 1 Report 87 International Electronic Filing Experiences 

# 8. 

# International **Electronic Filing Experiences** 

This Chapter discusses electronic filing of tax returns in selected foreign countries. Following a high

- level overview of approaches by a range of international tax authorities, th is Chapter focuses in more detail on three countries : the United Kingdom, Canada, and Australia. These countries have similar tax systems, have pursued long

- term electronic filing programs for individual taxpayers, and have a similar level of technical maturity. For each of these three countries, the Chapter provides a brief comparative overview follo wed by a summary of each country’s electronic filing options and features
, electronic fil ing history and adoption, and role of third parties. Themes identified in this Chapter include the following : While foreign countries have employed a range of methods on par with, and some beyond the scope of, those explored by the IRS for e
filing Federal returns, there is no single approach that by itself stands out as a paradigm of electronic fil ing success. Many variables a ffecting technology adoption overall and e lectronic fil ing adoption in particular

— size of population, culture, existing technology infrastructure, tax code
, and third party models

— must be taken into account when drawing insights from other countries’ experiences with electronic filing.



### 8.1 

## Intern **ational Experiences at a Glance**

Foreign countries employ a range of methods for the electronic filing of individual income taxes. While tax systems around the globe differ in numerous ways, these varying experiences with electronic filing offer insights fo r the IRS. Overall, two common, interrelated trends emerge among countries adopting electronic filing: an effort to simplify tax preparation and filing and a focus on making more tax

- related information, including tax account information, available online.

Table 8

- 1 summarizes the electronic filing methods of more than 20 foreign countries. While each country may use a different title for the same method, this report assigns labels (column headings in th e table) that most closely resemble the nomenclature used in the U nited S tates

. The three countries that will be looked at in greater detail la ter in this Chapter

— the United Kingdom, Canada, and Australia

— are emphasized with bold blue text. Note also t hat the table identifies electronic filing approaches for these countries but does not offer analysis of the return volume for each. T he following de finitions and notes should be helpful in understanding Table 8

- 1 :

Pre

- Filled Form

— The tax agency prepares taxpayers ’ return s on their behalf using available data and then provides the returns to them to correct or accept as is.
2D Bar code

— Printing of a computer

- readable symbol on the computer

prepared paper form that allows all information encoded in it to be automatically extracted. **Contents of Chapter 8**  **:** 8.1 International Experiences at a Glance
8.2 Comparison of the U nited S tates , U nited K ingdom
, Canada, and Australia 8.2.1 Electronic Filing Adoption 8.2.2 Internet Adoption 8.2.3 Tax Sy stem Complexity
8.3 United Kingdom Electronic Filing Summary 8.3.1 Filing Options and Features 8.3.2 Electronic Filing History and Adoption 8.3.3 Role of Third Parties
8.4 Canada Electronic Filing Summary 8.4.1 Filing Options and Features 8.4.2 Electronic Filing History and Adoption 8.4.3 Role of Third Parties
8.5 Australia Electronic Filing Summary 8.5.1 Filing Options and Features 8.5.2 Electronic Filing History and Adoption 8.5.3 Role of Third Parties



### Foreign countries use a range of electronic filing approaches, including some not currently being considered in the U nited S tates

.

For more information on 2D barcodes in the United States, see Chapter 13

.Advancing E

- file Study Phase 1 Report 88 International Electronic Filing Experiences Extend Filing Period

— A later deadline o ffered to electronic filers.
Cash Incentive

— Government

- provided direct monetary payments offered to taxpayers for electronically fil ing

. Misc

. Incentive

— Other (miscellaneous) incentives to electronically file

. Free Tax Soft.

— Government

- provided free tax return preparation software.
Free E

- file

— Electronic filing with n o cost for tran smit ting the tax return

. Online Acct

. Access

— Ability to view and/or edit tax (and sometimes other) information through a government web site.
Phone

— Ability to file taxes by phone using a keypad or voice

. Text Msg.

— Ability to file by text messaging on a mobile phone.

Table 8

- 1 Summary of International Electronic Filing Efforts

Country Pre

Filled Form 2D Bar

code Extend Filing Period Cash Incen

tive Misc. Incen

tive Free Tax Soft. Free E

- file Online Acc t. Access Phone Text Msg.

Australia 274 Yes Yes Yes Yes Yes Yes Belgium 275 Yes Yes Yes Yes Yes Yes
Brazil 276 Yes Yes
Canada 277 Yes No a Yes Yes Yes
Denmark 278 Yes n/a n/a Yes Yes
Finland 279 Yes n/a n/a Yes Yes

France 280 Yes Yes Yes b Yes Yes Germany 281 Yes Yes Yes
Iceland 282 Yes Yes Yes Yes
India 283 Yes Yes

274 Australian Taxation Office (2007) Commissioner of Taxation Annual Report 2006

– 07 p. 46

275 Belgium (2008) Belgium Tax

- on

- web; epractice.eu (2008) eGovernment Factsheet

- Belgium

- History
276 Brazilian Government

- Ministér io da Fazenda (2008) Centro Virtual de Atendimento ao Contribuinte

– e

CAC; Federal University of Brasília Impacts of Internet Use on Public Administration: A Case Study of the Brazilian Tax Administration; World Bank e

- Development Thematic Group (2005) Implementing E

Government at the Subnational Level: Lessons Learned from the Brazilian State of Minas Gerais p. 14
277 Canada Revenue Agency (2008) Certified Software for the 2008 NETFILE Program
278 Cross, M. (2006) Online Tax Gets Positive Return; Danish Inland Revenue (200 8) SKAT; London School of

Economics and Political Science ICT Observatory ICT Learning And Training: Data, Policies And Practice In Selected EU Countries, Work Package 2

– Synthesis Report p. 2; Organisation for Economic Co

- Operation and Development (2005) Using 3rd Party Information Reports to Assist Taxpayers Meet their Return Filing Obligations: Country Experiences with the Use of Pre

- populated Personal Tax Returns; Organisation for Economic Co

- Operation and Development (2008) Third Party Reporting Arran gements and Pre

- filled Tax Returns: The Danish and Swedish Approaches
279 Finland Ministry of Transport and Communications (2008) Finland Ministry of Transport and

Communications,; Finnish Tax Administration (2007) The Long and Winding Road to a Tax Return Free World: Experie nces from the Finnish Tax Administrations’ Pre

- completed No

- touch Return System
280 European Commission Directorate

- General for I nformatics (2008) Interoperable Delivery of European

eGovernment Services to Public Administrations, Business and Citizens (IDABC)

281 Stockholm Challenge (2008) Stockholm Challenge,
282 European Committee for Standardization (2004) Towards an Electron ic ID for the European Citizen, A

Strategic Vision For more information on incentives in the United States, see Chapter 10

.

For more information on phone filing in the United States, see Chapter 1 3. For more information on potential US options for free tax return preparation software, see Section 12.4.Advancing E

- file Study Phase 1 Report 89 International Electronic Filing Experiences Country Pre

Filled Form 2D Bar

code Extend Filing Period Cash Incen

tive Misc. Incen

tive Free Tax Soft. Free E

- file Online Acc t. Access Phone Text Msg.

Ireland 284 Yes Yes Yes Yes Italy 285 Yes Yes Yes c Yes d Yes Yes Yes Japan 286 Yes e Yes Yes
Netherlands 287 No Yes Yes Yes
New Zealand 288 Yes No Yes Yes Norway 289 Yes Yes Yes Yes Yes Portugal 290 Yes Ye s f Yes Yes Singapore 291 Yes Yes Yes Yes Yes
South Africa 292 Yes Yes Yes Yes Yes Yes Spain 293 Yes Yes Yes
Sweden 294 Yes n/a n/a Yes United Kingdom 295 Yes Yes Yes Yes Yes

Note s : Empty cells indicate data not available. “n/a” indicates not applicable (e.g., pre

- filled form precludes need to prepare and file a return) . (a) Must buy CRA

- certified software from commercial return preparation software vendors, but this software is free to qualified low

- income residents. (b) 20€. (c) About € 5 (based on char acters keyed in) to banks and post offices that act as preparer s and € 10 to u nion co

- operatives that also assist in return preparation . (d) Legislative mandate for electronic filing by individuals. (e) ¥ 5000. (f) Electronic filing mandatory for certain sel f

- employed workers.

283 Government of India Directorate of Income Tax (2008) Individual Income Tax; Moneycontrol.com (2007)

The Flip Side of E

- filing Tax Returns
284 Cosgrove, S. & Hegarty, C. (2006) Revenue On

- Line Service (ROS), Ireland’s e

- Government Success Story pp.

52

- 62; eprac tice.eu (2008) IE: Growing Returns for eTaxes; Irish Tax and Customs (2008) Revenue's On

- Line Service Wins Award
285 Agenzia Entrate (2007) The Costs and Benefits of ‘Il fisco telematico’; Booz Allen Hamilton (2005) Beyond e

Government: The World's Most Successful Technolog y Enabled Transformations pp. 54

- 56; Carter, P. (2006) Review of HMRC Online Services p. 33
286 Guirong Mao (2004) Building e

- Government in Japan p. 15; PricewaterhouseCoopers Tax (2007) Japan Tax

Update June 2007, Issue 30
287 Deloitte (2008) E

- filing in the Netherlands; epractice.eu (2008) eGovernment in the Netherlands p. 22; IBM (2008) Case Studies: Web Services

- Dutch Tax Authorities
288 New Zealand Inland Revenue (2008) Individ ual Income Tax
289 Accenture (2004) eGovernment Leadership: High Performance, Maximum Value; Accenture (2006) High

Performance in Government

- Leadership in Customer Service: Building the Trust p. 33; Nordisk eTax (2008) Nordisk eTax Portal
290 Accenture (2004) eGovernment Leadership: High Performance, Maximum Value p. 95; epractice.eu (200 8)

PT: E

- tax Service Increasingly Popular With Portuguese Taxpayers; Government of Portugal Building Bridges Towards Better Administration

- State Modernization in Portugal
291 Accenture (2004) eGovernment Leadership: High Performance, Maximum Value pp. 18

- 19 and 96; Carter, P.

(2006) Review of HMRC Online Services; United Nations (2008) UN E

- Government Survey 2008: From E

Government to Connected Governance p. 54
292 Accenture (2004) eGovernme nt Leadership: High Performance, Maximum Value p. 98; South African

Revenue Service (2008) SARS Efiling
293 epractice.eu (2004) ES: Spanish Taxpayers Embrace E

- tax Filing; European Public Administration Network

(2008) EUPAN Learning Team A dministrative Burden For Citizens

- Report On National Approaches p. 39
294 Organisation for Economic Co

- Operation and Development (2008) Third Party Reporting Arrangements and

Pre

- filled Tax Returns: The Danish and Swedish Approaches
295 HM Revenue & Customs (2008) Software You Can Use For Your Tax ReturnAdvancing E

- file Study Phase 1 Report 90 International Electronic Filing Experiences 

### 8.2 

## Comparison of **the U**  **nited S**  **tates ,**  **the U**  **nited K**  **ingdom , Canada, and Australia** 

This Section focuses on the experiences of three countries

— the United Kingdom, Canada, and Australia

— with electronic filing programs similar to the ones in the United States. These countries were selected for comparison primarily based on expressed interest from IRS stakeholders, similarities in features and approaches to tax administration, comparable levels of Interne t penetration and use, and relative availability of a considerable body of documentation across several years. In addition, each has experienced choices and challenges similar to those in the United States as they have implement ed electronic filing capabil ities and other electronic services and seek to increase the level of adoption of these services. The IRS may be able gain insights from these experiences as lessons learned for various electronic filing solutions and adoption factors. Although each of the selected country’s electronic filing program s has similarities to the United States e

- filing program, each country has taken a different approach to fostering adoption of electronic filing. Still, they all follow a trend among governments to alter their approaches to taxpayers, by treating them as clients, addressing their needs
, and fostering greater awareness of their tax obligations 296

. There are other countries of similar size and complexity that may also be worthy of comparison ; however
, for the purposes of this phase of the report, the field has been limited to a high

- level overview of these three. Additional in formation about these three countries or other countries would require additional research in subsequent phases as deemed necessary.

**8.2.1** 

## Electronic Fil **ing Adoption** 
For a high

- level comparison of electronic filing adoption in these three countries, the followi ng factors were considered: electronic filing adoption rates, Internet adoption
, and tax system complexity (including the role of third party preparers). Recognizing that there are additional and more in

- depth ways of comparing these tax administrations, f uture phases of the IRS advancing e

- file effort could offer more in

- depth comparison with additional insights about other countries’ experiences. The individual electronic filing adoption rates of the U nited S tates , the U nited K ingdom
, Canada , and Australia are summarized in Table 8

- 2

.

296 Kirchler, E. (2007) The Economic Psychology of Tax Behavior p. 176 

### While the U nited K ingdom
, Canada
, and Australia use varying approaches and have encountered different challenges, each country has made progress with electronic filing.

There are similarities and differences between these
count r ies and the U nited S tates that affect the applicability of a particular option.Advancing E

- file Study Phase 1 Report 91 International Electronic Filing Experiences Table 8

- 2 Summary of Individual Electronic Filing Adoption by S elected Country

Country Total Returns 2003 2004 2005 2006 2006 %

United States 297 134,421,400 a 52,869,000 61,428,300 68,463,900 73,239,500 54 .5 %

U nited K ingdom 298 9,000,000 b 700,000 1,100,100 2,000,000 2,895,482 36%
Canada 299 23,606,102 c 9, 94 0,000 11, 18 0,000 12, 05 0,200 12, 650,000 54.7%
Australia 300 11,500,000 d 8,633,000 9,000,000 8,900,000 9,100,000 80% e

Notes: (a) Data as of 2006. (b) Data a s of 2007 ; approximation . (c) Data as of 2007. (d) Data as of 2005. Australia electronic filing statistics combine ELS and e

- Tax adoption; ELS contribution: 7,800,000 in 2003, 7,900,000 in 2004, 7,500,000 estimated in 2005, 7 ,500,000 estimated in 2006. (e) Includes all electronic filings.
More information on the electronic fil ing programs and the first year of electronic filing operation for each country follows :

U nited States

— The first year of electronic filing operation in the U nited S tates was 1986, and its programs include e

- file , Free File, and Telefile (retired in 2005)

. U nited K ingdom

— The first year of electronic filing operation in the U nited K ingdom was 2000 , and its programs include the l egacy Electronic Lodgement System (ELS) (retired in 2006) and Filing by Internet (FBI)

. Canada

— The first year of electronic filing operation in Canada was 1999 , and its programs include NETFILE ( Internet filing for individuals ), EFILE ( Internet filing for preparers ), and TELEFILE

. Australia

— The first year of electronic filing operation in Australi a was 1999 , and its programs include e

- Tax ( direct Internet filing for individuals with free e

Tax software ) and the legacy Electronic Lodgement System (ELS) for preparers fi ling for individuals 301

.

297 IRS (2006) SOI Bulletin Historical Table 22: Selected Returns and Forms Filed or To Be Filed by Type During

Specified Calendar Years, 1990

- 2007 ; IRS (2007) Calendar Year Return Proje ctions for the United States and IRS Campuses CY 2007

- 2014 p. 13
298 2003 data based on 11% e

- filing rate given for Self

- Assessment returns ( Inland Revenue (2003) Annual

Report for the Year Ending 31st March 2003 p. 4 ); 2004 data from ( Inland Revenue (2004) Autumn Performance Repor t 2004 p. 10 ); 2005 data from ( HM Revenue & Customs (2006) Annual Report 2005

- 06 and Autum n Performance Report 2006 p. 85 ); 2006 data from ( epractice.eu (2007) On

- line Submission of Tax Declarations Reaches New High in UK; HM Revenue & Customs (2007) Departmental Autumn Performance Report 2 007 p. 19 ).

299 2000 NetFile data from ( Canada (2006) Government On

- Line 2006 ); other figures from ( Canada Customs

and Revenue Agency (2002) CCRA Annual Report to Parliament 2001

- 2002; Canada Customs and Revenue Agency (2003) CCRA Annual Report to Parliament 2002

- 2003; Canada Customs and Revenue Agency (2004) CCRA Annual Report to Parliament 2003

- 2004; Canada Customs and Revenue Agency (2005) CCRA Annual Report to Parliament 2004

- 2005; Canada Revenue Agency (2006) CRA Annual Report to Parliament 2005

- 2006; Canada Revenue Agency (2007) CRA Annual Report to Parliament 2006

- 2007 ).
300 Australian Taxation Office (2007) Commissioner of Taxation Annual Report 2006

– 07; Australian Taxation

Office (2008) Taxation Statistics; Turner, L. & Apelt, C. (2004) Globalisation, Innovation and Information Sharing in Tax Systems: The Australian Experience of the Diffusion and Adoption of Electronic Lodgement
301 The Australian Electronic Lodgment System was developed in 1989 as a batch filing protocol that integrated

with the practice management software used by Tax Agents, allowing them seamless lodgment as part of their internal work processes. With the combined ELS and e

- Tax electronic filing programs, over 80% of all filings are now done electronically and this co ntinues to grow year

- on

- year. ( Australian Taxation Office (2008) Taxation Stat istics ) This report uses the term “ filing ” in place of the equivalent term

—

“ lodgement ”

— used in Australia and the United Kingdom. Similarly, the term “ preparer ” is used in place of the equivalent term “ agent ,” which is used in the United Kingdom and Canada.Advancing E

- file Study Phase 1 Report 92 International Electronic Filing Experiences **8.2.2** 

## Internet **Adoption**

The level of Internet usage is closely correlated with electronic filing adoption within a country. Each of the three countries selected for comparison have Internet adoption rates comparable to those in the U nited S tates

. Table 8

- 3 summarizes the population, number of Internet users, and the percentage of each country’s population that use s the Internet 302

.
Table 8

- 3 Internet Usage in the U nited S tates , the U nited K ingdom
, Canada
, and Australia (as of 2007 )

Country Total Population Internet Adoption Adoption

United States 301,139,947 215,088,545 71% United Kingdom 60,776,238 40,362,842 66%
Canada 33,390,141 22,000,000 66%
Australia 20,434,176 15,504,532 76%

**8.2.3** 

## Tax System Complexity

T here is no commonly accepted measure of tax system complexity acr os s the four countries compared. Two data points

— the number of pages of primary tax legislation and the percentage of returns filed by preparers

— offer limited insight into the comparison of tax code complexity and the level of difficulty associated with completing an individual tax return. Since the de finition and role of preparer s varies by country, and some countries’ tax laws are supplemented by regulation s , these are rough indicators at best.

Table 8

- 4 compares the percentage of returns prepared by third parties

– the definitions and roles of which vary

– in the United States
, the United Kingdom, Canada, and Australia. In each of the countries selected for comparison, a large percentage of individual taxpayers rely on the assistance of a third party to help them prepare and file their tax returns.

Table 8

- 4 Percentage of Preparer

- Filed Return s for Selected Countries

Country Preparer

Filed Retur ns
United States 303 58% United Kingdom 304 53%
Canada 305 48.6%
Australia 306 72.8%

Table 8

- 5 compares the United States, the United Kingdom, Canada, and Australia on the basis of global Gross Domestic Product (GDP) rank , GDP, and the number of pages of

302 Internet World Stats (2008) Internet World Stats Usage an d Population Statistics
303 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 27
304 United Kingdom Parliament House of Commons (2007) Testimony on UK Tax Returns p. 4
305 Canada Revenue Agency (2008) Electronic Filing for Tax Preparers
306 Australian Taxation Office (2007) Community Perceptions Survey 2007 p. 133 

### Internet usage is comparable among the selected countries.Advancing E

- file Study Phase 1 Report 93 International Electronic Filing Experiences primary tax legislation (as a proxy for tax system complexity ) 307

. As of 2007, the U nited K ingdom had the longest national tax code in the world because the Chancellor’s 2007 Finance Bill brought the code up to just short of 10,000 pages 308

.
Table 8

- 5 Tax System Complexity for Selected Countries (as of 2006)

Country GDP Rank GDP ( $ Millions ) Pages of Tax Law
United States 1 11,711,834 5,100 a
United Kingdom 4 2,124,385 8,300 b

Canada 9 977,968 2,440
Australia 13 637,327 7,750

Notes: (a ) Considering tax regulations in addition to tax law, t he number of pages for the United States increased from 40,500 in 1995 to 66,498 in 2006 309 . ( b ) 200 7 figure: 10,000

. The remainder of this Chapter takes a more detailed look at each of the thre e countries described here, providing a high

- l evel overview of each country
, including its tax systems for filing individual income tax returns, filing options and features, electronic filing history and adoption
, and the role of third parties.



### 8.3 

## United King **dom Electronic Filing**  **Summary**

The primary tax authority in the United Kingdom is H er M ajesty’s (HM) Revenue & Customs (HMRC), formed in 2005 following the merger of the Inland Revenue and HM Customs and Excise Departments. HMRC responsibilities include the following 310 :
Collect and administer direct taxes paid by taxpayer s or their business es on money earned
, Capital Gains Tax
, Corporation Tax
, Income Tax , Inheritance Tax , and National Insurance Contributions

. Collect and administer indirect taxes paid by taxpayers or their business es on money spent on goods or services

. Collect and administer Excise duties
, Insurance Premium Tax
, Petroleum Revenue Tax , Stamp Duty , Stamp Duty Land Tax
, Stamp Duty Reserve Tax , and Valued Added Tax (VAT)

. Pay and administer C hild Benefits and the Child Trust Fund and Tax Credits

. Collect Environment Taxes, enforce the National Minimum Wage
, and service student loans. The two major approaches to individual tax assessment and filing in the U nited K ingdom , Pay As You Earn (PAYE) and Self

- Assessment (SA)
, are discussed below. Pay As You Earn ( PAYE ) Most employees pay their taxes automatically by having income tax withheld from their wages as they are paid, similar to the United States. Under the PAYE program, tax is withheld from an employee’s earnings by the employer and paid to HMRC. The U nited

307 World Bank (2008) Paying Taxes 2008: Th e Global Picture p. 17
308 AccountingWeb (2007) UK Now Has Longest Tax Code in the World
309 Edwards, C. (2007) The Federal Tax Gap p. 1
310 HM Revenue & Customs (2007) About Us The United Kingdom tax year runs from April 6 th of one year through April 5 th of the following year , and is referred to using b oth the start and end calendar years

.Advancing E

- file Study Phase 1 Report 94 International Electronic Filing Experiences K in gdom differs from the U nited S tates in the way the withholding amount is determined. HMRC sets the rate based on previous year’s earnings and creates an alphanumeric code that is included on paychecks and end

- of

- year earnings summaries. The earnings summar y document (called a P60) is the equivalent of a W

- 2 in the United States

. If the PAYE code is correct

— meaning the income tax due matches the amount withheld by the employer

— no further action is required by taxpayer s to comply with their tax obligatio n s 311

. In this sense, the PAYE program is comparable to the “pre

- filled” tax returns used in other countries or the ReadyReturn method used in California. However, if HMRC provides an incorrect PAYE code, the taxpayer must file a n SA tax return (see below). In 2005, PAYE coding accuracy was 73.3%
, and the estimated number of SA taxpayers affected in 2004

– 20 05 by coding errors was 1.4 million 312

. Self

- Assessment (SA) Tax Return Filing A minority of taxpayers whose situations are too complex to be addressed sol ely with PAYE

— usually those who are self

- employed or have multiple sources of income

— file

a n income tax SA to reconcile their tax obligation s

. Taxpayers use the SA to document individual income earned and capital gains and to claim tax allowances or reliefs. 313
Taxpayers are then required to make any payment by one of two due dates: for tax year 2007

– 20 08 onward, returns submitted on paper must be sent by 31 October, though payment is not due until 31 January. As an incentive to file electronically usi ng the FBI program, the deadline for online filers to submit their SA return s is extended to 31 January. 314
HMRC collects £16 billion a year from Income Tax SA 315

.

**8.3.1** 

## Filing **Options and Features**
For PAYE, tax payments are handled through the employer with no action required by the taxpayer. SA tax returns can be filed on paper or online using the FBI program. Unlike the IRS, HMRC provides its own free tax filing ser vice through HMRC web site
, which automatically calculates any refund or tax due and provides acknowledgment of receipt. HMRC’s web site also provides downloadable SA forms for paper SA filers and instructions in Portable Document Format ( PDF ) format.

HMR C offers an extension of the tax filing period for those submitting their returns via the FBI service. Starting in tax year 2007

– 20 08, returns submitted on paper must be sent in by 31 October; online return filers are given until 31 January. After April 20 08, it

311 House of Commons Committee of Public Accounts (2006) Filing of Income Tax Self Assessment Returns:

Twenty

- thir d Report of Session 2005

– 06 p. 14
312 Note that for employees or pensioners with PAYE tax underpayments of up to £2,000, HMRC usually

provides a PAYE coding adjustment without the need for a self

- assessment tax return.( HM Revenue & Customs (2008) Introduction to Self Assessment )
313 HM Revenue & Customs (2008) Introduction to Self Assessment
314 HM Revenue & Customs (2008) Introduction to Self Assessment
315 House of Commons Committee of Public Accounts (2006) Filing of Income Tax Self Assessment Returns:

Twenty

- third Report of Session 2005

– 06 p. 5 

### HMRC ’s web site offers downloadable forms as well as an online pr eparation service at no charge.Advancing E

- file Study Phase 1 Report 95 International Electronic Filing Experiences will be possible to amend a 2007

– 2008 return online using either third party software or HMRC software. 316
To encourage greater adoption of online filing, beginning in April 2008, HMRC will no longer accept computer

- prepared SA returns printed out on paper (i.e., returns prepared using third party tax software and printed out on paper, equivalent to V

Coded returns in the U nited S tates ) 317

. This new mandate was based on recommendations from the 2006 Lord Patrick Carter review of HMRC online services 318

. As a result of this policy decision, preparers will either have to file applicable forms online or prepa re paper forms manually (not on computer). There are very few exceptions, affect ing less than 1% of filers 319

.

**8.3.2** 

## Electronic Filing **History and Adoption**

In 1 998 , HMRC included the future capability for citizens to electronically file tax returns in its modernization strategy
, and in 1999
, Gordon Brown (then Chancellor of the Exchequer) confirmed the development of electronic filing as part of the government’s commitment to e

- government services 320

. By 2001, U nited K ingdom citizens were able to file their own tax returns online. Online delivery of services and systems remains an important theme in HMRC business and information technology strategies: “...enabling [ HMRC] customers to use their channel of choice but encouraging the use of online services, as these are [HMRC’s] lowest cost channel, by designi ng easy to use on line products ” 321

. Currently, HMRC’s electronic filing goal is considerably lower than the US go al of 80%. T he target for tax year 2007

– 2008 was 35% of SA returns

. HMRC achieved this goal 1 year early

— by tax year 2006

– 2007

— with 36% of SA returns filed electronically 322

. In the 2006

– 2007 tax year almost 2.9 million of the total of approximately 9 m illion SA returns were filed online, a figure expected to increase to 4 million in the current tax
year 323

. Some 150,000 returns were received by the system in the 24

- hour run

- up to the 31 January 2007 deadline. During the filing peak, the system processed m ore than 6,000 returns per hour 324

. There has been a significant increase in online filing by preparers, with 29.7% more returns being filed online during 2007

– 2008.

316 HM Revenue & Customs (2008) Self Assessment: the Tax Return 2007/08

317 United Kingdom (2007) Paper Substitutes for SA Retu rns p. 1
318 Carter, P. (2006) Review of HMRC Online Services p. 11
319 HRMC will provide a list of exception cases for 2008. Only for these exceptional cases will a filer be able to

use tax software to print out an “identical ” return and file it manually. Identical returns must be printed in grayscale or color

– not black and white. HMRC has stated that it will monitor the use of these identical returns and will withdraw this limited concession to paper filing if it is abused. However, s ome practical difficulties remain

. For example, filers may no t know that they are exceptions. For security reasons, some clients may not wish to tell their preparers that they are exceptions and HMRC will not be able to tell the tax preparers whether or not a particular client actually is an exception.( World Opportunities & Services

- UK (2008) “Important UK Tax Changes for April 2008” )
320 Cabinet Office (2008) Modernising Government; Hansford, A. et al. (2004) IT Adoption Strategies and their

Application to E

- Filing Self

- Assessment Tax Returns: The Case of the UK
321 HM Revenue & Customs (2006) Information Management Solutions (IMS): Information Systems Strategy p.

3
322 HM Revenue & Customs (2004) SR 2004

- Departmental Investment Strategy 2005

- 06 to 2007

- 08
323 TimesOnline (2008) Havoc on Deadline: the Great Tax Crash
324 epractice.eu (2007) On

- line Submission of Tax Declarations Reaches New High in UK 

### Starting in April 20 08, the U

nited K ingdom will no longer accept computer

prepared returns filed on paper

— what the IRS calls V

- Coded returns.

The U nited K ingdom is still making progress with electronic filing despite its technical challenges

.Advancing E

- file Study Phase 1 Report 96 International Electronic Filing Experiences Operational Challenges In his 2006 HMRC report on the U nited K ingdom ’s electronic filing program, Lord Carter recognized that adoption had been slow and lagg ed behind other countries pu rsuing similar goals. He referred to similar low usage of online services by businesses and their
preparers and pointed out that challenges to adoption “may have been exacerbated by some high profile problems with HMRC online services at peak times.” 325

HMR C online tax filing services for both individuals and business es have faced challenges in terms of infrastructure re liability since their inception 326

. Examples include the following:
In May 2007, HMRC was forced to extend the SA online filing deadline and mitigate penalties for late filing for PAYE, after preparers complained that the online service was so slow that the only way to file a return was at 4 a.m. or on weekends. 327 On January 31, 2008, hundreds of thousands of HMRC customers were given an
extra 24 hours to file their returns online for the 2007

– 2008 filing season after HMRC’s computer filing system crashed hours before the 31 January filing deadline 328 . The web site failed to work for nearly 6 hours on the busiest day of the tax year 329

. HMRC itself at one point admitted that thousands of “high

- profile” people ( members of Parliament , celebrities
, and the Royal Family) had secretly been advised against using it because its system was not secure enough 330

. A 2006 report by Lord Carter addressing the stat e of HMRC online services identified some of the problems
, including the following 331 :

In 2004

– 20 05, many individuals completing the online exit poll for SA Online were critical of service performance during peak filing periods, despite the fact that 88% wer e “ satisfied ” or “ very satisfied ” with the service. The paper processes that clients used to notify HMRC that their preparers were authorized to act for them also caused difficulties. Preparers indicated that HMRC’s records of the authorizations were sometimes out of date, with the result that they were unable to access some of their clients’ data online. Preparers felt that HMRC’s online services had not always been designed with their needs in mind. For example, they sometimes need to send additional documents with their clients’ returns
, but the SA Online service did not allow attachments to be sent. Software developers were disappointed that HMRC and the Government Gateway had not provided full end

- to

- end test services and that the test services pro vided were often implemented too late to ensure that their products would meet HMRC standards and pass the validation tests.

325 Carter, P. (2006) Review of HMRC Online Services
326 Carter, P. (2001) Review of Payroll Services
327 AccountingWeb (2007) PAYE: HMRC Allow Filing Extension And Agree Penalty Mitigation
328 TimesOnline (2008) Havoc on Deadline: the Great Tax Cra sh
329 AccountingWeb (2008) UK Self Assessment Tax System Recovers from Crash, Extra Day Given to Filers
330 TimesOnline (2008) Havoc on Deadline: the Great Tax Crash
331 Carter, P. (2006) Review of HMRC Online Services 

### HMRC has experienced a number of significant technical challenges while implementing online Self Assessment filing services

— the press has covered several highly visible incidents involving slow system performance and crashes during the annual filing seas on. The security of the online filing process has also been a concern for high

- profile users.Advancing E

- file Study Phase 1 Report 97 International Electronic Filing Experiences UK Customer Satisfaction/Concerns with Electronic Filing
In 2006, HMRC collaborated with preparer s on a survey of preparers’ satisfaction with electronic filing 332

. While the survey indicated a high level of enthusiasm for e

- services, it also underscored widespread concerns about HMRC’s abi lity to deliver reliable, robust systems with sufficient capacity to cope with predictable and inevitable peaks. A summary of the results follows 333 :
Need for Improved Functionality

— 17.6% of respondents indicated that they

use d HMRC’s online product and wo uld welcome enhancement of the software to include more of the supplementary pages. The FBI system

— unlike its predecessor, ELS

— does not currently permit filing of previous years ’ returns, a drawback and key reason for the need for computer

- printed paper returns beyond 2008. Overly High Rejection Rate

— Too many SA returns submitted online using FBI

we re rejected. The rejection rate was higher than with ELS
, and many of the

reasons for rejection were unacceptable in a system that had been in existence for 5 years. Ongoing Need for Paper Returns

— Respondents believe d that paper returns will be needed beyond 2008 for several reasons:

o General lack of confidence in HMRC’s IT infrastru cture

.
o FBI system’s inability to accept returns from some taxpayers

.
o Need for evidence that a client has approved a return’s full content. Learning Lessons from the Past

— The results of the survey reinforced the importance of the Carter Principle, set ou t in Lord Carter’s report, which state d : “as part of their work to deliver robust, high capacity services, HMRC should build in more rigorous testing...and if any tests are not successful the measures relating to that service should be deferred. We believe t hat nothing would do more damage to the potential success of the Carter program than the premature launch of services that are not fit for purpose” 334

. Figure 8

- 1 displays the survey responses for some of the factors preparer s saw as inhibiting electronic filing of personal tax returns 335 :

332 HMRC has a unit specifically representing and championing the interest of individual customers with the

rest of the department. Within the customer units is a cross

- disciplinary customer insight t eam. The team is intended to become a centre of expertise, creating best practices and establishing a central repository of customer data to prevent duplication of effort. ( HM Government (2007) Service Transformation Agreement p. 47 )

333 United Kingdom (2006) E

- Filing of Personal Tax Returns Surve y: Collective Views of the Association of

Accounting Technicians, the Association of Chartered Certified Accountants, the Association of Taxation Technicians, the Chartered Institute of Taxation, the Institute of Chartered Accountants in England & Wales,
t he Institute of Chartered Accountants in Ireland, and the Institute of Chartered Accountants of Scotland p. 25
334 Carter, P. (2006) Review of HMRC Online Services p. 12
335 United Kingdom (2006) E

- Filing of Personal Tax Returns Survey: Collective Views of the Association of

Accounting Technicians, the Association of Chartered Certified Accountants, the Asso ciation of Taxation Technicians, the Chartered Institute of Taxation, the Institute of Chartered Accountants in England & Wales, the Institute of Chartered Accountants in Ireland, and the Institute of Chartered Accountants of Scotland p. 291 

### Users of United Kingdom e
services are enthusiastic but concerned abou t system dependability.Advancing E

- file Study Phase 1 Report 98 International Electronic Filing Experiences Figure 8

- 1 Preparer Problems with Electronic Filing in the U nited K ingdom (as of 2006)

**8.3.3** 

## Ro **le of Third Parties**
Third parties in the U nited K ingdom tax system include accountants, auditors, tax advisers, bookkeepers, payroll agents, and tax consultants, which are authorized by HMRC and can register as Acco untancy Service Pr oviders (ASP) 336

. There is also a tax
return preparation software vendor industry

. HMRC maintains a Working Together web site that provides information and guidance to preparers and communicates information about upcoming workshops and other events involving preparer s. As of January 2006, 17,927 preparers had registered to electronically file on behalf of their clients. For the 2004

– 2005 tax year , preparers file d approximately 600,000 returns on behalf of the ir clients 337

. By the 2006

– 2007 tax year , the number of individual SA returns filed by preparers had risen to 4,521,689 (this is 53% of the total of 8,534,084 SA forms filed for individuals in that tax year )

. In the process of promoting electronic filing, t he HRMC has placed an emphasis on communicating with third parties. Following Lord Carter’s 2006 Review of HMRC online

s ervices
, HRMC consulted widely with its customers, delivering presentations to accountants and tax professionals to raise awareness of o nline services, to communicate the benefits of dealing with HMRC online, and to solicit ideas and feedback. HMRC also established a working group to facilitate communication among

336 In order to register for each online service the Agent is required to have a different Agent Reference

Number. For the Self Assessment (SA) Online Service, they must apply through their local tax office. The agent’s client can still register as an Individual or Org anization to use HMRC online services. A client authorizes their Agent to act on their behalf by completing the relevant authorization form and sending it to the address provided on the form (for some services, e.g., VAT, can be completed online). HMRC giv es the agents some latitude in preparing their clients’ returns.
337 Hansford, A. et al. (2004) IT Adoption Strategies and their Application to E

- Filing Self

- Assessment Tax Returns: The Case of the UK p. 9 1.6% 2.3%

4.1% 4.3%

6.1% 9.1% 16.5% 17.3% 38.7%

Complexity of use Client resistance to filing online Security concerns Slow response times Cost of third party software Registering as an agent for online filing Authorisation by client of the agent Inadequate functionality in HMRC software Fear of HMRC systems failure UK Preparer Problems with Electronic FIlingAdvancing E

- file Study Phase 1 Report 99 International Electronic Filing Experiences software vendors, preparers, and HMRC on issues related to the implementatio n of the Carter report recommendations. 338
According to HMRC, for preparers who are new to the online filing system, HMRC offers a series of introductory workshops, various printed materials
, and a help line. In addition
, there is a preparer zone on HMRC ’s w eb site specifically for tax professionals. 339

A significant difference between third parties in the U nited K ingdom and U nited States tax systems is the much more prominent role of the US private sector in the online tax filing system. A May 2008 report , The Future of Income Tax Administration in the UK
, by the All Party Parliamentary Taxation Group pointed out this distinction and linked it to the US e

- file rate: “Not only has the US Internal Revenue Service (IRS) avoided having to provide its own filing service, many more taxpayer s in the US file online at a fraction of the cost to the Department” 340

. Reinforcing findings from an earlier review of HMRC’s o nline services by Lord Carter , the All Party Parliamentary Taxation Group report recommended the following : HMRC should urgently review the success that has been achieved in the US to consider whether it would be more beneficial to HMRC and taxpayers to leave software provision to the software industry and focus HMRC’s resources on the infrastructure for exchanging electronic [data] with customers, agents and other intermediaries. The comparison with the US experience would suggest that the free Government service provided by HMRC has suppressed the take up rate of online filing. 341



### 8.4 

## Canada **Electronic Filing Summary** 

In Canada, the tax agency is directed by an oversight management/advisory board. Federal taxes are collected by the Canada Revenue Agency (CRA), formerly known as Revenue Canada or the Canada Customs and Revenue Agency. Under its Tax Collection Agreements, CRA collects and remits the following to the provinces:
Provincial personal income taxes on behalf of all provinces except Quebec so that individuals outside of Quebec file only one set of tax forms each year for their Federal and provincial income taxes. Corporate taxes on behalf of all provinc es except Quebec and Alberta. Provincial sales taxes in New Brunswick, Nova Scotia
, and Newfoundland and Labrador.

The Ministère du R evenu d u Québec collects the Goods and Services Tax (GST) in Quebec on behalf of the Federal government and remits them to Ottawa.
In Canada, both the Federal and provincial governments impose income taxes on individuals, and these are the most significant source s of revenue for those levels of government , accounting for more than 40% of tax revenue. The Federal government

338 HM Revenue & Customs (2007) Departmental Autumn Performance Report 2007 p. 13
339 Banyard, S. (2008) "Advice for Agents" Podcast: Paul Hartigan Interviews Stephen Banyard of HMRC
340 All Party Parliamentary Taxation Group (2008) The Future of Income Tax Administration in the UK p. 6
341 All Party Parliamentary Taxation Group (2008) The Future of Income Tax Administration in the UK p. 6 

### “ The comparison with the US experience suggests that the free Government service provided by HMRC has suppressed the take up rate of online filing. ”

— All Party Parliamentary Taxation Group, May 2008

The Canadian tax year runs from January 1 st to December 31 st of the same year (equivalent to a calendar year).Advancing E

- file Study Phase 1 Report 100 International Electronic Filing Experiences charges the bulk of income taxes
, with the provinces charging a somewhat lower percentage. Federal and provincial income tax rates are shown on the CRA web site 342

.

**8.4.1** 

## Filing Options and Features

Tax return s can be filed on paper tax forms or electronically using CRA

- approved software. As described in Table 8

- 6 , CRA offers free electronic filing through one of three vehicles: NETFILE (for individuals), EFILE/EFILE Plus (for third parties)
, and TELEFILE (for individuals). In addition, individual taxp ayers can access and manage their tax data via the CRA My Account capability on the CRA web site 343

.
Table 8

- 6 F ree Electronic Tax Filing Services Offered by Canada Revenue Agency

Program Description

NETFILE Electronic filing service designed for individual taxpayers only, for filing their own personal income tax and benefit returns with the CRA

. EFILE EFILE On

- Line allows preparers to transmit their clients’ returns individually over the Internet. Acknowledg m ent of receipt of the electronic return is immediate.
EFILE Plus EFILE On

- Line Plus allows preparers to transmit from 1 to 60 of their clients’
returns at the same time over the Internet. Acknowledg m ent of a batch transmission takes a few hours.

TELEFIL E TELEFILE is an interactive computer program that allows taxpayer s , if eligible, to electronically file their tax return s for free using a touch

- tone telephone. Using the service requires a touch

- tone telephone.
In addition to these electronic filing methods, the CRA uses Magnetic Ink Character Recognition (MICR) technology for some paper forms 344

. This is comparable to the US situation in which some forms cannot be e

- filed . Unlike the U nited S tates , where even forms that cannot be e

- filed are available online for download ing , CRA’s use of MICR technology means that these forms cannot be electronically downloaded and printed because consumer

- grade printers do not support MICR 345

.

342 Canada Revenue Agency (2008) What Are The Income Tax Rates In Canada For 2008?
343 The individual taxpayer can access their tax data via the CRA My Account capability. With My Account the

taxpayer can see information about their: Tax refund or balance owed; direct deposit; Registered Retirement Savings Plan (RRSP), Home Buyers' Plan, and Lifelong Learning Plan; tax returns and carryover amounts; disa bility tax credit; account balance and payments on filing; installments; Canada Child Tax Benefit and related provincial and territorial programs payments, account balance, and statement of account; Goods and Services Tax (GST)/Harmonized Sales Tax (HST) c redit and related provincial programs payments, account balance, and statement of account; Universal Child Care Benefit payments, account balance, and statement of account; Children for which you are the primary care giver; Working Income Tax Benefit advan ced payments; pre

- authorized payment plan; authorized representative; and addresses and telephone numbers. My Account also allows taxpayers to manage their personal income tax and benefit account online: changing return(s) information; changing address or telephone numbers; applying for child benefits; arranging direct deposits; authorizing their representative; setting up a payment plan; and formally disputing assessments or determinations. It is possible to see information on the My Account pages before
t he official document or documents from the CRA arrive. For example, if a return is reassessed, the details of the reassessment may be available on My Account before they receive their Notice of Reassessment in the mail. ( Canada Revenue Agency (2008) My Account for Individuals )
344 Canada Revenue Agency (2008) Forms Available Only in Paper Format
345 Certain payment forms and remittance vouchers are not available in a computerized format due to the

technical requirements of the Magnetic Ink Character Recognition (MICR) technology used on these forms. The CRA states that this is because the ink or toner is magnetized, so they can provide these forms o nly inAdvancing E

- file Study Phase 1 Report 101 International Electronic Filing Experiences NETFILE for Individual Filers Individual taxpayers who prepare their personal income tax and benefit returns themselves and wish to send them to CRA via the Internet must use NETFILE. Th is online system requires the use of a security code found on the mailing label affixed to t he taxpayer’s T1 (Income Tax and Benefit Return) preparation package

. To prevent preparers from using the NETFILE service, the CRA has set a limit of 20 returns that can be prepared with NETFILE

- certified tax return preparation software. Software developer s must respect this limit for their software to be certified for NETFILE use 346

. C RA randomly asks electronic filers to send in supporting documentation for their
returns. 347
A description of NETFILE characteristics follows:

Benefits

— CRA claims NETFILE benef its such as security and confidentiality
, quick refund s (usually within 8 business days)
, greater accuracy (fewer transcription errors occur when tax return preparation software is used)
, convenience (nothing to be mailed and no receipts to be submitted unless requested)
, and immediate acknowledgment of receipt of tax return 348

. The benefit of quick turnaround for refund s was confirmed in processing the 200 4 tax year returns , when the CRA su rpassed its own performance target of 2 weeks for processing electronically filed returns by processing returns within 1. 85 weeks. The paper

- filed return processing target was 4 to 6 weeks, 3. 57 weeks actual 349

. Cost

— Although NETFILE is free of charge, ta xpayers who wish to use NETFILE must purchase a web application or a tax return preparation software package marketed by the private sector and certified by the CRA.
Eligibility

— Although eligibility is broad, some citizens are excluded
, including those in bankruptcy, non

- residents of Canada
, and those with income from a business with a permanent establishment outside their province or territory of residence. NETFILE cannot be used to send an amended tax return. 350
EFILE and EFILE Plus for Preparers The CRA offers a service for third party filers called EFILE that allows registered preparers to file current

- year individual tax returns using one of two methods of electronic transmission:

preprinted format. If these forms were printed from the Internet or computer software, they would not be acceptable for payments at financial institutions. As a result, various forms including the non

- personalized GST/HST (Goods and Services Tax/Har monized Sales Tax) return are only available in pre

- printed format. ( Institute of Chartered Accountants of Alberta and Institute of Chartered Accoun tants of Saskatchewan (2006) Income Tax Questions )
346 The CRA has determined that a limit of 20 returns, whether printed or filed using NETFILE, is appropriate

and sufficient for a NETFILE software product. This allows even a large family to share one so ftware product to prepare and file their tax returns. Canada Revenue Agency (2008) Certified Software for the 2008 NETFILE Program (2007 Tax Return)
347 Wong, C. (2006) CRA Looks to Have More Than Half of Returns Filed Electronically
348 Le Goff, P . (2005) Individual Income Tax Returns: Taxpayers Pay While The Government Saves p. 1
349 Canada Revenue Agency (2006) CRA Annual Report to Parliament 20 05

- 2006 p. 44
350 Wong, C. (20 06) CRA Looks to Have More Than Half of Returns Filed ElectronicallyAdvancing E

- file Study Phase 1 Report 102 International Electronic Filing Experiences The EFILE On

- Line software program allows transmission of client s’ returns individually over the Internet. The preparer receives an acknowledgment of the individual return receipt immediately.

The EFILE On

- Line Plus application is an enhanced electronic filing software program that allows the preparer to transmit from one to 60 returns electronically at one time (i.e., in a batch) via the Internet; acknowledgment of receipt of the return takes a few hours. To file electronically using either EFILE On

- Line or EFILE On

- Line Plus, the preparer needs CRA

- certified tax retu rn preparation software. In addition, the client has to complete and sign an authorization (Form T183, Information Return for Electronic Filing of an Individual’s Income Tax and Benefit Return ) before the preparer can electronically file the return. 351

TELEF ILE for Filing by Telephone for Eligible Individual Filers The CRA also offers TELEFILE, an interactive computer program that allows eligible taxpayers to electronically file their tax return s for free using a touch

- tone telephone. Besides using a touch

- to ne telephone, the service requires the taxpayer’s social insurance number (SIN), a personalized access code
, and a completed tax return. If taxpayer s cannot use the TELEFILE service due to a disability or lack of access to a touch

tone telephone, they are directed to a toll

- free telephone number for assistance. 352

TELEFILE is designed for taxpayers with the most common types of income tax information
, such as employment income, pension income, interest income, registered pension plan contributions, and charit able donations. The TELEFILE system does not accept m ore complex tax information, such as self

- employment income, capital gains
, and rental income

. F irst

- time filers are not eligible to use TELEFILE. 353
The TELEFILE service is also available to taxpayers who receive the tax package for computer software users and who would otherwise receive one of the T1 special forms and guidance. These packages also contain a personalized access code that can be used for both the TELEFILE and NETFILE services and informa tion about the TELEFILE service. 354
Canada’s TELEFILE capability is well promoted, with a prominent entry on the CRA web site, which points to benefits similar to those for electronic filing

— security, quick refund (within 2 weeks), convenience, and no cost to taxpayers 355

. TELEFILE was introduced in 1998 and had 700,000 participants in 1999 356

. In 2006, there were 585,762 TELEFILE user s , and in 2007, 510,438, a drop of 12.86% 357

. Additional information concerning the drop in TELEFILE use between 2006 and 2007 may be a topic of future research, because no readily available information was found

.

351 C anada Revenue Agency (2008) Electronic Filing for Tax Preparers
352 Canada Revenue Agency (2007) About the TELEFILE service
353 Canada Revenue Agency (2007) About the TELEFILE service
354 Canada Revenue Agency (2007) About the TELEFILE service
355 Canada Revenue Agency (2008) Sending a Tax Return
356 Inland Revenue (2000) Information A ge Government: Benchmarking Electronic Service Delivery p. 140
357 CBCNews.ca (2007) E

- filing Running Ahead of Last Year, Tax Department SaysAdvancing E

- file Study Phase 1 Report 103 International Electronic Filing Experiences **8.4.2** 

## Electronic Filing **History and Adoption** 
The adoption of electronic filing of tax returns in Canada mirrors the overall Canadian electronic services experience. In 1997, Canada announced its aim to become the most connected nation on earth. Through an initiative called Connecting Canadians, the Federal government provided access to the best available communications technologies, including the Internet, in all areas of the country. Canadians have subsequently become among the world's most enthusiastic users of the worldwide web. A 2005 Canadian government survey revealed that 72% of Canadians had Internet access at home, and 71% of these had used a Federal government web site in the previous 12 months. 358
Building on the Connecting Canadians program, in 1999 the government launched the Government On

- Line (GOL ) initiative to make the 130 most commonly used government services available online, anywhere, anytime. As of 2005, individual Canadians and businesses could access all of the promised 130 government services online, in English or French. 359

The CRA electr onic filing program for tax returns was one outcome of the GOL initiative. When electronic filing over the Internet was first offered, the CRA received 443,000 individual tax returns via this channel (representing 2% of the T1 [ Income Tax and Benefit Retur n ] individual tax returns); by 2004, it had received close to 4 million returns via the Internet. A capability for filing business tax returns via the Internet began in 2004. Canadian electronic filing figures indicate some of the same trends as in the Un ited States, including the common practice (by both individuals and preparers) of printing out a paper version of a tax return prepared using tax return preparation software (V

Coding in the U nited S tates ). The following table and figures provide addition al insight into Canadian filing trends. Table 8

- 7 displays the 2006 figure s for paper and electronic filing, including the number of software

- prepared returns printed out for submission 360

.

358 Canada (2007) Service Canada

– A New Paradigm in Government Service Deliver y p. 1
359 Canada (2007) Service Canada

– A New Paradigm in Government Service Delivery p. 1
360 Canada Revenue Agency (2008) Electronic Filing for Tax Preparers 

### Canada has an Internet

literate and Internet

experienced population

.Advancing E

- file Study Phase 1 Report 104 International Electronic Filing Experiences Table 8

- 7 Canadian Filing Methods (as of 2006)

Method Millions of T1 Returns Paid Preparer

EFILE 8.8

V

- Coded 2.6 Paper 0.1
Self

- Prepared

NETFILE 4.1

TELEFILE 0.5

V

- Coded 2.8 Paper 4.8

TOTAL 23.7

Figure 8

- 2 shows the trend in electronic filing in Canada from 1994 through 2006 361

.

Figure 8

- 2 Canadian Electronic Filing Trend s ( 1994

– 2006 )

361 Binder, M. (2007) Canada’s Challenge: The Network Economy and The Wireless Revolution 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0 2 4 6 8 10 12 14

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Adoption RateReturns (Millions) E

- Filing Adoption in Canada

# Returns % E

- fileAdvancing E

- file Study Phase 1 Report 105 International Electronic Filing Experiences Table 8

- 8 shows electronic filing statistics for processing that occurred in 2006 and 2007 , covering returns filed for tax years 2005 and 2006, respectiv ely 362

.
Table 8

- 8 Canadian Revenue Agency Electronic Filing Statistics ( 2006

– 2007 )

Program 2006 2007 Change

EFILE 7,991,399 8,392,061 +5.01%

NETFILE 3,781,706 3,998,742 +5.74%

TELEFILE 585,762 510,438

- 12.86% Paper 11,182,330 10,704,861

- 4.27%

TOTAL 23,541,197 23,606,102 +0.28%
Although many Canadians still prefer to file paper returns by regular mail, the se numbers are decreasing. 363

**8.4.3** 

## Role of Third Parties
Third parties play a key role in Canadian electronic filing of taxes because taxpayers must use third

- party

– provided software to self

- prepare their returns. In addition, in 2006 , 48.6% of Canadian individual taxpayers used third party preparers 364

. As discussed previously, preparers cannot use the NETFILE service for individual tax returns; they must use EFILE to electronically file returns on behalf of others. The EFILE service requ ires preparers to sign in with their own user ID and password. A preparer who wishes to use EFILE must first register online 365

. Before a preparer can file on another’s behalf, the preparer need s specific authorization from the client. This authorization doe s not permit a preparer to file on a client’s behalf using NETFILE. 366
Although Canada has different private professional organizations for chartered accountants and tax professionals, there is no equivalent to the enrolled agent concept as practiced in the United States . Virtually anyone can register as a third party preparer via the CRA web s ite and use EFILE On

- Line or EFILE On

- Line P lus to represent another party 367

. According to the CRA web site , any firm, organization, or individual who wants to provide electronic filing services to members of the public, their clients, or their employees can apply. There is an EFILE Registration On

- Line form to complete; it is a

one

- time application, but in some situations the preparer will have to submit revised informa tion. There is no fee for processing the application. 368
Canada does regulate “tax

- discounting services.” Tax preparation firms that provide early tax refunds (similar to refund anticipation loans , or RALs, in the U nited S tates ) are constrained in the fees t hey can withhold by the Tax Rebate Discounting Act, which regulates tax discounting in Canada. 369

362 CBCNews.ca (2007) E

- filing Running Ahead of Last Year, Tax Department Says
363 CBCNews.ca (2007) E

- filing Running Ahead of Last Year, Tax Department Says
364 Canada Revenue Agency (2008) Electronic Filing for Tax Preparers
365 Canada Revenue Agency (2008) EFILE New Registration
366 Canada Revenue Agency (2008) Certified Software for the 2008 NETFILE Program (2007 Tax Return)

367 Canada Revenue Agency (2008) EFILE for Electronic Filers
368 Canada Revenue Agency (2008) EFILE New Registration
369 Canada Revenue Agency (2008) Information for Discounters 

### Canadian preparer electronic filing is more than double that of individuals

.Advancing E

- file Study Phase 1 Report 106 International Electronic Filing Experiences 

### 8.5 

## Australia **Electronic Filing Summary** 
The Australian Taxation Office (ATO) is the Australian government’s principal revenue collection agency and a payer of gover nment funds 370 . The ATO also has regulatory responsibility for aspects of superannuation (retirement pensions). The ATO administers legislative systems that fund public goods and services, safeguard retirement incomes
, and support social and economic policy, as outlined in the Australian Treasury Portfolio Budget Statements.
The ATO administers the tax system through the income tax (including Pay as you go [ PAYG ] withholding and installments and capital gains tax), Goods and Services Tax (GST)
, and other tax es 371 . As part of Australia’s largest tax reform, the New Tax System, which went into effect on 1 July 2000, the GST replaced the wholesale sales tax and state transaction taxes, and personal income taxes were substantially reduced 372

. For individual income ta xes there are two main systems

— PAYG and Personal Income Tax Returns. The former is filed by the employer ; the second is filed by the individual or a third party preparer. Pay as you go ( PAYG ) Most Australian employees have their income tax es withheld from their paychecks as they are paid during the tax year, similar to employee withholding in the U nited S tates and the PAYE program in the U nited K ingdom 373

. Personal Income Tax Returns

All those with income not taxed at the source (by employers [ PAYG ] ) are liable for income tax; a small threshold applies 374

. As t he largest group in the tax system , the individual taxpayer segment includes mostly salary and wage earners and contributes around 40 % of Australian tax revenue 375

. For the 2006 financial year , 11.5 million Australian individuals filed tax returns 376 . These individuals represented 55.8% of the total estimated Australian population of 20.6 million as of 30 June 2006 377

.

370 Australia raises the majority of its taxation revenue (62.8% in 2004) from direct taxation, which is levied on

incomes: wages, salaries, pa yrolls, and profits. This compares with the United States, which raised 69.6% of its (2004) taxes through direct taxation. The remaining 37.2% of Australia’s taxation revenue is derived from indirect taxation, including the goods and services tax (value ad ded tax), excise and customs duties, and property taxes. The OECD average is 38.6%. Australia (2008) A ppendix G: Australia's Tax System

- Australia's Tax System Compared with the OECD
371 Other taxes include: Fringe benefits tax, wine equalization tax, luxury car tax, excise duty, fuel grants and

benefit schemes, and Higher education funding (jointly). Australian Taxation Office (2007) Commissioner of Taxation Annual Report 2006

– 07 p. 9
372 Australia (2007) Pocket Guide to the Australian Tax System p. 1
373 Australian Taxation Office (2008) PAYG withholding (PAYGW) essentials

374 Organisation for Economic Co

- Operation and Development (2004) Tax Administration in OECD Countries:

Comparative Information Series (2004) pp. 38

- 41
375 Australian Government: Inspector

- General of Taxation (2008) Appendix C

- Overview of the Tax

Administration System
376 Australian Taxation Office (2008) Latest Taxation Statistics Released
377 Australian Bureau of Statistics (2008) 3101.0

- Australian Demographic Statistics, S ep 2007 The Australian financial year or income tax year runs from July 1 st of one year to June 30 th of the following year , and is usually referred to by the year it ends in

.Advancing E

- file Study Phase 1 Report 107 International Electronic Filing Experiences **8.5.1** 

## Filing Options and Features
Australian individual tax returns can be filed on paper, through a number of electronic options or using the phone. Table 8

- 9 provides a brief description of each filing option (both paper and electronic).

Table 8

- 9 Summary of Australian Filing Methods

Method Description

TaxPack Taxpayers can file returns through the mail by using TaxPack (a paper filing method) . Most tax refunds or debts are issued within 6 weeks. TaxPack 2007 is available from n ews agents or can be ordered online or by phone. 378

e

- Tax Electronic filing using ATO’s free e

- Tax software

. The taxpayer can download the e

- Tax software for free from the ATO web site.
Preparer A taxpayer can file a return through a registered tax agent (a preparer ) for a
tax

- deductible fee 379

. The return may be filed on paper or electronically.

Pre

- Filled Returns ATO pre

- fills electronic returns with salary, wages, allowances
, and other information when filing online.
Phone The phone filing service is an option for those individuals who use the short version of the individual tax return.
In addition to electronic filing, the ATO offers online calculators and other electronic products to help taxpayers apply the law to their own tax situation s . Examples include the “Do I Need to Lodge” tool
, which helps taxpayers determine whether they need to file an income tax return
, and the Simple Tax Calculator , which assists in calculating taxes owed 380

. There is no online access to account data for individual Austra lian taxpayers. The ATO also provides assistance to low

- income earners who need help with their tax returns through a free community service called Tax Help. About 1
, 400 volunteers in more than 800 locations across Australia provide this service from July to October 381

. Electronic Filing U sing ATO’s e

- Tax Software The ATO initiated a direct, electronic filing method for individual taxpayers through the

e

- Tax program in January 1997. It was one of the first applications in the world to be offered by a revenue service and one of the first of its type to use Public Key Infrastructure (PKI) technology and Internet transmission. The e

- Tax program was developed to address concerns from a number of sources regarding complexity of tax legislation and complexity of th e TaxPack (paper filing) documents and to take advantage of a general increase in community use of Internet services. The service is direct in that no third parties are involved in the process of transmitting return s to the ATO.

E

- Tax was developed to be a free, easy

- to

- use software package for the 2.5 million individual taxpayers who prepare and file their own personal income tax returns. It is an electronic advancement of the paper

- based TaxPack package of forms and guidance and

378 Australian Taxation Off ice (2007) Essential Info for Employees: It's Tax Time: What You Need to Know p. 4
379 Australian Taxation Office (2007) Taxpayer Charter: Who Can Help with Your Tax Affairs p. 3
380 Australian Taxation Office (2008) Do I Need to Lodge a Tax Return?
381 Australian Taxation Office (2007) It's Tax Time: What You Need to KnowAdvancing E

- file Study Phase 1 Report 108 International Electronic Filing Experiences complements the back

- end s ystem, the Electronic Lodg e ment System (ELS ), used by third party preparers to file income tax returns. 382

With built

- in checks and calculators to ensure accuracy, the software provides an on

the

- spot estimate of the tax refund or balance due. The 2007 vers ion of e

- Tax software permits user s to download return data directly into their tax return s (e.g., interest paid from more than 20 participating banks and credit unions, dividends paid via three major share registries plus details of Centrelink and other g overnment payments). Most tax refunds are issued within 14 days. 383
An updated version of e

- Tax was released in July 2008 384

. The standard processing time for returns filed through e

- Tax is 2 weeks, compared with 6 weeks for paper returns 385

. Tax Agent Portal ( F

or Third Party Preparers ) The ATO operates a Tax Agent Portal for registered preparers and their employees. The Tax Agent Portal is the preparers’ secure gateway to ATO online services. Registered
preparers can use the portal to accomplish the following 386 : View and update clients’ registration details

. Prepare, file , view
, and print business activity statements for clients

. View filing information

. View client account information

. Request refunds and credit transfers on behalf of clients

. Send messages to the ATO on selected topics.

A 2006 ATO survey found that the Tax Agent Portal had a high satisfaction rating among preparers, with more than two

- thirds (70%) of the preparers surveyed reporting that they found the Tax Agent Portal to be v ery useful. The individual functions viewed as being most useful wer e as follows 387 :
View Client Accounts

— 66% rated as very useful.
View Client Activity Statement

— 65% rated as very useful

. Add Client / Delete Client

— 51% rated as very useful.
Preparer u se of the Tax Agent Portal continues to increase. In March 2007
, 62% of preparers indicat ed that the Tax Agent Portal is their most frequently used channel for contacting the ATO 388

. The ATO notes that:

T he Tax Agent Portal is one of our biggest success stories. The Tax Agent Portal has revolutionized the way we work together. Over 80% of tax agents say they spend less time contacting [ATO] because of the portal. We have spent over $40 million on the Tax Agent Portal since 2002 when the po rtal was

382 Australian Government: Information Management Office (2008) E

- government Benefits Agency Case

Studies

- Australian Taxation Office
383 Australian Taxation Office (2008) E

- Tax Essentials: E

- Tax 2008
384 Australian Taxation Office (2008) E

- Tax Essentials: E

- Tax 2008
385 Australian Taxation Office (2 008) Where's My Refund?
386 Australian Taxation Office (2008) Welcome to the Tax Agen t Portal
387 Australian Taxation Office (2008) 2006 Tax Agent Portal and Technology Survey
388 Australian Taxation Office (2007) Commissioner of Taxation Annual Report 2006

– 07 p. 59Advancing E

- file Study Phase 1 Report 109 International Electronic Filing Experiences first released . T here have been nine updates with tax agents involved in making improv ements for each release. 389
For 2008, extra government funding will be used to enable e

- Tax users and preparers to download more information to tax returns, includ ing dividend information from share registries 390

. Pre

- Fill ed Returns

The Australian Treasury plans to invest additional funding of $20 million in 2007

– 20 08 to enable the ATO to expand its pre

- fill ed electronic tax returns for about 9 million taxpayers. Th is measure is intended to make completing income tax returns significantly easier for the 80 % of individual taxpayers who use e

- Tax or file their returns through a
preparer , allowing taxpayers to do no more than file their pre

- filled return s electronically or provide only a few additional pieces of information to the pre

- filled information to complete their returns 391

. The ATO will pre

- fill electronic returns with the following information:
Salary, wages
, and allowances, where the employer has filed the emplo yee’s payment summa ry electronically with the ATO.
Dividend and interest income and di stributions from managed funds. Payments from Centrelink ; the Department of Education, Science and Technology ; and the D epartment of Veterans’ Affairs.
Medicare out

- of

- po cket expenses and privat e health insurance information. Higher Education Contribution Scheme and Higher Education Loan Program details. Taxpayers with additional sources of income, such as rental income, capital gains
, or foreign

- source income, will need to augment their returns with that information, as do individuals whose employer s have not filed payment summaries electronically with the ATO. Filing by Phone The phone filing service is based on the information in the short version of the individual
tax return. The service is available 24 hours a day, 7 days a week , and taxpayer s get an

on

- the

- spot estimate of their tax refund or balance due, with a receipt number. The average time to file by phone is about 12 minutes; most refunds are issued within 14 da ys. 392

**8.5.2** 

## Electronic Filing **History and Adoption** 
Overall filing of individual tax returns grew by 2 .4% for the 2006 financial year , and growth in returns filed by third party preparers increased by 2% that same year 393

.

389 Australian Taxation Office (2007) A Long

- Term Commitm ent to the Profession: Commissioner D'Ascenzo's

Speech to the Chartered Institute of Management Accountants, Canberra
390 Australian Taxation Office (2007) Commissioner of Taxation Annual Report 2006

– 07 p. 6
391 Australian Government (2008) Budg et Paper No. 2, Part 2: Expense Measures: Treasury: Australia Post

—

Continuation of Funding for Competition Regulation
392 Australian Taxation Office (2008) Entering the Tax System 2007

- 08: Phone Lodgement
393 Australian Taxation Office (2008) Personal Tax [Taxation Statistics 2005

- 06] p. 1Advancing E

- file Study Phase 1 Report 110 International Electronic Filing Experiences Online filing is the most popular method of self

- filing, with half of respondents who file their return s themselves using e

- Tax and a third using the TaxPack (paper filing method). Filing via e

- T ax (13.2%) almost overtook paper and telephone lodgments (14. 0% or 1.6 million ) for the 2006 financial year 394

. Overall growth in electronic tax filing in that year
grew by 17.2% to 1.5 million 395

. In 2006, around 1. 6 million people filed their financial year 2006 tax return s using e

- Tax , for the first time surpassing the number of self

- preparers who filed paper returns 396 . In addition, more than 1 million taxpayers chose to use the pre

- filling function. Australian Customer Satisfaction In 2007, Australian Commissioner of Taxation Michael D’Ascenzo pointed out that the
p ercentage of people saying the ATO was doing a good job had grown from 55% to 80%. According to D’Ascenzo, research indicated that this improvement in community perception was largely driven by the ATO providing much better tools and information for people to manage their tax affairs. At the same time
, there is a perception that the ATO has become much more accessible and approachable during the past decade. 397

**8.5.3** 

## Role of Third Parties
For individual filers who file electronically using e

- Tax, the role of third parties is nonexistent, because third parties are involved in neither preparing return s n or in the process of transmitting return s to ATO. The registration of preparers in Australia is controlled by the Tax Agent Boards. There is one board in each of the states and territories of Australia. Each Board consists of three members, including one from the ATO, and acts autonomously in performing its functions. Historically, the non

- ATO Board members have been drawn from the accounting and legal professions. The Tax Agent Boards are independent from the Tax Commissioner. The Boards maintain the registry of preparers , a publicly accessible listing of all prepare r s currently registered. Only registered preparers are permitted to offer and charge a fee for the provi sion of tax services to the public. The Boards consider the academic qualifications and experience and personal integrity and propriety of applicants. Preparers prepare income tax returns and objections and transact business on behalf of taxpayers in incom e tax matters. Preparers must keep up with tax law, act professionally when dealing with clients and the ATO , and continue to meet the requirements for preparer registration. By law
, preparers may be de

- registered by a Board if they have prepared and filed false tax returns, engaged in misconduct as a
preparer , neglected client taxation affairs, or undertaken activities that call into question their integrity, character, fitness
, and propriety, such as criminal or fraudulent conduct. The Boards may investig ate complaints against preparers and consider other information that may assist in determining whether a preparer should remain registered. 398

394 Australian Taxation Office (2008) Personal Tax [Taxation Statisti cs 2005

- 06] p. 1
395 Australian Taxa tion Office (2008) Personal Tax [Taxation Statistics 2005

- 06] p. 1
396 Australian Taxation Office (2007) Commissioner of Taxation Annual Report 2006

– 07 pp. 4, 59
397 Australian Taxation Office (2007) It's All About People: Australia's Tax and Superannuation Systems: Speech

by Michael D’Ascenzo, Commissioner of Taxation, Taxpayers Australia & Superannuation Australia, Annual Conference, Melbourne
398 Australian Government: Tax Agents' Board (2008) About the BoardAdvancing E

- file Study Phase 1 Report 111 International Electronic Filing Experiences Preparers are authorized to register for the legacy ELS and file an individual’s return. Since 2001

– 2002 , preparer s have filed roughly three

- quarters of all individual tax returns; of these, all but a small percentage have been filed electronically via ELS. As the percentage of individual returns filed via e

- Tax software increased from 5.28% in 2000

– 2001 to 9.24% in 2003

– 2004, the percentage of individual returns filed through ELS by
preparers dropped only slightly (74% in 2001

– 2002, down to 72% in 2003

– 2004). Although exact figures for ELS filings by preparers for 2005

– 2006 and 2006

– 2007 were not available at the tim e this report was prepared
, it is estimate d that more than 7.5 million returns were filed electronically via ELS for those two financial years . Filings via

e

- Tax grew to 1.5 million (13.2%) in 2005

– 2006 and to an estimated 1.9 million (estimated at 16% or more, depending on the final number of returns filed) for 2006

– 2007. 399

Similar to the U nited S tates , however, Australian taxpayers most commonly choose a third party preparer to file their income tax return s (72.8% in financial year 2006 )
, 400 and those third parties can either file on paper or electronically through ELS. In these cases, the individual is primarily responsible for gathering information to pass on to a tax professional to prepare and file the return on the taxpayer’s behalf. Respondents to a 20 07 ATO survey said they chose to use a preparer to ensure that their return was correct and because they found the tax process too complicated. 401
Approximately 97% of business

- related income tax returns are filed through preparers , and 55% of business acti vity statements (equivalent to information returns in the U nited S tates ) are also filed through preparers

. 402

ATO Commissioner D’Ascenzo has noted the critical role played by preparers in his country. He stated that taxpayers’ reliance on preparers had gradually increased in Australia for a number of reasons, including demographic and social changes, such as an inc reasing proportion of non

- salaried wage earners , an increasing number of taxpayers with non

– bank investments such as stocks and rental pr operties
, and a trend to buy services to increase free time or to deal with a more complex tax environment. In a 2007 speech to preparer s, ATO Commissioner D’Ascenzo restated the importance of preparers’ role: “There is no doubt about the vital role of ta x practitioners in our tax system. By supporting and working with you, together we can better influence the compliance behavior of many people.” He noted the practical assistance offered to
preparer s, citing more than 5,000 visits to preparers and response s to more than 153,000 calls from preparer s about electronic filing, Tax Agent Portal use, web site navigation
, and practice management issues. The ATO delivered presentations and

399 Australian Taxation Office (2008) “Delivering for the community: making tax and superannuation easier,

cheaper and more personalised" speech by Michael D’Ascenzo, Commissioner of Taxation to the Australasian Tax Teachers’ Association Conference; Australian Taxation Office (2008) Taxation Statistics
400 Australian Taxation Office (2008) Personal Tax [Taxation Statistics 2005

- 06] p. 1
401 Concerns motivating the use of tax agents included: Making sure that the return is correct (38%) and

perception that tax is too complicated (37%).Among respondents who filed the return themselves, online filing is the most popular metho d. In addition, exactly half (50%) of the respondents who filed the return themselves had used the ATO’s e

- Tax direct

- filing software to file their most recent income tax return. A further third (33%) filed on paper, using the TaxPack paper forms and guida nce documents provided by the ATO

. ( A ustralian Taxation Office (2007) Community Perceptions Survey 2007 p. 132 )
402 Australian Government: Inspector

- General of Taxation (2008) Appendix C

- Overview of the Tax

Administration SystemAdvancing E

- file Study Phase 1 Report 112 International Electronic Filing Experiences conducted seminars
, reaching hundreds of preparers

. The ATO also works to in corporate the preparer ’s perspective in the design of products and services. 403

403 Australian Taxation Office (2007) It's All About Peo ple: Australia's Tax and Superannuation Systems: Speech

by Michael D’Ascenzo, Commissioner of Taxation, Taxpayers Australia & Superannuation Australia, Annual Conference, MelbourneAdvancing E

- file Study Phase 1 Report 113 Introduction to Option Chapters 

# 9. 

# Introduction to Option **Chapter s** 

Chapters 2 through 8 offer overviews of the IRS, its stakeholders
, and its relationship with third parties; the history of e
- filing and the effect of
t echnology a doption on progress toward the 80% e
- file goal; taxpayer and preparer perceptions and motivations; and S tate and foreign electronic filing experience. The balance of this report focuses on the potential options for the IRS to pursue to advance e
- filing , highlighting considerations and

resea rch gaps. As noted in Chapter 1, this report does not offer detailed analysis on factors such as cost/benefit, security, and other considerations
, which will be crucial for the IRS in making decisions about any particular option. As presented in Chapter 1 of this report, the following overall themes have been identified for all options : **There is no silver bullet.** An advancing e
- file strategy must take into consideration many complex factors , and there is no quick fix or any single option approach for the IRS to convert remaining paper filers. **The IRS cannot meet the goal without help.** T he multifaceted landscape of the US tax system, by its very nature, requires that the IRS rely on strong partnerships with third party partners, stakeholders, and Congress t o advance e
- file

. **Technology is secondary to motivating behavior**

. Even the most innovative technology will not help the IRS achieve the 80% e
- file goal unless it is grounded in a thorough understanding of the intricacies of filer behavior

— their motivator s, concerns , and relative position s on t he technology adoption curve

.



### 9.1 

## Overview

Having covered the history of e

- file , its stakeholders, taxpayer and preparer behaviors, and related programs and efforts , the following Chapters focus on potential options the IRS may choose to advance e

- file

. The first two sets of options discuss opportunities tied directly to individual and paid p reparer motivators and concerns , while the last three sets focus on technology

- driven options. The first and second technology

- based o ptions directly influence e

- filing , while the last

— paper

- based filing options

— does not directly affect the e

- file rate but may result in increased efficiencies comparable to those achieved by e

- file

. Addressing paper return processing is an important consideration closely tied to the 80% e

- file goal given that reaching the goal will leave 20% of returns still filed on paper. Subsequent phases will address in greater detail the feasibility, cost/benefit analysis, and implementation cons iderations of each option. Table 9

- 1 lists the options discussed in the following Chapters. **Contents of Chapter 9:** 
9.1 Overview
9.2 Summary of OptionsAdvancing E

- file Study Phase 1 Report 114 Introduction to Option Chapters Table 9

- 1 Summary of Opt ion Categories

Chapter Description of Option Categories
Behavior and Motivation Focus

10. Incentive

- Based E

- filing Options Incentives include strategies for increasing e

- file participation by encouraging voluntary adoption through monetary enticement or enticements that offer other real or perceived benefits.

11. Mandate

- Based E

- filing Options Federal mandates for e

- filing require a specified group of preparers to file individual tax returns electronically. Technology Focus

12. Internet

- Based E

- filing Options Internet

- based options focus on using the Internet as the approach to increase e

- filing

. Although these options are based on technology
, their more substantive implications are operational and political.

13. Phone

- Based E

- filing Options Phone

- based options provide a means for taxpayers, especially those without access to computers or the Internet, to file electronically using landline or mobile phone capabilities. Efficiency Focus (non

– e

- file)

14. Paper

- Based Filing Options While not actually e

- filing , paper

- based options provide the means to automate paper return processing to achieve the efficiency and cost

- saving outcomes typically associated with e

- filing

. Each of the chapters follows a similar structure:

Overview

— Introduces the category of options and provides introductory information and definitions. History and Background

— Provides IRS context on historical, current, and future related efforts. State Experiences

— Notes relevant findings from States

. Options

— Describes the options generally and then provides for each option a definition, an analysis of the option’s potential contribution to the 80% e

- file goal, and related considerations that affect the viability, feasib ility, or appropriateness of the option.



### 9.2 

## Summary of Options

Table 9

- 2 provides an overview of each of the options described in Chapters 10 through 14, along with a sum mary of the targeted population/potential e

- file contribution to the goal for each. For subsequent phases, the remaining columns

— actual expected contribution to the 80% e

- file goal as well as cost/benefit and other detailed considerations can be added.Advancing E

- file Study Phase 1 Report 115 Introduction to Option Chapters Table 9

- 2 Summary of Options and Estimated Contribution to the 80% E

- file Goal

Option Targeted Population/Potential E

- file Contribution Expected Contribution to the 80% E

- file Goal Cost/Benefit Analysis and Implementation Considerations

Incentive

- Based E

- filing Options Incentive Option 1: Direct Monetary Incentives Direct monetary reward (e.g., cash, tax credit) for filing electronically. Targets taxpayers and preparers who do not file electronically and are motivated by cash

. Future Phase Future Phase

Incentive Option 2: Targeted Marketing of E

- file Focused marketing efforts towards taxpayers and preparers who continue to file on paper

. Targets taxpayers and preparers who do not file electronically for reasons that can be addressed through awareness and education. Future Phase Future Phase

Incentive Option 3: Increased Marketing for Free File Retain current Free File program as is (no changes in eligibility), but increase and focus marketing. A theoretical target of about 95 million individuals, which likely will be considerably reduced by realistic expectations of the targeted self

- prepared paper filers. Future Phase Future Phase

Incentive Option 4: Expand the Free File Program Expand curren t Free File program by increasing the pool of eligible taxpayers. As mentioned in Incentive Option 3, actual contribution to the 80% e

- file goal is more likely to be a subset of the eligible population , no matter how eligibility is defined

. Future Phase Future Phase

Incentive Option 5: Develop New Benefits Consider new benefits and incentives to convert e

file holdouts
, such as extending the payment deadline for e

- filer s beyond April 15. In 2006, approximately 19.5 milli on paper filers ( 14% )
, owed a balance, representing a group that might be persuaded to switch to e

- file in order to hold on to its money longer. Future Phase Future Phase

Mandate

- Based E

- filing O ption Mandate Option 1: Federal Mandate on Paid Preparers Establish a Federal mandate with a description of applicable features and thresholds (e.g.
, only paid preparers that meet a threshold for a certain number of returns filed in a year). Targets paid preparers who do not yet file electronically; the actual contribution to the 80 % e

file goal will be determined by the threshold set (for example, using 2005 data, a threshold of more than 50 returns per year produces an increase of 18%; a threshold of more than 200 returns per year produces an increase of 14%.) Future Phase Future P hase

Internet

- Based E

- filing Options Internet Option 1: Enhance IRS Systems Continue to maintain EMS while preparing an incremental release of 1040 forms on the MeF system to provide enhance d e

- file features. Targets only the preparer community because MeF is only available to registered preparers ; p rimari ly targets preparers who never or only sometimes e

file due in part to restrictions in the number of forms supported by e

- filing

. Future Phase Future Phase

Internet Option 2: Direct Filing Enhance current IRS Internet e

- filing (or MeF) to handle direct user interaction for individual taxpayers and preparers; the use of third party transmitters w ould continue to be an option

. Targets taxpayers and preparers who do not currently e

- file , but wh o use a computer/tax return preparation software to prepare tax returns (V

Coders); such returns constitute approximately 38 million returns or 30% of all returns filed. Future Phase Future PhaseAdvancing E

- file Study Phase 1 Report 116 Introduction to Option Chapters Option Targeted Population/Potential E

- file Contribution Expected Contribution to the 80% E

- file Goal Cost/Benefit Analysis and Implementation Considerations Internet Option 3a: IRS

- Provided Form

- Based Preparation Tool Expand taxpayer preparation methods to include IRS

- provided tools such as fillable PDF forms (i.e., a template) or web

- based forms that can be directly transmitted to the IRS. Targets individuals who are comfortable using forms and do not need the add itional assistance of an interactive interface (guided interview)
, including those who handwrite or type their returns on paper forms and V

- Coders who currently use IRS fill

- and

- print forms

. Future Phase Future Phase

Internet Option 3b: IRS

- Provided Inter view

- Based Preparation Tool Expand taxpayer preparation methods to include IRS

- provided tools such as an interactive application for taxpayers to prepare and transmit their return s directly to the IRS. Targets taxpayers and preparers who do not currently e

- file , but who use a computer/tax return preparation software to prepare tax returns (V

Coders) ; such returns constitute approximately 38 million returns or 30% of all returns filed. In this case, the cost objection is related to the preparation fee, not just the e

- file fee. Future Phase Future Phase

Phone

- Based E

- filing Options Phone Option 1: Rethink Phone E

- filing Evaluate current and cutting

- edge phone technology and conduct research on usage trends and the behavior of various target populations for phone

- based e

- filing

. The projected contribution to the 80% e

- file goal depends on the scope and eligibility requirements of any phone

- based program. Among the key targets are paper filers who have access to a landline or mobile phone but do not have access to a computer. Future Phase Future Phase

Paper

- Based Filing Options Paper Option 1: 2D Barcodes Implement 2D barcodes through: Fill

- and

- print forms

— The IRS update s the 1040 family of forms on IRS.gov to include 2D barcodes when printed

. Tax return preparation software

— The return preparation software vendor community update s its products to allow for this capability on IRS forms. Because the filing of machine

- fri endly paper returns is not considered e

- filing , this option category does not directly contribute to the 80% e

- file goal

. However, there are significant cost savings and efficiency benefits from automating the extraction of data from paper returns. Future Phase Future Phase

Paper Option 2: Character Recognition Implement return imaging and character recognition capability. Similar to the approach planned for the IRS Msp project (note Msp also reads 2D barcodes). Because the filing of machine

- friendly paper returns is not considered e

- filing , this option category does not directly contribute to the 80% e

- file goal

. However, there are significant cost savings and efficiency benefits from automating the extraction of data from paper returns. Future Phase Future PhaseAdvancing E

- file Study Phase 1 Report 117 Incenti ve
- Based E

- filing Options 

# 10. 

# Incentive

**- Based**  E

- fil ing **Options**

This Chapter focuses on strategies for increasing e
- file volumes th r ough incentives that offer monetary or value

- add ed benefits for filing electronically. The Chapter reviews past and current incentive strategies from the IRS and other stakeholders and then presents a number of incentive

- based options for future consideration. In some cases, the current incenti ves may be refocused or enhanced as part of a future option. Themes identified in this Chapter include the following : Effective incentives address perceptions and motivations around the choice of how to file a tax return and are tied directly to taxpayer a nd preparer behavior s and motivation s , rather than to a specific technology

. I ncentives that have succeeded in the past may not be as attractive to taxpayers and preparers who have not yet converted to e
- filing . New or different incentives may be required to convert e
- file holdouts.

T he benefit of any given incentive can be relatively subjective ; therefore
, it may be difficult to quantify its contribution to the 80%

e
-

file goal. More research may be needed in this area

.



### 10.1 

## Overview

Chapters 10 and 11 explore options for advancing e

- fil e that are tied directly to taxpayer and preparer behavior and motivation, rather than to a specific technology . This Chapter looks at strategies for increasing e

- file participation by encouraging voluntary compliance through incentives, while Chapter 11 focuses on options that impose mandates on certain subsets of those filing individual tax returns. Targeting the taxpayer, the preparer, or both, incentives take many forms and can be implemented as stand

- alone strategies or in conjunction with other options for advancing e

- file . Effective incentives address perceptions and motivations around the choice of how to file a tax return. For the purpose s of this study, incentive

- based options are divided into two categories

— those in the form of tax credits or monetary enticement and those that appeal to real or perceived benefits to taxpayers and preparers (e.g.
, value

- added features of e

- file ).
Among key considerations for incentives:
Marketing and communications are critical, because the success of any incentive is dependent on people knowing about it. Once implemented, incentives could become expected by e

- file users , and removing them could cause a backlash. New incentives to encourage converts to e

- file must also be offered to current

e

-

filers

— an especially important consideration when it comes to monetary incentives. **Contents of Chapter 10**  **:** 10.1 Overview
10.2 History and Background 10.2.1 Direct Monetary Incentives 10.2.2 Benefit

- Based Incentives
10.3 State Experiences
10.4 Incentive

- Based Options 10.4.1 Incentive Option 1: Direct Monetary Incentives 10.4.2 Incentive Option 2: Targeted Marketing of E

-

file 10.4.3 Incentive Option 3: Increased Marketing for Free File 10.4.4 Incentive Option 4: Expand the Free File Program 10.4.5 Incentive Option 5: Develop New Benefits



### Effective incentives must be marketed strategically with targeted communications

.Advancing E

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- Based E

- filing Options 

### 10.2 

## History and Background

Since the launch of electronic filing, the IRS and som e third party partners have offered a range of incentives, both monetary and benefit

- based. While RRA98 allows for both types of incentives, there are few examples of consideration given to monetary incentives. The following Section s present at a brief history of incentives in both of these categories.

**10.2.1** 

## Direct Monetary Incentives
Section 2001(c) of RRA98 authorizes the Secretary of the Treasury to “i mplement procedures to provide for the payment of appropriate incentives for electronically filed returns,” which could include tax credits or other monetary enticements to encourage individuals or preparer s to e

- file their returns 404

. In 1998, the IRS cons idered a program that would pay $3 for every electronically filed return transmitted by a third party partner. The proposal did not find much traction and ultimately was not implemented. 405
Other than some anecdotal discussion among stakeholders, this repo rt did not find any other proposals for monetary incentives

.

**10.2.2** 

## Benefit

**- Based Incentives** 
This second category of incentives would appeal to taxpayers and preparers by promoting the benefits, or perceived benefits, of abandoning paper and filing electronically. These incentives may be associated with marketing campaigns and other communications efforts to inform individuals and preparers of e

- file value

- added features an d encourage them to take advantage of those features. Section 2001(c) of RRA98 authorizes the Secretary of the Treasury to promote the benefits and encourage the use of electronic tax administration programs, as they become available, through the use of ma ss communications and other means 406

. Initial marketing efforts consisted of public service announcements (PSA) that promoted e

- file and Free File. The IRS marketing approach since 1999 has been to focus on building awareness of the

e

-

file brand and educating taxpayers and preparer s about the benefits of filing electronically. The key messages of annual campaigns promote e

- file features such as faster refund, accuracy, acknowledgment of receipt of return, file

- now

- pay

- later
, and other key b enefits. 407
As the IRS marketing budget grew from $9 million in 1999 to $13 million in 2004, marketing expanded to include paid placement of advertisements on television and radio and in cinemas, magazines, and other venues typical ly used for private sector

404 Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98) p. Sec.2001(c)
405 Wongtrakool, B. M. (1998) Does Paperless Mean Painless? Electronic Tax Return Filing in the New

Millennium
406 Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98) p. Sec.2001(c)

407 IRS (2008) Marketing 

### Historically, there has been little real consideration given to direct monetary incentives

.

It is unclear whether current benefit

- based incentives will convert e
- file holdouts.Advancing E

- file Study Phase 1 Report 119 Incenti ve
- Based E

- filing Options marketing campaigns. The expanded marketing campaigns also promoted other IRS initiatives as determined by SPEC and Taxpayer Education and Communication ( TEC )

. Marketing reverted to PSAs when the marketing budget shrank in 2005 to $1.2 million. Currently, the budget is $2.5 million to market e

- file and Free File. 408
Tax season marketing campaigns have focused on building awareness of IRS initiatives and educating taxpayers and preparer s about the benefits of filing electronically. Marketing campaigns have be en adjusted based on feedback from the target audience and based on changes in research and strategic priorities, including lessons learned.
The 2007 marketing campaign promoted e

- file and Free File through radio and television PSAs, a comprehensive publi c education campaign, online media, and directed stakeholder outreach 409

. The campaign contrasted the benefits of electronic filing with those of paper filing, including ease of use, convenience
, rapid feedback for received returns, and the availability of F ree File in Spanish. The IRS also expanded the number of partners working with the IRS to promote e

- file and Free File across five national partners

. 410
It is unclear, however, whether these benefits resonate with the population of taxpayers and preparers who continue to file on paper. This Section reviews IRS experience s with incentives to date, while Section 10.4 explo res whether continuing on this same path will reach the intended target population of e

- file holdouts.

**10.2.2.1** 

### Faster Refund and Direct Deposit

Direct deposit is a feature that allows refund s to be deposited directly from the IRS into the taxpayer’s bank account. Although this feature is available for both paper and electronic filing, historically, IRS marketing of and literature on e

- file has been heavily focused on promoting the benefit of a faster refund through the use of direct deposit. Recent estimates show that the average wait to receive a refund from a paper return is up to 40 days, whereas the average length of time to receive a refund from an e

- filed return is closer to 8 to 15 day s (when using direct deposit) and an estimated 15 to 22 days for e

- filed returns requesting a paper check to be mailed 411

. The fastest refund is expected for taxpayers who both e

- file and use direct deposit, resulting in an estimated 75% decrease in average refund time 412

.

408 IRS (2008) Marketing
409 The public education campaign for 2007 included press releases, online press kits containing fast facts,

frequently asked qu estions and in depth articles with key audience messages for the media. IRS hosted English and Spanish television and radio satellite media tours in mid

- January and an additional English tour in March for last minute filers. The Director of ETA conducted n umerous interviews with the media during the 2008 filing season. Targeted TV and radio placement launched to target audiences in March with another aggressive push in early April. Leveraging existing partnerships with the Society for Human Resource Managem ent, the Direct Sellers Association, the American Payroll Association, and National Restaurant Association, the IRS developed articles throughout the tax season in support of primary and secondary messages.
410 IRS (2008) Marketing

411 The 2008 IRS e

- file Refund Cycle Chart at www.irs.gov/efile shows taxpayers when to expect a direct deposit to be sent or a paper check to be mailed depending on when a particular e

- filed return is transmitted and accepted. The chart shows a 7

- day difference between the two

. ( IRS (2008) 2008 IRS e

- file Refund Cycle Chart )
412 IRS (2006) Report to Congress on Uses of the De bt Indicator Tool

— and Whether it Facilitates the Use of

Refund Anticipation Loans (RALs)

— the Debt Collection Offset Practice, the Use of RALs, and Evaluations of For more information on taxpayer and preparer motivations and perceptions of currently marketed benefits, see Chapters 4, 5, and 6.



### On average, e
- filing with direct deposit provides the fastest return.Advancing E

- file Study Phase 1 Report 120 Incenti ve
- Based E

- filing Options In addition to promoting the direct deposit feature’s s peed
, the IRS also promotes the direct deposit feature as being secure (no chance of losing the check in the mail) and convenient (no “special trip t o the bank” to deposit the check) 413

. As the IRS continues to modernize its systems, moving to daily rather than weekly return processing, faster refund processing is anticipated 414

. Beginning in 2007, for refunds paid through direct deposit
, the taxpayer cou ld choose to split the refund and direct deposit into multiple accounts ; i n this first year of offering the split refund option, the IRS processed 80,000 split refund requests 415

. This is an option that is also available to those who file on paper but only i f a separate form (Form 8888) is completed 416

.

**10.2.2.2** 

### Debit/Credit Card and E **lectronic F**  **unds T**  **ransfer Payment Options** 

Similar to a direct deposit for refunds, Electronic Funds Transfer (EFT) payments allow the transfer of funds to the IRS directly from the taxpayer’s bank account. Unlike direct deposit , the EFT feature is available only to those who e

- fil e their return s . This feature

— allowing tax payers to use their debit or credit card s or to set up an EFT payment when a balance is due

— was introduced to e

- fil e in 1999. Taxpayers benefit from EFT because it enables them to file any time and then delay the payment of any balance due until a date o f their choosing, up until the tax deadline of April 15. This “file now pay later” marketing approach counters the misperception that e

- filing requires immediate payment. ( E

- filers who pay on April 15 are likely paying sooner than last minute paper filers because their balance s are deducted from their account s electronically , which is faster than if they had mailed a check.) A credit card payment also allows filers to delay actual payment in accordance with the terms of the credit card. These features speak to ease and convenience in that the taxpayer can file and pay in one transaction, and with EFT payment, a taxpayer know s when the payment clears the bank.

RAL Alternatives, and Use of Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax Refunds More Quickly
413 IRS (2008) Receive Your Refund Faster with Direct Deposit

414 Government Accountability Office (2007) Tax Administration: 2007 Filing Season Continues Trend of

Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated
415 D escription of the split refund was mentioned as part of Linda Stiff’s official response included in the 2007

GAO annual report. Stiff also explained that the number of split refund users was 1.4 million lower than was anticipated and cited the fact that “s everal major software vendors did not provide the ability to split refund in their tax preparation software and may have contributed to the lower than expected volume.” ( Government Accountability Office (2007) Tax Administration: 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 41 )

416 IRS (2008) Form 8888: Direct Deposit of Refund to More Than One Account 

### Using a debit/credit card or an EFT payment allows taxpayers to “file now and pay later”

— up to April 15

.Advancing E

- file Study Phase 1 Report 121 Incenti ve
- Based E

- filing Options **10.2.2.3** 

### Automated Error Checks

IRS Publication 17 markets accuracy as an e

- file benefit because “IRS computers quickly and automatically check for errors or other missing information” that would prevent a return from being accepted for further processing 417

. Approximately 600 validation controls check for errors on an electronic return, resulting in a 1.99% error rate for e

- fil ed returns, compared with a 24.51% error rate for paper
returns 418

. This error checking refers only to mistakes that would prevent a return from being accepted by the e

- file system; acceptance does not preclude a return from being selected for audit.
Electronic error checking prevents downstream delays in processing and
, by extension, refunds. Errors are identified within 48 hours and the refund is returned to the taxpayer (or E RO) for correction, enabling “taxpayers and IRS to promptly and efficiently resolve problems on legitimate returns, and ... help stop fraudulent returns” 419 . In contrast, similar errors on paper

- filed returns must be identified after they are manually keyed in to the system ( i.e., transcribed, which also accounts for some errors)
, and the correspondence required to correct information can add weeks or months to the process. In part, the low error rate for e

- filed returns may be attributed to the fact that
return s that are prepared using software are able to take advantage of built

- in error checks through the software, a benefit to preparing returns electronically that shifts the burden of accuracy to third party partners.
Although accuracy is marketed as a time

- s aving incentive to e

- file , the error

- checking process can sometimes be cumbersome and create new complications for filers. Some reject codes require complicated resolution among related taxpayers (e.g.
, who is entitled to claim certain exemptions) and may result in time

- consuming back and forth between the IRS and multiple taxpayers. According to the IRS, invalid depende nt Social Security Number s (SSN) and invalid electronic signature s are the most frequent reject codes, resulting from errors in validating data such as SSNs and AGIs that cann ot be identified by current third party return preparation software. According to ETAAC, the number of e

- filed returns could increase by addressing the “about nine percent” of returns historically rejected bec ause of these error checks or “social security number mismatches.” Although these returns are typically able to be successfully e

- filed once errors are corrected, this percentage of returns may ultimately correspond to the group of taxpayers classified as e

- file Quitters, because ETAAC estimates that “more than 20 percent never try to e

- file again.” 420
The IRS Oversight Board echoes an ETAAC recommendation stating “the process the IRS uses for resolving the errors on the attempted e

- file transmissions should be user friendly and done in a way that does not create an incentive for these filers to revert to paper. Any revisions to the IRS error correction process should employ these principles” 421

.

417 IRS (2007) Your Federal Income Tax
418 IRS (2008) IMF Electronic Filing

- ERS Fall

- Out: Cumulative Year to Date Information through April 4, 2008 ;

IRS (2008) Miscellaneous Monitoring Report for Week of April 4, 2008
419 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 33
420 Electronic Tax Administration Advisory C ommittee (2007) Annual Report to Congress p. 9
421 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 33 

### E

- file error checks allow filers to correct items that may hold up return processing , but when these checks become cumbersome, they can act as an e
- fil ing demotivator.

For more information on error checks as a perceived benefit, see Section 5.4

.Advancing E

- file Study Phase 1 Report 122 Incenti ve
- Based E

- filing Options **10.2.2.4** 

### Acknowledg **m ents** 

One a spect of e

- filing recognized as an incentive is electronic acknowledgment of receipt and acceptance of the e

- filed return

. A corresponding acknowledg m ent for paper filers is U nited S tates Postal Service Certified Mail
, which, for a cost, offers a receipt stamped with the date of mailing with a unique article number allowing online verification of delivery. For an additional fee, a paper filer can request a copy of the Certified Mail signat ure record before or after delivery with Return Receipt. For some taxpayers, eliminating the trip to the Post Office and the worry about whether the IRS received their return s is perceived as a major convenience. The IRS markets “quick confirmation” as a benefit of filing electronically. E

- filer s receive an electronic acknowledgment within 48 hours confirming that a return has either been accepted for processing or rejected for correction (as described above) 422

.

**10.2.2.5** 

### 24x7 Availability
Although paper preparation is also technically available around the clock, ETAAC points out the “24x7 availability” of e

- filing as a “huge convenience factor for Americans who choose to wait until the last minute to file ” 423

. Self

- preparers typically prepar e their tax
returns online from a home computer where they can take advantage of the 24

- hour

- a

day, 7

- day

- a

- week availability and other convenience features 424

. In fact, ETAAC reports that the number of “last minute” filers choosing electronic over
paper filing is on the rise. Looking at the last week of the regular filing season for 2007, the number of e

- filed returns increased 35% compared with the same week in 2006. “This increase occurred in an environment where the overall number of paper and electronic returns received during the same week rose only 12%” 425

.

**10.2.2.6** 

### Offering **Other Electronic Services to Individuals** 
The IRS Oversight Board, ETAAC, and the TAB have discuss ed e

- filing within the context of a “comprehensive e

- service vision” 426 . Although it currently offers a range of products and service s , the IRS has not yet formall y developed a broader strategy for e

government.

Electronic services other than e

- filing

— such as the current “ Where ’s My Refund ?” or the forthcoming “ My IRS Account ” tool

— are not limited to taxpayers who file taxes online. These broader service offerings provide an indirect incentive to e

- file , the rationale being that as more individuals look to the IRS for online service s , e

- filing will become a natural extension of thei r contact with the IRS. One of ETAAC’s strategies is to encourage e

- filing as part of a larger package o f services that help taxpayers more q uickly understand and meet their tax responsibilities and thus reduce taxpayer burden. Over the years, the IRS has “made progress in providing

422 I RS (2008) IRS e

- file for Individuals
423 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 2
424 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 23
425 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 4
426 Electronic Tax Administration Advisor y Committee (2007) Annual Report to Congress p. 12; IRS (2006) The

2006 Taxpayer Assistance Blueprint, Phase 1; IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2; IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress pp. 5

- 6 , 14

- 15, 34 

### E

- file can be particularly attractive for last minute filers

.

Further research is needed to determine how effective IRS electronic services are in inducing

users to e
- file

. 

### The IRS offers other electronic services that may

a ttract individual taxpayers
to e
- file

. E

- filers benefit from the convenience of a quick confirmation that their return s have been received

.Advancing E

- file Study Phase 1 Report 123 Incenti ve
- Based E

- filing Options electronic access to information and services that assist with preparing, filing, reporting and otherwise meeting tax related obligations”

. 427
Examples of these services available through the IRS.gov web site include the following : Downloadable forms, instructions, and publications as well as FAQs and topic

specific articles 428

. Where’s My Refund feature on the IRS web site introduced in 2003 allows taxpayers to check the status of their tax refund s (which has also increased in usage each year to more than 22 million taxpayers in fiscal year [ FY ] 2005) 429

. Online tools for determining whether taxpayers owe Alternative Mi nimum Tax (AMT) or qualify for Earned Income Credit (EI C)

. Enhancements to the online payment agreement application for installment agreements and approval notification

. Payment of 1040 quarterly estimated tax payments through the Electronic Federal Tax Payment System (EFTPS) 430

. Other proposed services include the My IRS Account tool
, which will allow individuals to register for online service access and view account information online (including several years of prior year tax information).

**10.2.2.7** 

### Offering Elec **tronic Services to Preparers Who**  E

- file

An incentive that is similar to offering a broader range of electronic services to individuals is the incentive derived from offering e

- services ( business

- related incentives) specifically to preparers, in an effort to influence their clients to e

- file . These services differ slightly from those designed for individuals, however, in that they are intended to provide business value to the third party partners that use them.
In 2000, the IRS began developing a suite of electronic services on the IRS.gov web site specifically for the use of third part ies assisting taxpayers. Launched in 2004, this suite, called e

- services, includes the following 431 : Disclosure Authorization, the ability to file powers of attorney electronically

. Transcript Delivery Service, the ability to obtain transcripts of taxpayer transactions with the IRS electronically

. Electronic Account Resolution, the abil ity to resolve taxpayer account issues via

secure e

- mail.
Initially, as an incentive to convert preparers to e

- file
, the IRS restricted access to e

services to preparers electronically filing 100 or more returns. Even though there is no direct evidence of how many preparers became Electronic Return Originators (ERO) to qualify for e

- services, according to conversations with the IRS
, there is some anecdotal evidence to that effect, including requests from preparers filing fewer than 100 returns

427 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 11
428 IRS.gov, originally named the IRS Digital Daily, started in 1996 and has gone through many enhancements

since then making it more attractive to users as a channel (according to the TAB, the number of visits to IRS.gov has increased by 72% over the pa st three years ( IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1 p. 30 ).

429 IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1 p. 30
430 I RS (2007) Electronic Federal Tax Payment System
431 IRS (2008) IRS e

- file Application

- Answers to Frequently Asked Questions 

### The IRS currently makes a number of e lectronic services available to preparers

.Advancing E

- file Study Phase 1 Report 124 Incenti ve
- Based E

- filing Options who wished t o be included in the program. Shortly after introducing e

- services, the IRS reduced the filing threshold from 100 to five returns, and in late 2007, the IRS opened e

services to all Circular 230 practitioners regardless of whether they filed tax returns at all. 432

Other online services include EFTPS for individual and business returns. There are also a number of other business

- related incentives that apply to business
, partnership
, and information returns, which are outside of the scope of this study.

**10.2.2.8** 

### Fed/State **Program**
As described in Chapter 2, the Fed/State program enables taxpayers and prepare rs to file both Federal and State returns in a single submission to the IRS. The IRS then makes the State return information available to the appropriate State . Taxpayers benefit from having to complete forms only once. (Some tax return preparation software offers this benefit as well, without requiring that the return be e

- filed .) States also benefit from this close relationship with the IRS in that many errors are eliminated before the return reaches the State

.

**10.2.2.9** 

### Filing Electronically for Free
Through the Free File program, eligible individuals can use tax preparation software and

e

-

file (and in some cases file State returns) for free over the Internet. This incentive is provided indirectly by the IRS though its agreement with the Free File Alliance (FFA). Although Free File may cover up to 70% of taxpayers through its overall eligibility requirement that the taxpayer’s AG I be $54,000 or less ( f or TY 2007), the vendors’ products can and do impose additional criteria, which vary from vendor to vendor 433 : Many vendors do not offer free service to mature taxpayers (e.g., age 50+) or those under 19.
Some vendors impose a maximum AGI threshold of less than $54,000 , and some have a minimum AGI threshold as well.
Some vendors use military service as an eligibility criterion.
Additionally, Free File products impose the following limitations or considerations 434 : Some products do not inform taxpayers that t hey are in eligible for Free File until after they have completed the majority of the return. Not every product is available in every State ; taxpayers with a preference for a specific product (e.g., based on experience) may find that the product is not avai lable because of their State of residence. Taxpayers residing in States that provide Federal government e

- filing solutions that the FFA perceives as compe tition may have fewer or no Free File options available to them.

432 IRS (2008) Incentives to e

- fi le
433 IRS (2008) Free File Alliance Online Tax Preparation Companies; IRS (2008) Free File: Frequently Asked

Questions
434 IRS (2008) Free File Alliance Online Tax Preparation Companies; IRS (2008) Free File: Frequently Asked

Questions 

### The Fed/State program enables taxpayers to file both their Federal and State
returns at once.

For more information about the Fed/State program, s ee Chapter 2

.



### Fr ee File allows eligible taxpayers to electronically prepare and file their tax
returns free of charge.Advancing E

- file Study Phase 1 Report 125 Incenti ve
- Based E

- filing Options Some products do not support preparation or filing of State returns. Vendors of products that do support State returns tend to charge extra for State returns and/ or for State electronic filing

. Some products do not support all individual forms and schedules (e.g., Form 982 , Mortgage Forgiveness Debt Relief ; Form 4868 , Extensions ; Schedule C ; Form 4562 , Depreciation and Amortization ). Some products do not support all current tax situations and credits (e.g., AMT ). Some products do not support more than four dependents.
Web

- ba sed design necessarily entails sharing personal information with a private company, although assurances of confidentiality are given

. The l arge number of FFA products , many of which are not highly recognized brand names, may be confusing, especially to les s sophisticated taxpayers

. All products are web

- based, requiring a computer and an Internet connection

. All products are accessible only through the IRS Free File web site

. Since increased marketing and the possible expansion of Free File will be explored as potential options in upcoming Section s of this Chapter , it is instructive to consider the use of the Free File program to date , as shown in Table 10

- 1 435

.
Table 10

- 1 Free File Adoption (2003

– 2007)

Tax Year Total # Returns Filed FFA

- Eligible Ceiling a % of All Taxpayers b # Free Filed Returns Adoption Rate as % of Ceiling Adoption Rate as % of Total

2003 130,836,700 78,502,020 60% 2,800,000 3.6% 2.1%

2004 131,297,500 78,778,500 60% 3,500,000 4.4% 2.7%

2005 133,023,100 79,813,860 60% 5,140,000 6.4% 3.9%

2006 135,197,441 94,638,209 70% 3,900,000 4.1% 2.9%

2007 c 136,767,900 95,737,530 70% 4,680,000 4.9% 3.4%

Note s : (a) This ceiling reflects only the AGI limitation as defined by the IRS in that particular year. Given the further restrictions ( e.g., lower AGI, age limit ) imposed by some FFA firms, the actual ceiling for each year is lower. (b) Note that the target threshold changed from at least 60% to no more than 70%. (c) 2007 data estimated

. The fact that the adoption rate for Free File is relatively low suggests that cost may not be the greatest factor behind t he adoption of Free File . As discussed in the upcoming Section s, a number of taxpayers who are eligible for Free File are choosing to e

- file through other means (e.g., through a preparer or by purchasing other tax preparation software to help with self

- pre paration )

. W hen considering the contribution of Free File to the 80% e

- file goal , the target population consists of eligible taxpayers who currently self

- prepare and file on paper. In addition to Free File, other IRS programs encourage third parties to reduce the cost burden to taxpayers. For example, in 2008 , the IRS continued a program that provide s

435 IRS (2003) IRS Details Free File Initiative; Millions Eligible for Free Online Preparation and E

- Filing; IRS (2004)

IRS Details 2004 Free File Initiative; IRS (2005) IRS e

- file Now Available; Free File Opens Third Year; IRS (2006) 2006 IRS e

- file; IRS (2006) R ALs Removed on Free File; 93 Million Eligible for Program; IRS (2008) Free File: Frequently Asked Questions; IRS (2008) Most Taxpayers Eligible to File Their Taxes Online for Free For more information on the relat ionship between the IRS and the FFA, see Secti on 2.2.1.3.



### In addition to promoting the Free File program, the IRS encourages its third party partners to reduce or offset the cost of e
- filing

.Advancing E

- file Study Phase 1 Report 126 Incenti ve
- Based E

- filing Options indirect monetary incentives to taxpayers filing individual returns through services offered by third party partners. Through the IRS Stakeholder Partnersh ips, Education and Communication (SPEC) Office, the 2008 Individual e

- file Partnership Program facilitates collaboration between the IRS and approved third party partners to encourage and promote e

- filing

. These are non

- monetary partnerships with commercial businesses, non

- profit organization s, and State or local governments that apply for annual partnership status. Although the partnerships themselves are non

- monetary

— the IRS does not offer fundi ng or monetary compensation to the partners

— the program encourages the partners to provide monetary incentives directly to taxpayers, such reduced return preparation and electronic filing costs. The program also includes guidance and materials for partne rs to promote e

- filing

.

**10.2.2.10** 

### Third Party Offerings

**— Bank Products** 
Millions of taxpayers take advantage of t hird party bank product offerings
, including loans and services such as the following : Refund Anticipation Loans (RAL)

— Very short

- term loans offered by banks and preparers that are secured by Federal and/or State refunds

. Refund Anticipation Check s (RAC)

— A financial institution sets up a temporary account for a taxpayer to which the IRS can direct ly deposit refund money. RALs allow individuals to receive their anticipated refund s , less any fees and finance charges
, in approximately 1 or 2 days, which is 80 % to 90% faster than the IRS’s ability to deposit refunds 436

. In 200 5, 10 million taxpayers

— 1 4 % of all e

- filer s
— applied for RALs 437

. RACs create temporary bank accounts so refunds can be direct deposited. This benefits taxpayers without bank accounts and taxpayers that want their return preparation fees deducted from their refunds

. RACs can take an estimated 9 to 15 days to set up.

S ome consumer advocates consider these third party products

— available only to e

filers

— to be controversial due to their target population and the assoc iated interest rates and fees. Thes e products have inherent positive and negative aspects
, which are out of scope for this report. They are reviewed here because of their indirect contribution to e

- filing ( e

- filing is a requirement to get RALs and RACs). I n its report to Congress, the IRS n ote d “the fact that 10 million people apply for RALs indicates strongly that the demand is real” 438

.

436 IRS (2006) Report to Congress on Uses of the Debt Indicator Tool

— and Whether it Facilitates the Use of

Refund Anticipation Loans (RALs)

— the Debt Collection Offset Practice, the Use of RALs, and Evaluations of RAL Alternatives, and Use of Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax Refunds More Quickly p. 5
437 IRS (2006) Report to Congress on Uses of the Debt Indicator Tool

— and Whether it Facilitates the Use of

Refund Anticipation Loans (RALs)

— the Debt Collection Offset Practice, the Use of RALs, and Evaluations of RAL Alternatives, and Use of Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax Refunds More Quickly p. 18
438 IRS (2006) Report to Congress on Uses of the Debt Indicator Tool

— and Whether it Facilitates the Use of

Refund Anticipation Loans (RALs)

— the Debt Collection Offset Practice, the Use of RALs, and Evaluations of RAL Alternatives, and Use of De bit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax Refunds More Quickly p. 6 For more information about SPEC,

s ee Section 2 .2.1.2.



### 10 million taxpayers

— 1 4 % of all e
- filer s

— applied for RALs in 2005

.Advancing E

- file Study Phase 1 Report 127 Incenti ve
- Based E

- filing Options As e

- file adoption has grown, RAL adoption has remained steady: compare the 10 million RAL users in 2005 with the 9.5 million taxpayers that applied for RALs in 1994 ( 65% of that year’s e

- file rs ) 439 . A s the turnaround time for refunds likely decreases in the future due to IRS system enhancements, the attraction of RACs and RALs should also decrease

.



### 10.3 

## State Experiences

State tax agencies have experience offering incentives to taxpayers and preparers to encourage electronic filing. According to the FTA, States offer many of the s ame benefit

based incentives currently provided or planned for by the IRS, including the following 440 :
Faster refunds

— States reported to FTA a 6 to 12 week difference in refund response time between paper and electronic filing

. Direct deposit

. Electronic refund inquiry (e.g.
, from a State web site )

. Electronic account update s

. Automated extensions

. Free tax preparation software (through Free Fi le or through a State offering).

Also similar to the Federal experience, FTA explains that “the greater the percei ved benefits to the tax preparer community, the less resistance to e

- filing in general ” 441

. Two examples of State experiences with incentives follow : South Carolina, which ranks among the top 10 States in percentage of taxpayers who file their individual income tax return s electronically, extended the State electronic filing deadline to encourage filers to give up paper 442

. In the late 1990s, Oklahoma pa rtnered with a third party to provide free tax preparation and electronic filing for State and Federal returns from the State ’s web site . Under this arrangement, taxpayers were able to access services free from the State ’s web site
, and the State paid the third party at a reduced rate. After several years
, the program was dropped due to cost considerations. Today
, Oklahoma participates in the Free File program

. 443

More research to evaluate how these and other State

- based incentives have affected State electro nic filing rates could provide instructive lessons learned for the IRS.

439 IRS (2006) Report to C ongress on Uses of the Debt Indicator Tool

— and Whether it Facilitates the Use of

Refund Anticipation Loans (RALs)

— the Debt Collection Offset Practice, the Use of RALs, and Evaluations of RAL Alternatives, and Use of Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax Refunds More Quickly p. 18
440 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 1
441 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 1
442 The South Carolina Department of Revenue promotes this incentive explicitly on their web site: “Taxpayers

that file via either of the [ S outh C arolina] EFile methods have until May 1, 2008 to both file their return and pay any balance due with no penalty or interest being in curred. This special incentive does not apply to Federal returns or to [ S outh C arolina] taxpayers that file paper returns!” ( South Carolina (2008) Electronic Services

- Individual Income )
443 Korchanke, J. & Hulsey, G. (2008) Interview of E

- file Coordinator, and 2D Barcode and Softw are Developer Coordinator and Manager of Imaging, State of Oklahoma Tax Commission 

### States offer many of the

same e
- file incentives as the IRS. However, very little information about specific State incentives exists.

Further research is needed on the types of State incentives offered and their effectiveness.Advancing E

- file Study Phase 1 Report 128 Incenti ve
- Based E

- filing Options 

### 10.4 

## Incentive

**- Based Options** 

RRA98 authorized the Secretary of the Treasury to promote the benefits and encourage the use of electronic tax administration programs. These options fall into two categories:
Provide Monetary Incentives

— Reward e

- filer s di rectly (e.g., cash, tax credit)

. Reinforce/Refocus E

- file Benefits

— Improve and increase marketing on existing e

- file benefits and/or offer new value

- add ed features to drive uptake

. Th e design of a successful incentive should be based on a thorough understanding of the motivations of taxpayers and preparers who are still using paper to file. This Section offers examples of some enhancements or new incentives. As the IRS better understan ds the concerns and needs of e

- file holdouts, it can develop additional new incentives to more effectively target and convince this population to convert to e

- file

.

**10.4.1** 

## Incentive Option 1: Direct Monetary Incentives
Incentive Option 1 involves the Federal government providing a direct monetary reward (e.g., cash, tax cre dit) for filing electronically. This option inherently require s a disbursement of Federal funds or a reduction in Federal revenue. Examples include th e following : The IRS provide s a $5 to $20 tax credit to taxpayers who file electronically. The IRS pay s preparers/EROs based on a negotiated rate per return or flat fixed fee for each return filed electronically. In this scenario, preparers/EROs would
pro vide free filing to taxpayers (i.e., zero transmission cost ) , but the taxpayer may still be charged for preparation services or for preparation software. Only the cost to actually file would be waived under this option.
Although allowable under RRA98, no proposals are currently pending.

**10.4.1.1** 

### Targeted Population/Potential E

- file **Contribution**
While specific contribution to the 80% e

- file goal is difficult to assess, this option targets taxpayers and preparer s who are still not filing electronically primarily beca use of the
cost.

**10.4.1.2** 

### Considerations
This option has two significant implications for both the 80% e

- file goal and the cost: rewarding everyone to e

- file is expensive, and rewarding only those new to e

- file may have a detrimental effect on the majority who cur rently e

- file

. As pointed out on its web site, “the IRS does not charge a fee for electronic filing” 444

. Rather, e

- filer s are charged by third parties

— preparers, software vendors
, and transmitters. Because the IRS does not control the amount charged to e

- file by third parties , a monetary incentive to the taxpayer may not necessarily offset the total cost of

e

-

filing ( e.g., preparers may bundle the previously separate e

- file charge into the overall

444 IRS (2008) Authorized IRS e

- file Providers for Individuals: Is There a Fee for IRS e

- file? 

### Effective incentives are linked to the motivations and behavior of a specific group.

Direct monetary incentives offered to all e
- filers would be costly and if only offered
to new e
- filers , could subvert overall progress if
current e
- filers revert to paper to take advantage of the incentive the following year. Chapter 1 5 lists incentive

- based options that may be viable but were out of scope for this report.Advancing E

- file Study Phase 1 Report 129 Incenti ve
- Based E

- filing Options price, pocket some or all of the incentive, or raise the ir rates ). Some form of oversight or authority may be required to ensure that the incentive gets to the intended party

. Another consideration is whether a monetary reward/tax credit aimed at enticing e

- file holdouts would need to be extended to all e

- filer s, offering an unnecessary

— and costly

— incentive to the nearly 60% who already file electronically.

**10.4.2** 

## Incentive Option 2: Targeted Marketing of E

- file
Incentive Option 2 provides t he 44% of taxpayers and preparers who continue to file on paper focused marketing attention. The IRS has accumulated a great deal of research and information about all filers and co uld benefit from closely analyzing data about the remaining paper filers and developing tailored marketing strategies for them. Late adopters of technology are skeptical consumers who acquire a product only after it has become commonplace and
, in their avoidance of change, may not adopt a product until traditional alternatives are no longer available 445

. This is a daunting challenge to the IRS given that paper returns will almost surely remain an option. It could be prudent for the IRS to identif y the late adopters within the 39 % of paper filers and the n focus marketing attention on those who are more likely to convert.

**10.4.2.1** 

### Target **ed Population**  **/ Potential**  E

- file **Contribution**
In general
, this option targets taxpayers and preparer s who do not file electr onically for reasons that can be addressed through awareness and education about the benefits of

e

-

file

. For some of the specific current incentives described in Section 10.2 , additional information concerning the targeted population associated with each incentive is provided in Table 10

- 2

.

445 Rogers, E . M. (2003) Diffusion of Innovations, Fifth Edition p. 281 

### Paper filers must be carefully researched and understood before incentives and marketing can strateg ically target their concerns and motivations

.Advancing E

- file Study Phase 1 Report 130 Incenti ve
- Based E

- filing Options Table 10

- 2 Potential Contribution of Non

- Monetary Incentives to 80% E

- file Goal

Current Incentive Reference in This Report Current Effect Potential E ffect on 80% E

- file Goal /Target Population Faster Refund through

e

-

filing and Direct Deposit §5.8 Taxpayer Demand, §5.11 Perceived Benefits 85% of taxpayers who filed electronically received a refund in 2006 446

. 60% of taxpayers who filed on paper received a refund in 2006 447

.

Debit/Credit Card or EFT Payments Accepted on Balance Due Returns §5.8 Taxpayer Demand, §5.11 Perceived Benefits 13% of taxpayers who filed electronically had a balance due in 2006 448

. 33% of taxpayers who filed on paper had a balance due in 2006 449

.

Offering Other Electronic Services to Individuals §5.6 Ease and Convenience IRS.gov had 176 million visits in FY2005 450

. Where’s My Refund feature had 22 million users in FY2005 451

. Unknown. Offering additional electronic services has an indirect effect on electronic filing. Further research needed to determine how effective it is as a motivator of paper filers

. Offering Other Electronic Services to Preparers §6.3 Availability 57,452 preparers are using the suite of e

services 452

. Unknown effect

. Surveys show that these are valued services, but wheth er these services attract

new preparers to e

- file is unclear.

Error Correction §5.4 Accuracy 9% of returns are rejected yearly because of error s, though 80% of these are corrected without the need for time

- consuming mail correspondence 453

. An estimated 1.8 million taxpayers intended to e

- file but could not due to errors they could not or chose
not to correct 454

.

24x7 Availability §5.6 Ease and Convenience, §4.3 T axpaye r Communications Tracking Study 39% of last minute filers preparing e

- file in 2005 455

. Unknown effect. It is unclear how many last

minute paper filers or V

- Coders could be encouraged to e

- file

.

446 IRS (2006) Tax Yea r 2006 Taxpayer Usage Study

447 IRS (2006) Tax Year 2006 Taxpayer Usage Study
448 IRS (2006) Tax Year 2006 Taxpayer Usage Study
449 IRS (2006) Tax Year 2006 Taxpayer Usage Study
450 IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1
451 IRS (2006) The 2006 Taxpayer Assistance Blueprint, Phase 1
452 IRS (2008) Summary e

- Services Report
453 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress
454 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 9
455 IRS (2005) Findings From The 2004

- 05 Taxpayer Communications Tracking Study p. 26Advancing E

- file Study Phase 1 Report 131 Incenti ve
- Based E

- filing Options **10.4.2.2** 

### Considerations
The key question for this option is whether the benefits as currently marketed offer the most attractive incentives for taxpayers who have yet to be convinced to e

- file

. ETAAC recommends that the IRS develop education and public relations initiatives with messages targeted to overcome barriers or perceived barriers to e

- fil ing in the areas of privacy, security
, and reliability of electronic transactions; risk of audit; and comfort with the status quo/comfort with traditional paper filing 456 . According to ETAA C, “targeted messages and enhanced eServices that deliver real benefits are critical to change the behavior of this group [those who are comfortable with paper filing]” 457 . The IRS Oversight Board agrees with this recommendation, explaining “Many taxpayers s till need a compelling reason to switch to electronic tax administration channels” 458

. Findings from a 2005 IRS study suggest that preparer s would also respond well to increased marketing of e

- file benefits. Key findings from re

- contacting preparer s who previously V

- Coded but migrated to e

- fi l e point directly to marketing and education. Preparer “responses here showed that a critical mass of changes in attitudes toward e

file had developed based on this segment’s learning (or learning more) about e

- file

— especially its benefits in terms of fast refund s , paper/cost savings, ease of use, accuracy, efficiency to their practice, and greater acceptance among clients”. 459
The study concludes: “these benefits... are those which IRS must emphasize in any future com munications to the V

- Coder audience. Highlighting these benefits would help fill the knowledge and belief gaps mentioned in the Key Findings

... and educate V

Coders about the benefits of e

- file to their Business, Themselves, and Their Clients.” 460

The same st udy asked preparer s who were Committed Users of the e

- file program in 2004 and preparer s who V

- Coded in 2005 to provide input about how the IRS could make implementation of the e

- file program easier. Their suggestions included the following 461 :
Provide more training/information/promotion (e.g.
, seminars, education, easy

to

- understand information, advertising )

. Make changes to the e

- file program (e.g.
, make e

- filing mandatory, have more forms available for e

- fil ing , eliminate signature forms, explain errors/ pr ovide information on rejected returns )

. Provide incentives/ ease the cost burden (e.g.
, provide incentives/compensation, make e

- file free, buy software for preparers)

. The researchers took the suggestions provided in 2004, created a list of some of those suggestions
, and asked V

- Coders in 2005 to rank them in terms of importance; t he results are presented in Table 10

- 3 462

.

456 Electronic Tax Admin istration Advisory Committee (2007) Annual Report to Congress p. 16
457 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 16
458 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 36
459 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 29
460 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 29
461 I RS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 7
462 IRS (2005) Findings From Practitioner Business Impact Research PBI

- 2 and PBI

- 3 p. 7 

### The IRS must first understand e
- file holdouts and how to address their concerns and motivations

.

Practitioners who switched
to e
- file attribute d their change to learning more about e
- file benefits such as fast refund s , cost saving s , ease of use, accuracy, efficiency
, and greater acceptance among clients

.

For more information about PBI, see Section 4.7.Advancing E

- file Study Phase 1 Report 132 Incenti ve
- Based E

- filing Options Table 10

- 3 Suggestions from V

- Coding Preparers for Making E

- file Implementation Easier (as of 2005)

Top Suggestions for Making E

- file Implementation Easier 25%+ V

- Code rs
The IRS should give practitioners who e

- file some customer service incentives to use e

- file

. 33%

The IRS should work with the software industry to improve e

- file for all business tax and information returns

. a 30%

The IRS should offer special seminars/workshops to train
pra ctitioners in how to use e

- file

. 19%

The IRS should make practitioner use of e

- file mandatory

. b 9%
The IRS should do more in communicating the benefits of e

- file directly to preparers not using e

- file

. 9%

Notes: (a) Out of scope for this report. (b) See Chapter 11 for more information on mandates

.

**10.4.3** 

## Incentive Option 3: Increased Marketing for Free File

Incentive Option 3 considers retaining the current Free File program as is (no changes to eligibility) but increasing and better targeting the program’s marketing and communications.

**10.4.3.1** 

### Targeted Population/Potential E

- file **Contribution**
Although about 95 million individuals, or 70% of all taxpayers, meet the Free File maximum AGI of less than $54,000, this technical definition of eligibility does not tell the whole story when it comes to the portion of the paper

- filing population likely t o be motivated by a Free File

– like program to switch to electronic filing. A more accurate description of the population targeted for contribution to the 80% e

file goal for Incentive Option 3 includes those eligible for Free File who meet the following t wo conditions:
Paper filers, including V

- Coders

— Because attracting eligible individuals who already file electronically will not help advance the 80% e

- file goal. Self

- preparers
— As described in Chapters 5 and 6, research suggests that individuals alrea dy using a preparer are not likely to switch to a self

- prepare option (for individuals using a preparer, other options may be more appropriate)

. T o reach this population, the IRS must have a better understanding of the motivations behind filing for fr ee and/or specifically using the Free File program. As part of its 2007 Annual Report to Congress, ETAAC recommended that the IRS “ invest more to market the Free File program and to assess the reasons why more taxpayers do not take advantage of the program ’s services” 463 . This recommendation could go a long way in helping the IRS better understand this target population.

463 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 8 

### T

o convert those eligible for Free File but not using it, the IRS must have a better understanding of the ir motivations and concerns.

An ongoing challenge in marketing

— determining its effectiveness in driving desired behavior

— merits further research for IRS e
- file and Free File.Advancing E

- file Study Phase 1 Report 133 Incenti ve
- Based E

- filing Options **10.4.3.2** 

### Considerations
As previously discussed, the impact of cost on filers’ behavior is a complex issue. Although some studies suggest that cost i s a key factor in motivating taxpayer behavior, it is not immediately clear what other motivators counteract the cost motivation or encourage taxpayers to go in other directions. In the case of the Free File program, the IRS’ s primary vehicle for offering free tax preparation and e

- filing (albeit indirectly), usage rates indicate that although the overall pool of eligible taxpayers is large ( 70% of all taxpayers ), the number of taxpayers historically taking advantage of this free service is not. According to the IRS, “the number of tax returns filled via Free File as of the end of February [ 2008 ] has jumped more than 12% compared with the same period last year” 464 . Even with this progress, however, the actual adoption rate is still quite low and suggests beha vior driven by more complex motivations than simply cost (see Table 10

- 1 )

. As part of its 2007 report to Congress, ETAAC recommended that the IRS focus on better understanding and strategically marketing to the target population for Free File 465 . The IRS marketing budget from 1999 to 2004 grew from $9 million to $1 3 million for both e

file and Free File. In 2005, the budget was reduced to $1.2 million for both programs. Currently, the budget is $2.5 million. 466
According to the IRS, for TY2007, online marketing initiatives include d paid placement of search and banner message s on a wide variety of media sites to promote the benefits of Free File and e

- file to employers, preparers, and consumers . The IRS began running a digital ad vertisement in cinemas frequented by taxpayers with a n AGI of less than $54,000 during the November 2007 Thanksgiving weekend, anticipating “that many Free Filers file early and receive refunds in the season.” The IRS then began running a second digital ad in cinemas to promote e

- file in late February. In addition, the IRS expanded the radio PSA campaign from the previous year to include a broader and enhanced distribution. 467
Along with revisiting the marketing effort, however, the second part of the ETAAC recommendation is worth repeating

— the need to “assess the reasons why more taxpayers do n ot take advantage of the program’s services” 468

. To that end, the IRS has been running queries in its marketing database to look specifically at the patterns of Free File participants over certain years 469 . In addition
,

464 IRS (2008) Use of Free File Growing in 2008
465 ETAAC noted that “Despite the lack of growth in Free File, the number of free retur ns offered by software

companies outside of the purview of Free File appears to be on the rise, creating its own competitive model within the tax preparation software industry. While the IRS has no way of tracking the effectiveness of this model on overall e

- file growth for do

- it

- yourself filers, this appears to be an emerging trend that warrants observation” ( Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 8 )

. GAO also found that “IRS Officials attributed this decline in part to companies offering free electronic online filing separate from the Free File program” ( Government Accountability Office (2007) Tax Admi nistration: 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 11 )

. 466 IRS (2008) Marketing
467 IRS (2008) Marketing
468 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 8
469 IRS (2007) 2007 Free File Survey Report and Presentation 

### Understanding why eligible filers have not used Free File will help improve marketing for the program.

79% of those who migrated from Free File used another

e
- file method the following year

.Advancing E

- file Study Phase 1 Report 134 Incenti ve
- Based E

- filing Options there have been a number of research projects
, including the 2007 Free File Survey and the March 2008 Free File Migration Study 470

. The latter looked at Migrators, or taxpayers who used Free File one year but did not use the program the next year, to better understand why some taxpayers leave the program and what it would take for them to return. Some of the key findings include the following 471 : Participants had an “overall disposition toward Free File
, ” wi th 88% saying they would “recommend it to friends and family” and just 14% responding that they would “not use it again

. ” 79% of Migrators used another e

- file method the following year ( 59% of self

preparers and 20% of paid preparers e

- file d )

. Many Migrat ors were “driven by a desire for convenience/ease of use” and did not have “strong feelings about which methods they [used] .” The “top specific reason for migration” among participants who remembered why they switched is that they “went directly to the web site of the company they used in 2006,” possibly because they “thought they were continuing to use Free File by going back to [last year’s] provider”. If there is an identified barrier, it is a “perceived difficulty of use and some confusion in use,” alt hough this was only mentioned by 10% of Migrators.
With the current FFA agreement due to expire in 2009, the IRS has the opportunity to examine the Free File program and continue to make improvements to attract more taxpayers. Over the past few ye ars, Fre e File was improved to ensure taxpayers are not subjected to marketing and advertising messages from the participating return preparation software vendors while preparing their returns

. For TY2007, among other items, the following improvements were made 472 :
Free File was available to individuals who do not usually file taxes but needed to do so for the economic stimulus payment

. Changes to software were made in accordance with changes in tax legislation (e.g.
, stimulus payment s , debt forgiveness associate d with mortgage payments). A better understanding of the motivations behind filing for free and/or specifically using the Free File program will inform enhancements to the program and more effective marketing.

**10.4.4** 

## Incentive Option 4: Expand the Free File Program
Incentive Option 4 entails expanding the Free File program to make it available to more taxpayers. If the pool of eligible taxpayers is increased (by adjusting AGI limits and/or addressing other constraints such as vendor

- specific eligibility criteria), the same issues associated with Incentive Option 3 apply regarding the need for a clear understanding of wh at portion of that eligible pool will actually be motivated to use Free File

.

470 IRS (2008) Findings From The Free File Migration Study
471 IRS (2008) Findings From The Free File Migration Study pp. 3,5
472 IRS (2008) Use of Free File Growing in 2008 

### If Free File has yet to attract

mo st of its eligible users, it is reasonable to question why any other eligible population would adopt Free File .Advancing E

- file Study Phase 1 Report 135 Incenti ve
- Based E

- filing Options **10.4.4.1** 

### Targeted Population/Potential E

- file **Contribution**

Similar to when a subset of the 70% of taxpayer s eligible to use Free File actually use it, the actual contribution to the 80% e

- file goal for an expanded Free File program is more likely to be tied to a smaller subset of that eligible population. However, t he better the IRS understands why eligible individuals use or do not use Free File, the more effective
any efforts to enhance the program will be.

**10.4.4.2** 

### Considerations of Expanded Free File Program
Expanding the Free File program under the current agreement would require negotiations between the IRS and the FFA. Although a new agreement will be considered in 2009, the FFA has a financial disincentive to expand Free File eligibility requirements becau se it will cut into the pool of potential customers who will pay for the services and products they sell. In addition, before moving to expand Free File eligibility
, the IRS will need to carefully analyze the currently eligible population and its reaction to the program. If Free File has not yet attracted more users from this population, it is reasonable to question why a different group of potential users (e.g., those with a slightly higher AGI ) will have a substantially different reaction.

**10.4.5** 

## Incentive **Option 5: Develop New Benefits**
Incentive Option 5 includes the broad category of developing new benefits (i.e., e

- file incen tives) that are attractive to targeted populations. There is a range of potential new benefits and incentives that the IRS might consider to attract e

- file holdouts to e

- file

. One example is to extend the filing and/or payment deadline for e

- filers beyond April 15

. Other potential options are listed in Chapter 15 but are out of scope for full consideration in this report

. The current “file now pay later approach” stops short of allowing individuals to pay later than the April 15 deadline. Under current tax law, individual taxpayers must file their returns, and pay any tax balance s due, on or before April 15 following t he close of the calendar year. A taxpayer may request an extension to file a return, but no extension is available for making tax payments. 473
The most commonly discussed extension would allow e

- filer s who use direct deposit for refunds or use EFT or credit / debit card s for paying th eir balance s due to file and pay by April 30, while the due date for returns filed on paper would remain April 15. Another option is to extend only the payment deadline for e

- filer s, while maintaining April 15 as the deadline for filing ( on paper or electronically) the return 474 . A payment extension for

e

-

filer s would presumably put balance due e

- filer s on equal footing with their paper filer counterparts, because paper filers who pay by check with an April 15 postmarked return benefit from the “float” between when the check is mailed and when the check is actually processed.

473 Department of the Treasury (2005) General Explanations of the Administration's Fiscal Y ear 2006 Revenue Proposals

474 As suggested by CERCA ( Council for Electronic Revenue Communication Advancement (2003) Response to

Request For Comments on the Proposal to Extend the Tax Filing and Payment Deadline for Individuals Who E

- File Their Returns ) 

### If Incentive Option 4 is selected, the IRS will need to negotiate these changes with FFA in a new agreement

.

Extending the payment deadline for e
- filers is one example of a new incentive that could help the IRS reach the 80% e
- file goal

.Advancing E

- file Study Phase 1 Report 136 Incenti ve
- Based E

- filing Options In fact, since the drafting of RRA98, when a p rovision for a 30

- day extension was considered but not included in final legislation, there has been ongoing debate over whether electronic filers should be offered an extension as a benefit 475

. In December 2001, the IRS submitted a proposal to change the d ue date for electronically filed individual tax returns to April 30 (two options were considered

— a 10

- day extension to April 25 and a 15

- day extension to April 30, the latter selected for the sake of simplicity
, among other considerations) 476 . Other propos als followed, all of which maintained the April 15 deadline for returns filed on paper :

2002

— The IRS proposal was included in the President ’s budget request submitted to Congress February 4, 2002. No resulting action followed.
2003

— H.R. 1528, the Taxpayer Protection and IRS Accountability Act of 2003
, was introduced in the House of Representatives ( the legislation was renamed the Tax Administration Good Government Act by Senate amendment ), including a provision for a 15

- day extensio n of the due date for electronically filed returns. That part of the bill did not pass. 477

2005

— A similar proposal for an extension, Extend the Due Date for ELF Returns, was included in the administration’s FY2006 revenue proposal, which would have also e xtended the filing due date by 15 days for e

- filed returns if taxpayers paid their balance s due by EFT. No resulting action followed. 478
No legislation or other internal actions are currently pending to change the due date for electronic filers. The existin g documentation on some of these initiatives provides additional detail and may include cost/benefit analysis.

**10.4.5.1** 

### Targeted Population/Potential E

- file **Contribution**
The option of extending only the payment deadline for e

- filer s (while maintaining the April 15 deadline for submitting the return itself) primarily targets taxpayers with balances due who file on paper because they want to keep their money for as long as possible

— specifically during the float time between the deadline of April 15 and when their check is cashed by the IRS.
In 2006, approximately 33% of 5 8 .5 million paper filers (19.5 million) owed a balance 479

. These 19.5 million filers represent a maximum potential contribution of 14% to the 80%

e

-

file goal, although research is required to determine how many in this group would be convinced by the deadline extension benefit to give up paper. Ex tending both the filing and payment deadline for e

- filers may also offer encouragement
, particularly to late filers
, to give up paper.

475 Wongtrakool, B. M. (1998) Does Paperless Mean Painless? Electronic Tax Return Filing in the New

Millennium
476 IRS (2001) Proposal to Change the Due Date For Electronically Filed Form 1040 Returns to April 30
477 Taxpayer Protection and IRS Accountability Act of 2003
478 Department of the Treasury (2005) General Explanations of the Administration's Fiscal Year 2006 Revenue

Proposals
479 IRS (2006) Tax Year 2006 Taxpayer Usage Study 

### Extending the payment deadline for e
- filers targets the 19.5 million filers who

owe a balance

— a potential 1 4 % contribution to the 80% e
- file goal

.Advancing E

- file Study Phase 1 Report 137 Incenti ve
- Based E

- filing Options **10.4.5.2** 

### Considerations Any new incentive requires consideration and input from key stakeholders , including input on the following:
Benefit to Taxpayers

— Taxpayers filing electronically benefit from additional time and those with balance s due have the opportunity to accrue further interest on mo ney owed to the IRS 480

. Additional Complexity / Potential for Confusion

— Having two deadlines may create confusion among taxpayers about who is eligible to file when (i.e.
, depending on how the option is written, taxpayers who file electronically but pay by c heck would not be eligible for the extension ) . This could also “compromise the significance of the April 15 date in the eyes of taxpayers” (a concern raised by the IRS and stakeholders alike) 481 . This potential will make communication and outreach important. The IRS included a marketing/communication plan in its 2003 Policy Council Briefing 482

. Preparer Concern s
— Many preparer s close their offices on April 16 each year. An extension would require these preparer s to modify business practices. CERCA echoed this concern in its comments to Congress in 2003 483

. Effect on State s
— According to the IRS, 30 of the 39 States responding to a survey about extending the Federal e

- file deadline indicated they would “support the initiative or follow the IRS’ lead ” 484 . However, concerns have been raised about the potential inconsistencies in State and Federal practices and
pressure on States to make deadline changes of their own 485 . Three States (Arkansas, Louisiana
, and Virginia) already have a due date later than Apr il 15 for all returns regardless of filing method, and at least one State , South Carolina, has a due date of April 30 for e

- filed returns 486

.

480 IRS (2001) Proposal to Change the Due Date For Electronically Filed Form 1040 Returns to April 30
481 Council for Electronic Revenue Communication Advancement (2003) Response to Request For Comments on

the Proposal to Extend the Tax Filing and Payment Deadli ne for Individuals Who E

- File Their Returns; IRS (2001) Proposal to Change the Due Date For Electronically Filed Form 1040 Returns to April 30; Winters, M. M. et al. (2003) Response to Request For Comments on Proposal to Extend Tax Filing Deadline to April 30 for Individuals Who File Electronically p. 4
482 IRS (2001) Proposal to Change the Due Date For Electronicall y Filed Form 1040 Returns to April 30; IRS (2003) Proposal to Change the Electronic Filing Due Date; Briefing for ETA Policy Counsel
483 Council for Electronic Revenue Communication Advancement (2003) Response to Request For Comments on

the Proposal to Extend the Tax Filing and Payment Deadline for Individuals Who E

- File Their Returns; IRS (2001) Proposal to Change the Due Date For Electronically Filed Form 1040 Returns to April 30
484 IRS (2003) Proposal to Change the Electronic Filing Due Date; Briefing for ETA Policy Counsel p. 6
485 Council for Electronic Revenue Communication Advancement (2003) Response to Request For Comments on

the Proposal to Extend the Tax Filing and Payment Deadline for Individuals Who E

- File Their Returns; Winters, M. M. et al. (2003) Response to Request For Comments on Proposal to Extend Tax Filing Deadline to April 30 for Individuals Who File Electronically p. 3
486 IRS (2001) Proposal to Change the Due Date For Electronically Filed Form 1040 Returns to April 30 

### Input from stakeholders is important to crafting an effective e
- file incentive.Advancing E

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- Based E

- filing Options THIS PAGE INTENTIONALLY LEFT BLANK.Advancing E

- file Study Phase 1 Report 139 Mandate

- Based E

- filing Options 

# 11. 

# Mandate

**- Based**  E

- fil ing **Options**

Mandates for e
- filing would require specified groups of paid preparers to e
file individual tax returns. This Chapter examines mandate

- based option s for advancing e
- file and the bump in e
- file volumes that would be incurred by imposing mandates. Th is Chapter also examines the change to Federal law that would be needed to implement a Federal mandate strategy for e
- file
, considers current State experie nces with mandates, outlines Federal implementation options, and discusses overall implications for e
- file participation. Themes identified in this Chapter include the following :
A F ederal mandate on preparers to e
- file individual returns increases

e
-

file volum es with minimal taxpayer burden, although the extent of the increase depends on how the mandate is designed. State experiences with mandates help frame the discussion for Federal options. In addition to providing examples of how mandates might work a t the Federal level, the IRS/ State relationship is also important for these reasons :

o State mandates affect Federal e
- file volumes.

o A Federal mandate could affect State electronic filing efforts. Successful mandates require a focus on strong partner relatio nships.



### 11.1 

## Overview
In general, mandates for electronic filing require specified groups of preparers and/or taxpayers to file certain tax returns electronically. In common practice, however, mandates typically focus on businesses and organizations (business returns) and paid preparers of individual returns who file more than a specified number o f tax returns, rather than on individual taxpayers.

Mandates have been tried in a number of States with general success. While a Federal mandate solution may look somewhat different, State experiences have informed the general dialogue around mandates
, and much of the discussion concerning mandate features and design comes from those experiences.
Mandates can be implemented as stand

- alone strategies or in conjunction with other options (e.g., technology or system

- based options) for advancing e

- file

. Because the nature of mandates varies , any mandate solution would require a definition of the specific mandate and a description of applicable features. Some general characteristics o f mandates may include the following : Scope Definition

— Definition of scope to clarify which tax returns must be filed electronically (e.g.
, individual income tax returns , business tax returns ).
Criteria or T hreshol ds

— Definition of which groups (e.g., paid preparers who filed a certain number of returns in the prior year) must comply with the mandate and by when (e.g., start ing at the intended target or lowering the **Contents of Chapter 11**  **:** 1 1.1 Overview
11.2 History and Background
11.3 State Experiences 11.3.1 Growth in Electronic Filing of State Returns 11.3.2 Overview of State Approaches to Mandates
11.4 Mandate

- Based Options 11.4.1 Mandate Option 1: Federal Mandate on Paid Preparers



### A number of States have successfully mandated that preparers file electronically ; an IRS e
- file mandate could be tailored to apply to the Federal context

.

Fo r more information on the characteristics of mandates, s ee Section 11 .4

.Advancing E

- file Study Phase 1 Report 140 Mandate

- Based E

- filing Options threshold over time to gradually increase the base of preparers that fall under the mand ate) 487

. Hardship E xceptions

— Allowance of a grace period for implementation 488

. Opt

- Out Provisions

— Opt

- out procedures for individuals who choose not to allow their paid preparer s to e

- file on their behalf (this is why taxpayer behavior plays a role even i n mandates on preparers ).
Enforcement

— O ptions/penalties for non

- compliance with mandate s

. Acceptable Alternatives

— Provision for acceptable alternatives to e

- filing (e.g.
, a machine

- friendly requirement for paper filing such as 2D barcodes)

. Scope of Ch apter This report considers mandate options for paid preparers only

— not on individual self

preparers. Similarly, consideration has not been given to related options such as charging a fee for filing on paper. Also
, even though this Chapter focuses exclusively on mandates that would require paid preparers who file a certain number of returns to do so electronically, there are possibilities for other kinds of mandates that may require other third parties (including software vendors) to adopt other practices (e.g.
, a Federal mandate to limit or eliminate the amount that a vendor may charge taxpayers to electronically transmit their return s to the IRS )

. This type of mandate is out of scope for this Chapter but is discussed briefly in Chapter 1 5

.



### 11.2 

## History and Backgrou **nd**

Currently, Federal law prohibits the IRS from requiring electronic filing of income tax returns for individuals, estates
, and trusts 489

. For Federal mandates on individual returns to be seriously considered and ultimately implemented, Congress would need to change the law to accommodate this option. A number of stakeholder groups have made recommendations related to allowing Federal mandates, including ETAAC, GAO, and the IRS Oversight Board. All three organizations advocate the repeal of the current prohibition but vary on whether they support implementing mandates at this time

. ETAAC In each of its annual reports for the past 3 years, ETAAC included the recommendation of a Federal mandate strategy fo r preparers of individual returns. In its 2007 annual report, ETAAC repeated its recommendation that the IRS mandate that paid preparer s

e

-

file 1040 returns, describing mandates as “a quick and relatively painless way to increase e

- filing ” 490 . ETAAC recommen ded that “Congress repeal the prohibition against preparer mandates and grant the IRS the discretion to implement such mandates at a time that is appropriate” 491 . ETAAC also provided the specific recommendation that the IRS adopt Federal mandates with “reaso nableness standards and exceptions” for
preparers filing more than 50 individual returns in a year 492 . In 2007, ETAAC called the

487 Federation of Tax Administrators Electronic Filing Mandates: Lessons Learned p. 1
488 Federation of Tax Administrators Electronic Filing Mandates: Lessons Learned p. 1
489 Department of the Treasury, Internal Revenue Service, 26 CFR Parts 1 and 301: Returns Required on

Magnetic Media
490 Electronic Tax Administration Advisory Committ ee (2007) Annual Report to Congress p. 6
491 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 7
492 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 6 

### A Federal mandate to e
- file individual tax returns requires a change in Federal law. Three key oversight bodies call for lifting the current legislative ban on such Federal mandates.

ETAAC considers mandates the “single biggest opportunity for the IRS to increase e
- filing rates ” for individual returns

. This report considers options for mandates on paid preparers only. It does not consider placing mandates on individual self

preparers, charging a fee for filing on paper, or requiring vendors to provide e
- file free of charge.Advancing E

- file Study Phase 1 Report 141 Mandate

- Based E

- filing Options mandate solution “the single biggest opportunity for the IRS to increase e

- filing rates of 1040 returns” 493

. GAO In the GAO 2006 and 2007 filing season reports, GAO recommended a repeal of the prohibition against making preparer e

- filing mandatory and endorsed a solution that includes Federal mandates on preparers meeting certain criteria 494 . In the 2007 report, GAO ec hoed its recommendation from the previous year suggesting that Congress mandate electronic filing by paid preparers meeting certain criteria, such as the number of returns filed . GAO cited the mandate option, coupled with a barcoding strategy, as a method for addressing the issue of V

- Coders. The report recognizes that “mandating electronic filing would not convert all V

- Coders because it would not apply to taxpayers who prepare their own returns on a computer” but state s , “still, most V

- Coders use a paid p reparer (68% in 2006)” 495

. IRS Oversight Board

In its 2006 and 2007 Annual Reports to Congress, the IRS Oversight Board echoed the ETAAC recommendation for Congress to lift the ban that prohibits the IRS from making

e

-

filing of Form 1040 tax returns mandatory, but the IRS Oversight Board c ame short of recommending that Federal mandates be put into place at this time 496 . In the 2007 report, the IRS Oversight Board encouraged the IRS to “use innovative and effective strategies to increase the voluntary e

- file participation among both paid and self

preparers, along with the Congressional elimination of the prohibition against IRS e

- file mandates for individual returns ” 497 . The IRS Oversight Board added, however, that it considered the latter option a “last resort” and did not recommend mandates until other options are exhausted 498 . Instead, in 2007, the IRS Oversight Board encouraged Congres s to “grant the agency the discretion to implement e

- file mandates for paid return preparers at a later date, if needed to reach the 80% e

- file goal ” 499 . Further, the IRS Oversight Board recommended that two conditions be met before the IRS actually implemen ts any kind of Federal mandate. According to the 2007 report, these conditions are as follows 500 :
The IRS must first e xhaust all reasonable steps to maximize voluntary participation in individual e

- fil ing

. The IRS must carefu lly study the trade

- offs between the expected benefits from increased e

- file participation and the burden imposed on filers and their preparers before setting specific mandate criteria.

493 Electr onic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 6
494 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to

Improve, but Opportunities Exist for Additional Savings; Government Accountability Office (2007) Tax Administration: 2 007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated pp. 15, 34
495 Government Accountability Office (2007) Tax Administration: 2007 Filing Season Continues Tren d of

Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 15
496 IRS Oversight Board (2007) Electronic Filing 2006: Annual Report to Congress; IRS Oversight Board (2008)

Electronic Filing 2007: Annual Report to Congress
497 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 30
498 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 30
499 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 6
500 I RS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 30 

### The IRS Oversight Board supports mandates as a last resort after exhausting all reasonable steps for voluntary participation

.Advancing E

- file Study Phase 1 Report 142 Mandate

- Based E

- filing Options During the 109 th Congress, S. 1321 included a provision that would have granted the IRS the authority to require preparers to file individual income taxes electronically. The GAO pointed to this bill as an indication that Congress has some degree of interest in increasing electronic filing among the preparer community 501 . In the Senate Report accompanying the bill, the Senate Committee on Finance wrote, “The Committee wants to encourage increased use of electronic filing

.... The Committee believes that giving the IRS the authority to require el ectronic filing of individual tax returns will increase the number of returns that are filed electronically” 502 . The bill would have also given the IRS authority to impose penalties for non

- compliance. IRS History with Mandating Business Returns Although the IRS does not have a history with Federal mandates for individual returns, Federal mandates on other kinds of returns are permissible by Congress . The thresholds for these mandates on organizational (versus individual) taxpayers are d ifferent from the thre sholds described for individual returns . The IRS mandates e

- filing for the following 503 : Corporations filing 250 or more information returns per year. Partnerships with more than 100 partners. Large tax

- exempt organizations with more than $10 million in asse ts filing 250 or more information returns per year. Entities registering 25 or more heavy highway vehicles (e.g., trucks).
According to the IRS Oversight Board, the IRS strategy for imposing such mandates for corporate returns has been limited and has tran slated into “piecemeal attempts” that have “yielded negligible results in many instances” 504

. To address such challenges, ETAAC has made recommendations for busines s and information returns
, and the IRS Oversight Board has commented on those recommendations. For example, ETAAC included recommendations in its 2007 Annual Report to Congress for adjusting the thresholds for corporate and partnership returns, mandating e

- filing for employment tax returns (e.g., Forms 940 and 941)
, and modifying

e

-

filing thresholds for information returns 505 . The IRS Oversight Board agreed “with the intent of the ETAAC recommendations” and included a number of considerations to assist the IRS in developing an overall “strategic approach” for handling mandates for these returns 506

.

501 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to

Improve, but Opportunities Exist for Additional Savings p. 16
502 U .S. Congress. Senate. Report 109

- 336

- To accompany Telephone Excise Tax Repeal And Taxpayer

Protection And Assistance Act of 2006
503 IRS (2007) Internal Revenu e Bulletin 2007

- 49: Returns Required on Magnetic Media; IRS (2008) e

- file for Charities and Non

- Profits; IRS (2008) Electronic Excise Tax Returns Are Here

- Formerly Known as "ETEC" (Excise Tax e

- File & Compliance) Form 2290, 720 and 8849 Join The Ranks of e

- file! 2008 2290 e

- file Returns May Be Submitted July 1, 2008; IRS (2008) Modernized e

- file (MeF) for Partnerships

504 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 30
505 Electronic Tax Adm inistration Advisory Committee (2007) Annual Report to Congress p. 7
506 IRS Oversight Board (2008) Electronic Filing 20 07: Annual Report to Congress p. 32 Full discussion of business and information returns is outside the scope of this report

.Advancing E

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- Based E

- filing Options 

### 11.3 

## State Experience **s**
Unlike the IRS, States are not restricted in their authority to mandate that indi vidual State tax returns be filed electronically 507 . In 2001, Minnesota was the first State to implement an electronic filing mandate strategy, followed by Michigan, Oklahoma
, and Wisconsin in 2003. By 2005, 12 States had State personal income tax mandates i n place for certain populatio ns of preparers. As shown in Table 7

- 2 , a s of May 2008, at least 1 8 States have impose d mandates on a select population of preparers who file individual State tax returns; two States have a mandate on software developers (rather t han on
preparer s ) to create electronic returns or paper returns with 2D barcode s

. The experiences in the States provide a series of snapshots of mandates as potential solution s for increasing e

- filing and provide a set of issues for consideration. As expl ored in this Section , the States have shared overall success with mandates, with success defined here as noticeable increases in both State and Federal electronic filing rates for individual returns with relatively minor disruptions to relationships with p artner organizations. The degree of this success and the chosen path to implementation varies slightly from State to State , though there are commonalities that help inform the mandate discussion. Also, given the States ’ relationship with the IRS, this Sect ion explores how the decisions that States make about mandates affect Federal e

- filing rates and how the decisions that the IRS may make about implementing mandates may affect State electronic filing programs. State mandate policy typically includes specif ic criteria that define which preparers will be affected by the mandate (e.g., each preparer who filed any number of individual
returns above a certain threshold in the year before the mandate takes effect will be required to file all returns electronically once the mandate is in place )

. Even though
most State s set a threshold of this kind, State mandates differ in where those thresholds
are set. Thresholds may also be phased in over time ; therefore , a threshold may start higher, often at 200 to 250 returns (affecting larger preparation firms ) and then ramp down over a period of typically 2 to 4 years to 50 to 100 returns (to include smaller preparation firms ). 508

Table 11

- 1 shows recent threshold levels for State s that are currently implementing mandate strategies 509

.

507 State mandates tend to come under one three umbrellas: specific statute, regulatory under general

authority, or administrative rule.
508 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 10
509 IRS (2008) Summary of State Mandates for Individual Tax Returns 

### Many States with mandates have seen increases in both S tate and Federal electronic filing rates and have not seen any major negative effects on relationships with the preparer community. State experiences help frame key issues when Federal mandates are considered

.Advancing E

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- Based E

- filing Options Table 11

- 1 Thresholds for States with Preparer Mandates ( as of PY2008 )

State First PY Threshold

Alabama a 2005 50
California 2004 100

Connecticut 2006 50
Indiana 2008 100

Louisiana b 2008 100

Maine c 2008 200
Massachusetts 2005 100 Michigan 2003 200

Minnesota 2001 100 New Jersey 2005 50

New Mexico 2008 25
New York 2006 100
Oklahoma 2003 50 Oregon d 2007 n/a

Rhode Island d 2003 n/a

South Carolina a 2008 100
Utah a 2006 101 Virginia a 2005 100 West Virginia 2007 100

Wisconsin 2003 100

Notes: (a) Paper returns with 2D barcodes also meet the mandate

. (b) 30% must be electronically filed in 2008; 60% in 2010; 90% in 2012. (c) Threshold reduced to 100 for PY2009 and to 50 for PY2010 . (d) Mandate on software vendors (not preparers) to require final output as electronic returns or paper returns with a 2D barcode.

**11.3.1** 

## Growth i **n Electronic Filing of**  **State Returns**
Electronic filing volumes for State individual returns have grown alongside Federal e

filing volumes since the first Fed/State program was piloted in 1990. In 2005, the number of State electronically filed returns reached approximately 50 million. As shown in Figure 7

- 6 , i n 2005 , 11 State s received more than half their returns electronically and two, Iowa and Minnesota, received more than 60% electronically. F our out of five State s with the highest proportion of electronic ally filed returns have an el ectronic filing mandate in place

— Minnesota, Wisconsin, California
, and Michigan. 510
According to the FTA, in the 2004, 2005, and 2006 filing seasons, State s that were first implementing a mandate experienced a higher rate of electronic filing growth than other State s. FTA calculations (based on data submitted by the State s) indicated that on

510 Duncan, H. T . (2006) Preparing Your Taxes: How Costly Is It? p. 4 

### In 2005, f our of the five States with the highest electronic filing rates had an electronic filing mandate for paid preparers.

For more information on state filing methods, s ee Chapter 7

.Advancing E

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- Based E

- filing Options average, electronic filing in State s with mandates in place grew 25 % to 50% faster than in their counterparts that did not implement mandates. 511
For example, New York and Connecticut implemented mandates for the first time in 2006 and saw growth rates in electronic filing of 30% and 20%
, respectively. Together, these two State s accounted for 25% of the total increase in State electronic ally filed returns. This is a difference from 2005 (pre

- mandate)
, when together these two State s accounted for 7% of all State electronic ally filed returns. Vermont was the only State without a new mandate that saw growth at a 20% rate in 2006 , and many State s ’ growth rates were in the single digits. 512

**11.3.2** 

## Overview of State Approaches to Mandates

Infor mation about State experiences from the first State mandate in 2001 until today has been compiled and documented by a number of different organizations, primarily the FTA 513

. Although not all State s have made the same implementation choices, they all had to make decisions around the same set of questions. It is likely that the IRS would have to make similar kinds of decisions if it decides to explore implementing a Federal e

filing mandate.

The Section s below present shared experiences and observations as dif ferent State s have implemented their various mandates. Not all of these experiences apply to every State

. Collaboration with Preparers and Individuals Many of the findings from the State s focus on State collaboration with both preparers and individuals to ensure that all stakeholders had a clear understanding of how the different mandates worked and what was expected of the affected preparers. As part of this colla boration, many State s chose to provide exceptions to ease the burden of converting to electronic filing during the transition period. In general
, there are two kinds of exceptions

— one aimed at paid preparers and one at individuals 514 : Hardship Exceptions

— These exceptions are intended for preparers who are not able to convert to electronic filing in the time prescribed by a mandate. This is a temporary exemption that allows for gradual implementation and acknowledges the potential hardship that smaller pr eparation firms may face in transitioning to electronic filing ( e.g., computer costs, learning how to use new tax preparation software, business process changes). Opt

- Out Provisio ns
— These exceptions are intended to provide an option for individual taxpayers who, for whatever reason, do not want their preparers to

511 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 11
512 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 6
513 See e.g., ( Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It?; Federation of Tax Administrators

(2005) Electronic Filing Mandates: Lessons Learned; Federation of Tax Administrators (2005) FTA Briefing Paper: 2005 Electronic Filing Season Results: A Review of State and Federal Data; Federation of Tax Administrators (2007) 2

- D Barcode Frequently Asked Questions; Federation of Tax Administrators (2008) State Electronic Commerce Programs: State EC Snapshots Updated March 13, 2008; Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings; IRS (2007) State Preparer Mandate Summary Matrix; IRS (2008) State E

- file Analysis; IRS (2008) Summary of State Mandates for Individual Tax Returns ).

514 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned 

### Electronic filing rates for S tate returns grew 25 % to 50% faster in States with mandates

.

Successful mandates require a focus on communication and strong partner relationships

.

For more information on preparer motivations and concerns, see Chapter 6.Advancing E

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- Based E

- filing Options file electronically on their behalf. Unless otherwise indicated by an opt

- out mechanism, mandated preparers must file the return electronically. Such mechanisms include using specially designed forms, signed paper return s , or other methods defined by the State

. In addition, many State s accompanied their mandate programs with increased communication

— communication with software developers, preparers
, and tax authority personnel to provide information on the scope of the mandate and details for complying with the mandate . Communication often included positive messages, training and education materials and programs
, FAQs and other publications
, and a focus on developing partner relationships with stakeholders. Other ways to collaborate with those most affected by mandates have included the following 515 : Scope Consideration s
— States had to define which pre parers were included in the mandate and how to handle preparers who file in more than one State

. Excluding Low

- Volume Forms

— S ome S tates have worked with partners to identify which forms are more cost

- effective to continue to file on paper because they a re not filed as often. Providing E

- Services

— E nhanced electronic services for preparers such as electronic account access and payment extensions may ease acceptance of the mandate

. Timing of Mandate Implementation Timing of mandate implementation refers to deciding on the type of threshold (e.g.
, adjustable or fixed) and deciding when to begin the mandate . Thresholds may also allow for phasing in or allow for lead time to work with preparers and software developers.
Adjustable Thresholds

— A llowed some State s to phase in mandates by adjusting the thresholds over time; this allowed for a gradual transition aimed at bringing in small volume preparers as implementation proceeded 516 . For example, Wisconsin, Massachusetts
, and Connecticut designed mandate programs with adjustable thresholds. Wisconsin and Massachusetts set a threshold of 200 returns for the first year and reduced the threshold to 100
returns for the second year. Connecticut followed suit, but has plans to reduce the threshold a third time to 50 returns in the third year. 517 Providing Lead Time

— Allowed some State s time to prepare for implementation and to prepare applicable stakeholders. This also allowed for prior

- year messaging and other communications. According to the FTA, “allowing sufficient time to discuss the mandate, identify issues and answer software developer and tax practitioner question s will achieve positive results once the mandate is in place” 518

.

515 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned
516 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned
517 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis
518 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 5 

### Timing, flexibility, and communicatio n are important tools to ensure a smooth transition to mandated electronic filing

.Advancing E

- file Study Phase 1 Report 14 7 Mandate

- Based E

- filing Options Penalties As of 2005, only two State s authorized the imposition of penalties on preparers who do not adhere to the prescribed mandates. Minnesota imposes a $5 processing fee for each return submitted on paper, unless the tax department requires the return to be filed on
paper

. California may assess a penalty of $50 per return again st preparers for every return that is not filed electronically. As of the date of this report , California has chosen not to impose a penalty and has opted for an approach that includes communicating by letter and working with the paid preparer s to encourag e compliance. This approach is echoed by FTA: “Broadly applied penalties will attract protest and resistance. Compliance is better achieved through an aggressive campaign of communication and education” 519

.



### 11.4 

## Mandate

**- Based Options** 

Implementation of mandates for individual tax returns can either be done at the Federal level (new option) or at the State level (as exists today). This Section explores the option of designing a Federal mandate strategy, on the assumption that Congress li fts the prohibition against Federal mandates for the electronic filing of income tax returns for individuals

. Even though this Chapter presents only one option

— a Federal mandate for a subset of paid preparers

— there are numerous ways to design and imple ment this mandate option, with varying results. In addition, this Section considers what would happen if Federal law is not changed (i.e., the potential effect of not imposing a Federal mandate but allowing or encouraging State s to continue to set their ow n mandates )

. In this scenario, with no nationwide mandate policy, State s would continue to set their own threshold levels and choose features of mandates that are most in line with the needs of their State s

.

**11.4.1** 

## Mandate **Option 1: Federal Mandate on Paid Prepar**  **ers** There are a number of ways to design and implement a mandate solution, depending on the desired outcome. With multiple variables for consideration, any Federal mandate solution would require a definition of the specific mandates and a description of applic able features.
As discussed throughout this Chapter , mandates are most commonly considered for paid preparers rather than individual filers

— either setting a threshold for the number of preparers included in the mandate (based on the number of returns pre pared or other measure s ) or developing a timeline for adjustable thresholds. Factors that may contribute to the definition of a Federal mandate include the following :
Level of Threshold to Gain Desired Impact

— For example, ETAAC recommends a mandate for paid preparer s filing more than 50 individual returns a year 520

.

519 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 4
520 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 6 

### Many States avoid imposing penalties provided by law, preferring instead a collaborative compliance approach.

There is no single formula for mandating e
- file for paid preparers. The extent to which mandates drive increases in e
- file volume depends on the threshold level and other key factors.Advancing E

- file Study Phase 1 Report 148 Mandate

- Based E

- filing Options State Thresholds Already in Place

— Setting a Federal mandate could “provide a national standard for all State s to adopt thus improving consistency between Federal and State tax administration ” 521 . Conversations with some State agencies suggest that setting a Federal mandate would do just that (Oklahoma, Connecticut ) ; others encourage the Federal government to carefully consider other State s before deciding on a threshold ( California )

. Accompany ing Policies / Exceptions

— An opt

- out provision or waiver that allows taxpayers to choose to not have their preparer s file electronically shifts the burden from the taxpayer to the paid preparer. As discussed earlier in this Section , other waivers for preparers (e.g.
, hardship waiver) may assist in easing the transition to electronic filing. Relationship with Third Parties

— As part of mandate implementation
, there is the opportunity to offer communication and training to paid preparer s and respond to t heir concerns.
Combination with Other Solutions

— These include encouraging voluntary compliance. The IRS Oversight Board and ETAAC have both expressed a concern that focusing exclusively on mandates would decreas e emphasis on voluntary options 522

.

**11.4.1.1** 

### Targeted **Population/Potential** E

- file **Contribution**
The overall target for paid preparer mandates is tied directly to the number o f returns from preparers that are not yet filed electronically, in particular those that are prepared by a preparer on a computer first and then mailed to the IRS (V

- Code r population) 523

. In TY 2006, about 63% of individual returns were filed by paid preparers (98% of paid
preparer
– filed returns were computer

- prepared). However, about half of the paper
returns

— approximately 30 million

— were from paid preparer s and were computer prepared. The effect of tapping into this targeted population of prepare rs ( V

- Coder s) would depend on how thresholds are set. 524

Table 11

- 2 provides IRS data from the ETA Business Master File ( BMF ) Marketing Database from PY2006 on the num ber of preparers who prepared a certain number of individual returns 525 . Using the information in this table
, it is possible to determine a ceiling for how many preparers and how many preparer

- filed returns would be converted from paper to electronic filing if a mandate were put in place.

521 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 6
522 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 7; IRS Oversight

Board (2007) Electronic Filing 2006: Annual Report to Congress p. 5
523 This targeting of the V

- Coding preparer population is discussed by the IRS Oversight Board, ETAAC
, and

GAO in their respective annual reports. For example, the IRS Oversight Board explain ed : “Sizeable volumes of returns prepared by ta x practitioners using computer software are nevertheless filed on paper, and ... mandates for certain paid preparers to e

- file these paper returns would be an effective means toward achieving the 80 percent e

- file goal” ( IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 29 ). Similarly the ETAAC wrote in their 2007 Annual Report: “In that profes sionally prepared returns represent 60 percent of all returns, a preparer mandate represents the single biggest opportunity for the IRS to increas e e

- filing rates of 1040 returns” ( Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 6 ).
524 IRS (2006) Tax Year 2006 Taxpayer Usage Study
525 IRS (2008) IIRAPHQ Report: Individual Income Received and Processed

- Headquarters [returns e

- filed as of 25 April 2008]; IRS (2008) IRS Master File Data on Total and e

- filed Individua l Returns CY2007 and Q1 CY2008; IRS (2008) Number of Preparers Broken Out by Number of Returns Prepared 

### A Federal mandate on preparers could add 5% to 20% to the bottom line e
- file rate, depending on the threshold and actual compliance.Advancing E

- file Study Phase 1 Report 149 Mandate

- Based E

- filing Options Table 11

- 2 Potential Effect of Various Paid Preparer Thresholds on E

- file Rate ( P Y200 6 )

Threshold (Returns/Year) # Preparers in Threshold # Paper Returns Filed Net E

- file Effect Total E

- file Effect
1,000+ 11,773 6,678,344 4.9% 59.4%

501 + 32,698 12,013,605 8.9% 63.4%

201 + 81,257 18,909,012 14.0% 68.5%

101 + 125,963 22,403,793 16.6% 71.1%

51 + 171,590 24,519,993 18.1% 72.6%

26 + 218,141 25,757,058 19.1% 73.5%

1 + 786,274 27,591,572 20.4% 74.9%
For example, i f the Federal threshold were set at 200 or more preparers (which is higher than the threshold s in most State s), 81,257 preparers would be required to move from
paper filing to e

- filing , resulting in 18,909,012 new e

- filed returns

— a 14% contribution to the 80% e

- file goal , which would bring the total e

- file rate to 68.5%. Alternatively, lowering the threshold to 50 or more as recommended by ETAAC would require 171,590 preparers to file 24,519,993 returns electronic ally

— yielding an 18.1% contribution to the 80% e

- file goal , which would bring the total e

- file rate to 72.6%.

I t is important to note that this estimate used P Y200 6 data

— the most complete data set currently available through the IRS

— to define the segments of number of preparers by threshold of returns filed per year . Therefore, further research will be required to obtain a more current estimate given that : The number and proportion of filers has changed since P Y200 6 (e.g., the use of paid preparers has increased since then )

. The e

- file adoption rate has grown to 59.8 % since the 54.5% ra te of P Y200 6

.

**11.4.1.2** 

### Considerations

Trade

- Off: Preparer Impact/Expected Benefits As shown above, there is a balance between how many preparers would be required to convert from paper filing to e

- filing under a mandate and how big a result would be achieved by that requir ement. T he IRS Oversight Board recommended that the IRS examine the “tradeoffs between the expected benefits from increased e

- file [from paid preparer mandates] and the burden imposed on filers and their preparers” before deciding to mandate or set a speci fic threshold aimed at reaching a certain percentage of the non

– e

- filing population 526 . The IRS Oversight Board suggested that “broadly

defined mandates could have an impact on a large number of preparers in a manner disproportionate to the additional e

- file returns generated” and recommended that the IRS conduct a threshold analysis before developing a mandate strategy 527

. The IRS Oversight Board also pointed out that “as the threshold is lowered, the percentage increase in tax practitioners affected is highe r than that of additional e

-

526 IRS Oversigh t Board (2008) Electronic Filing 2007: Annual Report to Congress p. 6
527 IRS Oversight Board (2007) Electronic Filing 2 006: Annual Report to Congress p. 5 Given the change s from TY2005 to today, further research is needed
to obtain a better estimate of the expected increase in e
- fil ing from a Fe deral preparer mandate.



### The IRS Oversight Board urges careful consideration of mandate th resholds and their impact on preparers. However, S tate experiences suggest that the disruption is manageable and has not posed a major problem in the S tate

- preparer relationship.Advancing E

- file Study Phase 1 Report 150 Mandate

- Based E

- filing Options returns generated ” 528 . As part of this analysis, the IRS Oversight Board noted that the preparer community has been a “major contributor to the success of e

- file to date” and expressed concern that the potential burden of a mandat e may affect the third party relationship with the IRS 529 . Similarly, the IRS suggested that preparer lobbies, especially among small businesses, may oppose Federal mandates because most small business and self

- employed taxpayers use a paid preparer 530

. Exper ience in the State s, however, has suggested that with sufficient communication and collaboration with the preparer community, the assumed burden could be minimized or mitigated . In conversations with State s and preparer organizations, there is a general se nse that although some have express ed concern about the potential burden before a mandate goes into effect, actual experience has shown that it is less burdensome than expected. This sentiment was echoed in interviews the IRS conducted with a number of Sta te s in early 2007 and in materials provided by FTA. For example, in its Electronic Filing Mandates: Lessons Learned
, FTA describes experiences in California:
Although California announced its mandate in June 2003 ( legislation was adopted August 2003 for a January 1, 2004 implementation date ) , the State made great efforts to partner with professional organizations, IRS and external partners to ensure those affected by the mandate would receive the education and training necessary to transition to e

- file. Bec ause of this effort, California reported limited negative response to the mandate. 531
Furthermore, when considering a Federal mandat e for preparers, it would be worth considering the e ffect that State s with mandates may have already had on paving the way for preparer readiness for a Federal preparer mandate

— not just because State s have built sustaining relationships with the preparer community, but also because preparers who have already converted their practice s to support electronic filing to
meet State mandate s will be well

- positioned to support a similar Federal e

- file effort. Effect of State Preparer Mandates on Federal E

- file V olumes Independent of a Federal mandate effort, research and experience suggest that the IRS has indirectly benefited from State efforts to impose paid preparer electronic filing mandates, in that as State s mandate preparers to electronically file , the result is not only an increase in the State electronic filing volumes, but also an increase in Federal e

file volumes.

This Section considers the possible effect of not implementing a Federal mandate but continuing to encourage State mandate programs, particularly in State s that participa te in the Fed/State electronic filing program or that have infrastructures similar to the IRS. This option currently does not consider adding additional incentives to State s to implement mandate programs, but such incentives could potentially be explored i f deemed necessary. The estimated contribution to the 80% e

- file goal is uncertain at this time, but the remainder of this Section looks at how Federal e

- file numbers have historically received a boost from State mandates. FTA research suggests that for State s that both participate in the Fed/State program and implement mandates, the IRS may see a bump in Federal e

- filed returns as an indirect

528 IRS Oversight Board (2007) Electronic Filing 2006: Annual Report to Congress p. 23
529 IRS Oversight Board (2007) Electronic Filing 2006: Annual Report to Congress p. 5
530 IRS (2007) Bar Coding and e

- Filing Mandates p. 13
531 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 5 Further research may be needed to confirm that the burden on preparers may be less than expected under certain conditions.



### States with mandates have seen increases in both S tate and Federal electronic filing rates and a reduction of V

Coding at the Federal level

.Advancing E

- file Study Phase 1 Report 151 Mandate

- Based E

- filing Options result of State s ’ mandate policies . For example, the FTA calls attention to State s such as Michigan, Oklahoma
, an d Wisconsin
, where State returns are “first filed with the IRS and are thus likely to be to be accompanied by a Federal return” 532 . For State s that are not part of the Fed/State program, such as Minnesota and California, the FTA noted
, “the infrastructure fo r State electronic filing is closely related to that for Federal filing, and the marginal cost of also filing the Federal return electronically is minimal” 533 . In addition, for State s using the Fed/State model, preparers will need to sign up for and

use IRS e

- file to meet State mandate s

. IRS analysis shows that the Federal electronic filing rates in State s with mandates (grouped together as a whole) increased from 2000 to 2005, and in 2005, the rates for State s with mandates exceeded electronic filing rates for the total population. Similarly, the percentages of paid prepare r s filing V

- Coded returns have gone down in that time period and dropped below the rate of the overall filing population i n 2004 and 2005. 534
In the same IRS report, case studies for Wiscon sin and Massachusetts show ed increased

e

-

filed and decreased V

- Coded returns among paid preparer s in those State s. Both State s had a threshold of 200 returns for the first year of implementation and reduced the threshold to 100 in the second year. Connecti cut show ed similar results, with plans to reduce the threshold to 50 in the third year of implementation. This has led the IRS to conclude the following : Based on our analysis of mandated State s from TY2000 to TY2005, State s with electronic filing mandates , on average, have a higher percentage of electronically filed ( Federal ) returns and a lower percentage of V

- Coded returns when compared to State s as a whole. These numbers imply that continued strong growth in e

- filing may require the adoption of addition al electronic filing mandates. 535
In a separate IRS study, researchers looked at growth rates for electronically filed Federal returns (Form 1040 series) before and after certain State s implemented their mandate programs. This information , which was compiled from e

- file returns based on selected editions of IRS Document 6187
, indicated growth in 10 State s 536

. In a 2006 report, the GAO compared the growth of electronic filing rates in Federal returns for nine State s that had mandates in effect before 2006 with national averages (not including State s that implemented mandates in 2007) 537 . As shown in Table 11

- 3 , the GAO found that “in eight of these nine State s the growth rate of electronically filed Federal returns increased the year the mandate was implemented ” 538 . Other findings include the following 539 :

532 Federatio n of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 2
533 Federation of Tax Administrators (2005) Electronic F iling Mandates: Lessons Learned p. 2
534 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis pp. 48, 50
535 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 74
536 IRS (2007) Bar Coding and e

- Filing Mandates p. 16
537 The findings from the 2006 GAO report were also presented at a CERCA meeting in May 2007 ( White, J.

(2007) How GAO Assesses Electronic Tax Administration p. 15 ).
538 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to

Improve, but Opportunities Exist for Ad ditional Savings p. 45
539 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to

Improve, but Opportunities Exist for Additional Savings pp. 14

- 15 

### GAO found that States with mandates outpaced the national average electronic filing growth

.Advancing E

- file Study Phase 1 Report 152 Mandate

- Based E

- filing Options Four State s had electro nic filing increases of between 7% and 48%. The electronic filing growth rates in four other State s more than double d, including California, whose growth rate nearly tripled. In all but one of these cases, the growth in electronic filing rate s for State s in the year that the State mandate s were implemented was higher than the nationwide electronic filing growth rate in that same year.

Table 11

- 3 E

- f

iling Growth in States with Mandates Compared with US Averages (as of 2006)

State T ax Y ear Mandate Implemented E

- filing Rate Before Mandate E

- filing Rate After Mandate Change in E

filing Rate National Change in E

filing Rate
Alabama 2004 9.9% 14.6% 48 .0 % 11.2%
California 2003 14.8% 55.7% 276.7% 12.3%
Massachusetts 2004 11.2% 28.1% 150.9% 11.2% Michigan 2003 14.2% 40.3% 184.1% 12.3%

Minnesota 2000 32.6% 34.9% 7.2% 13.6% New Jersey 2004 12.7% 35.0% 176.5% 11.2%
Oklahoma 2003 8.9% 12.6% 42.0% 12.3% Virginia a 2004 12.4% 11.0%

- 10.6% 11.2%

Wisconsin 2002 23.4% 29.6% 26.6% 16.6%
Notes: (a) The growth rate declined in Virginia because it had previously counted 2D barcoded paper returns as being electronically filed , and this was not consistent with the IRS counts.
In th e 2006 report, the GAO reported that IRS officials attribute d State mandates increasing the electronic filing of Federal individual returns to the possibility that once paid preparers were required to file State returns electronically they “converted their entire practice to electronic f iling” 540

. Other Considerations for a Federal Mandate on Paid Preparers Other considerations for designing and implementing a Federal e

- file mandate for paid preparers include the following :
Effect on States

— If Federal mandate thresholds are different from State thresholds (e.g., if a Federal threshold is set for 50 returns )
, what effect would this have on a State that has a higher threshold
, such as 100 or 200 returns? This question has come up in conversations with State s, but further research may be needed to determine the positive and negative effects

. 541 Coupling with Other Improvements

— A mandate strategy may be coupled with other improvements (e. g., standards
, screening ) for preparers. This consideration has been mentioned anecdotally, and although it ties to State s’ experience, which led some State s to consider ERO certification impacts brought about by mandates, it may also be a topic for furthe r research.

540 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Cont inue to

Improve, but Opportunities Exist for Additional Savings p. 14
541 Beach, C. (2008) Interview of Director, Filing Methods Bureau, Ca lifornia Franchise Tax Board 

### A mandate would not address the 28 million individuals who self

- prepare and paper file or V

- Code.Advancing E

- file Study Phase 1 Report 153 Mandate

- Based E

- filing Options Target Population

— A mandate strategy would not address the volumes of self

- preparers who file on paper or V

- Code. According to the IRS Oversight Board, “Preparers have provided solid support for Form 1040 e

- file without Federal mandates (although e

- file mandates at the State level have played a role); and a greater challenge exists with the lower e

- file rate among the self

prepared returns where preparer mandates would have no effect” 542

. Timing

— The IRS Oversight Board recommends that the IRS examine whether the new Form 1040 MeF platform

— “with its more customer friendly computer technology”

— should be in place prior to implementing a Federal mandate strategy. 543

Among s takeholders such as the IRS Oversight Board and ETAAC, there is general agreement that there is still need to promote voluntary e

- filing
, especially among individual filers. According to the IRS Oversight Board, “The Board does not want mandates to become a substitute for making electronic filing more convenient and attractive” 544

.

542 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 30
543 IRS Oversight Board (2007) Electronic Filing 2006: Annual Report to Congress p. 24
544 IRS Oversight Board (2007) Electronic Filing 2006: Annual Report to Congress p. 5 For more information on MeF, see Section 12.1.2.Advancing E

- file Study Phase 1 Report 154 Mandate

- Based E

- filing Options THIS PAGE INTENTIONALLY LEFT BLANK.Advancing E

- file Study Phase 1 Report 155 Internet

- Based E

- filing Options 

# 12. 

# Internet

**- Based**  E

- filing **Options**

This Chapter discusses Internet

- based e
- filing options
, which the IRS may leverage to help reach the 80% e
- file goal . An overview of the IRS’ s current methods
, including the role of third parties
, provides an understanding of Internet

- based e
- filing in general. The Chapter then reviews State tax administratio ns’ recent experiences with Internet

- based filing and concludes with a survey of the various options available to the IRS. Themes identified in this Chapter include the following : While these options have some impact on technology, their more substantive i mplications are political and operational. Two of the three options require a major shift in the third party model, transferring ownership of pieces of the current e
- file program from third parties to the Federal government. Estimating the number of filers who might migrate to these options is challenging and requires consideration of a number of complex factors in addition to cost to the taxpayer

. Determining these options ’ potential contribution s to the 80% e
- file goal requires understanding whether the options will attract paper filers or merely shift current e
- filers to a new method.



### 12.1 

## Overview

This Chapter describes opportunities to use Internet technology to advance e

- file

. The options in this Chapter do not necessarily introduce new technical solution s, but their implementation may result in new e

- file service roles for the IRS or its third party counterparts. While these options are technical in nature, at their core, they are driven by behavior and motivators and may affect relationships with third p arties. Options in this category may raise broader philosophical policy questions about the meaning of “good government” and its role and responsibilities to citizens

— that is, how far must government go in helping citizens meet their tax obligations? Wh ile not attempting to answer such questions, this report does recognize these concerns as potential drivers.



### 12.2 

## History and Background

The electronic filing of individual returns is part of the IRS e

- file program. The e

- file program provides a submission service for individual tax returns that supports the current model of third party preparation with third party transmission

. To set the stage for the discussion of future Internet

- based options for advancing e

- file , this Section describes how electronic filing occurs in the current IRS system environment and how planned system enhancements may affect e

- filing

. **Contents of Chapter 12**  **:** 12.1 Overview
12. 2 History and Background 12. 2 .1 E

- filing Individual Federal Tax Returns in the Current Environment 12.2.2 Modernized e

- File
12. 3 State Experiences 12. 3 .1 Direct Internet Filing (I

- File) 12. 3 .2 Online E

- Filing Programs
12. 4 Internet

- Based Options 12. 4 .1 Internet Option 1: Enhance IRS Systems 12. 4 .2 Internet Option 2: Direct Filing 12. 4 .3 Internet Option 3: IRS

Provided Preparation and Filing

For more information about e
- file history , see Chapter 2. See Chapter 3 for more information about e
- file growth and projections.Advancing E

- file Study Phase 1 Report 156 Internet

- Based E

- filing Options **12.2.1** 

## E

- filing **Individ ual Federal Tax Returns in the Current**  **Environment**
The process for electronically filing Federal individual income tax returns begins with preparation of the return and ends with IRS sending an electronic acknowledgment of acceptance of the return to the taxpayer or preparer.
Figure 12

- 1 provides a high

- level depiction of the e

- file process

. Green arrows indicate a potential cost to the taxpayer (i.e., the taxpayer may pay for a preparer’s services
, or tax software if the tax payer self

- prepare s , and may pay to e

- file ) . The process begins with the taxpayer or preparer using tax preparation software, which is purchased or used for free (e.g., through the Free File program) . These tax preparation solutions allow for the electroni c filing of 1040, 1040A, or 1040EZ returns and most associated forms and schedules through a n e

- file transmitter. The transmitter formats the returns in the IRS proprietary format and bundles them into submission files (batches of returns) for electronic t ransmission to the IRS. The role of the transmitter is unseen by most filers who simply press “ send ” to e

- file t heir return s and may assume that their returns go directly from their software product to the IRS

. 545

Figure 12

- 1 Federal E

- filing
An individual return filed through the IRS e

- file program may be completely paper less or a composite of electronically transmitted data and paper documents (a small number of forms cannot be submitted electronically) 546

. IRS Publication 1345, Handbook for Authorized IRS e

- file Providers , is a reference guide for transmitters outlining th e rules for the submission of individual tax returns

.

545 IRS (2008) Internal Revenue Manual: 3.42.1. Overview of Electronic Tax Administration (ETA) Programs

546 IRS (2005) Handbook for Authorized IRS E

- File Providers of Individual Income Tax Returns p. 5 

### Through its current electronic filing program the IRS has been able to achieve continuous growth toward the 80% e
- file goal.

For more information about EROs and transmitters and a high

- level overview of the electronic filling process , s ee Chapter 2

.Advancing E

- file Study Phase 1 Report 157 Internet

- Based E

- filing Options As with an income tax return submitted to the IRS on paper, an electronic return must be signed by the taxpayer as well as by the paid preparer
, if applicable. Taxpayers may sign individual income tax returns either electronically or on a paper declaration. 547
The current IRS system for receiving electronically filed returns from transmitters is called the Electronic Management System (EMS). As an e

- file submission gateway, EMS provides protocol translation, telecommunication s structure, security, and data management support for submission of individual returns to the IRS e

- file program. Business returns are handled through a sep arate s ystem. Submission files are received at the IRS by secured methods ( i.e., dedicated telecommunications lines or secured transmission protoc ol o ver the Internet ). 548

Usual ly within 2 business days, t he IRS sends the e

- file transmitter an electronic acknowledgment indicating whether each return was accepted or rejected. The transmitter then informs the taxpayer or preparer of the status the return. Rejected returns must be r esubmitted and acknowledged as accepted before they will be processed. 549

The IRS does not charge transmitters or any other registered third parties to participate in the e

- file program ( the IRS accepts electronic returns for free from registered transmitters) . In the current environment, however, these third part ies may and often do charge taxpayers to e

- file to cover their operating expenses and desired profit. There is c urrently no regulation of those charges. D epending on the service and the specific provider, the e

- file cost to the filer varies

. Third parties are increasingly bundling the historically separate e

- file fee with the fee for the preparation service or softw are . This practice of bundling hides the e

- file cost in the total cost but does not necessarily remove it.

**12.2.2** 

## Modernized **e -**  **File**

In 2004 , the IRS launched a new e

- file system for corporations called Modernized e

- File (MeF). MeF is a web

- based system allowing electronic filing of business income tax returns through the Internet. MeF uses the widely accepted eXtensible Markup Language ( XML ) format
, a standardized way of identifying, storing
, and transmitting data. The Me F program has expanded to include tax

- exempt organizations and partnerships. 550
For these types of returns, b usinesses originate their electronic submissions to MeF by doing one of the following 551 : Electronically sending returns to a transmitter that
, in tur n , sends the returns to the IRS. Directly tra nsmitting returns to the IRS (only for authorized, very large corporations)

. Providing returns to an Intermediate Service Provider for processing prior to transmission to the IRS.

547 IRS (2005) Handbook for Authorized IRS E

- File Providers of Individual Income Tax Returns p. 22
548 IRS (2007) Electronic Return Fil e Specifications for Individual Income Tax Returns (Tax Year 2007) p. 2
549 IRS (2008) Internal Revenue Manual

- 3.42.5 e

- file of Individual Income Tax Returns
550 IRS (2008) e

- file for Large and Mid

- Size Corporations

- Frequently Asked Questions (January 2008)

551 IRS (2008) e

- file for Large and Mid

- Size Corporations

- Frequently Asked Questions (January 2008) For more information about electronic signatures , s ee Section 5.6

.

For more information about error checking and acknowledg m ents , s ee Section 10.2.2.3

.

For more information about e
- file
cost structures and bundling, s ee Section 5. 7.Advancing E

- file Study Phase 1 Report 158 Internet

- Based E

- filing Options Transmitters may u se the Internet to transmit electronic return data to the IRS MeF system. The IRS included two new Internet options in the design of MeF: Internet Filing Application (IFA) and Application

- to

- Application (A2A) . These were designed to meet the needs of regis tered transmitters who send large complex returns. 552

MeF improves on the electronic acknowledg m ent capability of EMS

. Each return in a transmission is either accepted or rejected for specific reasons. Similar to e

- file , r eturns that meet the processing cri teria are considered “filed” as soon as they are accepted. Rejected returns that fail to meet processing crit eria are considered not filed. MeF, however, provides acknowledgments in minutes versus hours or days. 553
The IRS recently announced that it will ex pand MeF to include individual tax returns. This expansion preserves the current methods taxpayers or their preparers use to prepare returns, as well as the roles of third parties such as EROs and transmitters in originating and transmitting the returns el ectronically. The IRS plans an incremental release of the 1040 series of returns on the MeF system starting in the summer of 2009 through 2011. This enhancement will improve the integrity and efficiency of the process between preparers and the IRS. Because adding individual tax returns to MeF is a planned update to an existing system, this topic is addressed in more detail in the discussion of Internet Option 1 in Section 12.3.1.



### 12.3 

## State Experiences

This Section focuses on the Internet

- based solutions currently implemented at the State level for self

- prepared State Personal Income Tax (PIT) returns. In most cases, these programs provi de an alternative to filing State PIT returns through the Fed/State program. As seen in other option areas, the IRS may be able to gain insights about how these approaches affect the State s ’ electronic filing rates. At the same time, when looking at these examples, factors that can vary widely between the State and Federal levels (e.g., scalability, comp lexity, political climate, cost, overall usage ) should be taken into account. In general, the State s use two Internet

- based alternatives described by the FT A as follows : Direct Internet Filing ( I

- File ) Programs

— Enable electronic filing directly to the State through a State

- developed and State

- administered web site with no related fees. Online Filing Programs

— Enable electronic filing from PCs and approved commercial software routed through transmitters (most are independent arrangements with transmission directly to State s, but some State s also participate in the Fed/State program )

.

**12.3.1** 

## Direct Internet Filing (I

**- File)** 

State direct I

- File programs o ffer State taxpayers a web

- based set of forms (often electronic versions of paper forms) or web pages (interactive technology often following a question/answer format) to file their State PIT returns directly with the State’ s tax

552 IRS (2005) Corporate e

- File
553 IRS (2008) Modernized e

- File (MeF) Information for Authorized IRS e

- file Providers and Large Taxpayers (Corporations, Partnerships and Tax Exempt Organizations) Tax Year 2007 

### The IRS plans to incrementally expand its Modernized e
- File program to include 1040 returns beginning in 2009. This shift will enhance the program currently offered through EMS and is expected to improve services for individual e
- filing

.

The relevance of S tate electronic filing experiences depends on demographic, political, technical, and economic factors.Advancing E

- file Study Phase 1 Report 159 Internet

- Based E

- filing Options administration

— almost al l State s that currently provide I

- File use a form

- based (versus guided interview) interface. In general, these programs offer web forms or pages free of charge with key features such as automated calculations, hyperlinks to supporting material, and the abi lity to save and return to the form at a later date. These solutions typically target more simplistic income tax returns, usually with a limited number of associated schedules or forms.

I

- File systems, in their many variations, are the most commonly used technical solution offered by State s as a free electronic filing method. The S tates offering free I

- File for filing State PIT returns are shown in Figure 7

- 3 in Chapter 7. To illustrate the range of features and eligibility requirements associated with State I

File programs, Table 12

- 1 provides an overview of the system features for eight State solutions sampled by the GAO 554

.
Table 12

- 1 Overview of I

- File System Features for Eight States ( as of 2006 )

State ( System ) Year Started Key Features Eligibility Requirements

California ( CalFile ) 2003 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications Limits on residency, amount of income, type of income, itemized deductions, type of credits, number of dependents, types of payments

D.C. ( On

- line Tax Filing Service ) 2002 Log

- in/create account
Perform calculations Hyperlinked to other forms and publi cations Ability to save and return to form Auto populate some fields
Status checks Must have f iled a return the previous year

Indiana (I

- File ) 1998 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications Ability to save and return to form Auto populate some fields Limits on type of form Must have not legally changed first or last nam es since the last filed return

Kansas (Webfile) 2001 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications Ability to save and return to form Auto populate some fields
Status checks Limits on income Open to nonresidents
Must have filed a State return the previous year

554 Government Accountability Office (2007) Taxpayer Service: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Filing System with Net Benefits pp . 16

- 17 See Chapter 7 for a map of the S tates offering free I

- File as of 2 006.Advancing E

- file Study Phase 1 Report 160 Internet

- Based E

- filing Options State ( System ) Year Started Key Features Eligibility Requirements

Maryland ( I

- File ) 2001 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications Ability to save and return to form Auto populate some fields
Status checks View prior year’s information Limits on number and type of forms Open to nonresidents

Pennsylvania (pa.direct.file) 2000 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications Limits on type of income, type and number of forms, credits, and types of deductions

South Carolina (SCnetFile!) 1999 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications Auto populates some fields Limits on type of income, type of forms, and type of credits Open to nonresidents

Utah ( TaxExpress ) 2001 Log

- in/create account
Perform calculations Hyperlinked to other forms and publications
Status checks Limits on income, type of deductions, and type of credits
Must have filed a State return the previous year

The effectiveness of State I

- File programs in increasing State electronic filing rates varies . However, for the eight State s reviewed by GAO in 2006 , usage wa s generally low, ranging from less than 1% to just over 5% of total filers
, as shown in Table 12

- 2 555 . For information about State s not reviewed by GAO, additional rese arch is needed. One of the factors that may contribute to lower I

- File usage rates is limited eligibility. As shown in Table 12

- 1 , each of the eight State s profiled by GAO had at least some restrictions on eligibility, including income, residency, number of deductions
, and previous filings. Acc ording to conversations with one State , allowing first time filers to I

File could increase usage volumes, though that could negatively affect fraud detection efforts 556

. In addition, lack of marketing may be a factor affecting usage.

555 Government Accountability Office (2007) Taxpayer Service: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Filing System with Net Benefits p. 18
556 Annino, J. (2008) Interview of Electronic Filing Coordinator, Electronic Commerce Unit, Connecticut

Department of Revenue Services 

### While usage may be generally low, all States with I

- File implementations have seen some degree of increased electronic filing through I

- File.Advancing E

- file Study Phase 1 Report 161 Internet

- Based E

- filing Options Table 12

- 2 I

- File Adoption Rates for Eight States ( as of 2006 )

State Total # of I

- File Users Total # of Eligible Filers Total # of F ilers I

- File as % of Eligible Filers I

- File as % of Total Filers
California 111,436 6 , 4 00,000 14 , 6 00,000 1.7 % 0. 8 %

D .C. 9,285 n/a 3 00,000 n/a 3. 2 %
Indiana 83,422 n/a 3, 0 00,000 n/a 2.7%

Kansas 50,999 n/a 1, 4 00,000 n/a 3. 6 % Maryland 115,678 n/a 2, 8 00,000 n/a 4. 2 % Pennsylvania 300,552 1, 5 00,000 5, 6 00,000 20.0 % 5.3%
South Carolina 29,241 1 , 5 00,000 2, 0 00,000 2.0% 1.4 %
Utah 25,267 n/a 1, 0 00,000 n/a 2.5%
Notes: n/a indicates not applicable.
Other Considerations

I

- File solutions require that State s have direct ownership of the entire tax preparation and filing process. The development, implementation, support
, and maintenance (including customer support) of the entire system , whether contractors are utilized, is the sole responsibility of the State to fund and manage. This would be the same for the IRS if it were to undertake an e

- file solution modeled on I

- File.

Results from State s that have implemented I

- File s olutions are mixed. The GAO Report on Taxpayer Service highlighted the challenge of obtaining accurate cost information from the State s and the IRS to determine the true cost of paper and electronically file d
returns : Although incomplete, the available data combined with the decision by three State s to discontinue their systems raise the possibility that in at least some State s the benefits were less than costs. According to officials in two of the three State s that dis continued their I

- File systems, the benefits did not appear greater than costs and the system was not providing a good return on their investment. One agency official reported experiencing low usage and high costs. Officials with Iowa ’ s Department of Reven ue said the State had hoped to see major growth in electronic filing usage by introducing an I

- File system, yet the system use peaked at 22,815 I

- filed returns in 2004. Like Iowa, Arkansas discontinued its I

- File services. According to a State official, Ar kansas ’ s I

- File system operated for 5 years beginning in tax year 2000 and processed a total of 5,149 returns; the highest usage was in 2005, with 1,382 returns processed 557

. Although I

- File is a State mechanism for offering free electronic filing, depending on the service offered, doing so may prevent the State s from participating in the State

- level Free File program because it may go against the agreement with the FFA

.

557 Government Accountability Office (2007) Taxpayer Ser vice: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Filing System with Net Benefits pp. 25

- 26Advancing E

- file Study Phase 1 Report 162 Internet

- Based E

- filing Options **12.3.2** 

## Online Filing Programs
State online filing program s are similar to IRS e

- file for indivi duals but may be independent from the Fed/State program. Taxpayers and preparers use commercial software for tax preparation and electronically file returns through transmitters to the State . The EROs may impose a filing fee for the electronic filing of th e returns.

Seven State s (California, Illinois, Maine, Massachusetts, Minnesota, Ohio, and Utah ) offer ed the independent filing alternative for returns prepared by preparers or taxpayers and originated to transmitters in 2007 558

. Three of these State s (Illinois, Ohio, and Utah) also leverage d the Fed/State program for electronic filing.
Depending on whether State offerings are perceived by the FFA to be in competition with its members’ products, these State s may be eligible for participation in the Stat e

level Free File program

.



### 12.4 

## Internet

**- Based Options** 

This Section introduces a number of Internet

- based options to increase Federal e

- file volumes. The Section provides a working definition of each option , acknowledging potential variations within each ; disc usses the targeted audience and potential contribution to the 80% e

- file goal ; and addresses other considerations for each option.

Because a number of these options would require shifting ownership of certain pieces of the current e

- file program from thir d parties to the Federal government , e ach option is reviewed in the context of the historical relationship between the IRS and third parties and its potential effect on changing the third par ty model described in Chapter 2 . In most cases, the options do no t necessarily introduce new technical solutions, but implementation of the options may mean new e

- file services for the IRS or its third party counterparts. Excluded from discussion of each of the options is consideration of specific technology ( i.e., type s of hardware and software).

Because Internet

- based e

- filing options are many and varied, for the purposes of this report, they have been grouped into three main categories :

1. Enhance IRS Systems

— This represents the status quo from a program standpoint while the IRS continues to incrementally upgrade its systems.
2. Direct Filing

— U se of third party tax preparation software with the option to e

file directly to the IRS at no cost ( the preparation method remains commercial ).
3. IRS

- Provided Preparation and Fi ling

— U se of IRS

- provided tax preparation software and e

- fil ing directly to the IRS at no cost (for software or e

- filing )

. For each of the three options that are considered in this Chapter, there are a number of potential ways to implement these options. While all options have components that are owned and managed by the Federal government, options may differ in who operates the solution: the government or a contractor. Variations of these solutions may be a vendor

- maintained direct file solution (government

- owned, contractor

- operated) or an IRS

- maintained direct file solution (g overnment

- owned, government

- operated). Detailed consideration of implementation particulars is out of scope for this report
, and these variations will be examined in later phases . At a high level, however, it is

558 Federation of Tax Administrators (2007) State Electronic Filing Programs For Individual Income T axAdvancing E

- file Study Phase 1 Report 163 Internet

- Based E

- filing Options important to understand that each of these v ariations differ in the level of direct IRS involvement in the implementation and operation of the systems. Scope of Options Considered

A fourth option categor y was purposefully omitted from this Chapter

— File for Free

— which would largely preserve the current tax preparation and filing methods but directly or indirectly subsidize the e

- filing cost to the taxpayer. Options in this category would not involve bu ilding new system capabilities but would in fact be more closely aligned with incentives (i.e., eliminating the e

- file fee taxpayers are charged by tax preparation software vendors) . The specific option to subsidize and/or regulate e

- file fees is noted in Chapter 15. Related options, Increase d Marketing for Free File and Expand the Free File Program , are addressed in Chapter 10. In addition, a pre

- filled return solution is not discussed as an option in this report 559

.

**12.4.1** 

## Internet Option 1: Enhance IRS Systems

Under Internet Option 1: Enhance IRS Systems, the IRS follows through on its plan to continue maintaining EMS while preparing an incremental release of the 1040 family of forms on the MeF system from 2009 through 2011. The current methods of e

- filing are supported during the trans ition to MeF. Figure 12

- 2 illust rates how Internet Option 1 operate s and how it is identical from a Federal filing perspective to the current system sh own in Figure 12

- 1

.

Figure 12

- 2 Internet Option 1 : Enhance IRS Systems

559 See e.g., Department of the Treasury (2003) Repo rt to The Congress on Return

- Free Tax Systems: Tax

Simplification Is a Prerequisite , for more information on issues related to pre

- filled returns. For more information on f iling for free, see Section 10.4.3, Section 10.4.4, and Chapter 15.



### Internet Option 1 involves enhancing e
- file to remove system constraints and provide new services as incentives

.Advancing E

- file Study Phase 1 Report 164 Internet

- Based E

- filing Options MeF 1040 utilizes a new technology base to improve the e

- filing experience. The projected benefits to moving individual returns to the MeF system include the following 560 :

Faster Confirmation of Return Acceptance or Rejection

— MeF returns are processed as they are received instead of being delayed i n a batch system, as they are under the current e

- file program. Specific Explanation of Errors

— Under the current e

- file program, one error code may apply to multiple types of e

- file errors. MeF error codes use simple wording to clarify each error that triggers a reject ed return

. Ability to Attach Documents

— The current no

- attachment rule severely limits the number of returns that can be e

- filed

. Ability to File Amended or Prior Year Returns

— This option is not available under the current e

- file program.

**12.4.1.1** 

### Targeted Population/Potential E

- file **Contribution**

Because MeF is only available to registered providers, these improvements to the
current e

- file program only target the preparer c ommunity , s pecifically:
Preparers who currently file on paper primarily because of the restrictions in the number of forms supported by e

- filing

. Preparers who currently e

- file some, but not all, returns because of the forms restriction.

It appears that th e combined size of these populations is not large ; however
, the actual number is unclear. Further research is required to better understand these preparer population s and whether these enhancements would “ move th e dial ” to a significant
extent.

**12.4.1.2** 

### Considerat **ions**

Considerations for Internet Option 1 include the following : This option preserves existing stakeholder roles and business models. As return preparation software vendors integrate new MeF capabilities in to their products, the larger population of V

- Coding self

- filers may in turn benefit from these MeF enhancements.
Similar to incentives and other options, this option relies on marketing, education , and training to drive awareness and usage

. As a part of planned enhancements, the IRS may find opportunities to expand the scope as well as the quality of its e

- file offerings. For example, in terms of improving error resolution, the IRS may want to consider the ETAAC recommendation for the IRS to do the following :

560 Caplan, R. (2008) IRS Announces New Release Date for 1040 Modernized E

- File Program For more inf ormation about error checking, see Section 10.2.2.3.Advancing E

- file Study Phase 1 Report 165 Internet

- Based E

- filing Options ...evaluate its more than 600 validation controls with the goal of increasing e

filing rates while also mitigating erroneously filed returns. In pursuit of this goal, ETAAC encourages the IRS to collaborate with software developers to explore ways to further reduce controllable rejects. 561

**12.4.2** 

## Internet Option 2: Direct Filing
While maintaining the third party role in preparation, the Direct Filing option puts the IRS in the position of receiving returns directly from taxpayers and preparers , thereby diminishing the third party role in transmission , though that would remain as an option

. This approach shifts the roles of the electronic filing transmission process, requiring the IRS to augment its current Internet e

- filing capability (or MeF) to handle direct user interaction for individual taxpayers and preparers. This approach allows taxpayers and preparers to prepare returns with an IRS

- authorized tax preparation software package (all major comme rcial packages are currently IRS

- authorized) and file their return s , at no charge, over the Internet directly to the IRS.
Figure 12

- 3 illustrates how Internet Option 2 operate s compared with the current system shown in Figure 12

- 1

.

F igure 12

- 3 Internet Option 2 : Direct Fil ing
Similar to the current system, preparation software support remains the responsibility of the software vendors, and e

- filer s are responsible for access to the Inter net.

**12.4.2.1** 

### Targeted Population/Potential E

- file **Contribution**
The most likely target population for Internet Option 2 includes taxpayers and preparers who use the computer to prepare returns but do not take the final step of e

- filing (V

Coders), primarily becaus e they object to the cost, are concerned about sharing

561 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 9Advancing E

- file Study Phase 1 Report 166 Internet

- Based E

- filing Options information with a third party (transmitter), or both. Such returns constitute a portion of the 38 million V

- Coded returns (30% of all returns filed) shown in Figure 4

- 1

. Further research is required to better understand the taxpayer and preparer population and whether these enhancements would move the dial to a significant extent.

**12.4.2.2** 

### Considerations
Although Int ernet Option 2 is intended to remove the fee for transmission, it may not have a significant impact on the cost to the taxpayer. The IRS would need to provide capabilities like those of transmitters: receive, analyze, correct, package, and retransmit
retur n data; receive acknowledgments; retransmit returns; invest in and manage/maintain associated security, telecommunications, and hardware and software, all of which are costs that would ultimately be borne by the taxpayer

. Eliminating the third party transm itter cost does not preclude software vendors from increasing charges for tax preparation software . Given the industry trend toward bundling e

- file charges with the cost of online tax preparation products and even some boxed products, the cost of preparati on may increase even though the price of filing is zero. In the absence of government regulation, taxpayers are at the mercy of the market and how competition drives the cost of tax preparation software and transmission . A number of the targeted individual V

- Coders who see cost as a barrier may migrate to e

filing since there is no additional cost for e

- filing ; depending on the market price, however, taxpayers will have to choose whether to purchase tax preparation software in the first place. Effect on IR S

– Third Party Relationship This option changes the current IRS

– third party relationship somewhat

. Most preparers and return preparation software vendors would not be directly affected. Although this option does not necessarily preclude third parties from acting as transmitters, it is likely to be viewed by transmitter s as the IRS entering into competition with them

. Other Considerations

Other considerations for Internet Option 2 include the following :
Under this option, the IRS is responsible for the management
, security
, and support of public access to a direct filing solution. The IRS acquires significant new responsibilities for direct taxpayer and preparer support services as well as
return data formatti ng, validation
, and transmission. These new services

— particularly direct customer support for filing

— are outside the core services the IRS currently provides to its registered transmitters. It is unclear how many people would transmit returns to the I RS through a direct portal. Under the current paradigm, a finite number of transmitters are registered through the IRS; if this portal is open to the general public to file directly, it may attract paper filers as well as current e

- filers

. Implementation of this option may spur growth in the tax software preparation industry by encouraging the development of new products that enable taxpayers to transmit returns directly to the IRS
, not by means of a third party transmitter. This option may offer the bene fit of n ear real

- time response for acknowledg m ents because return s are not routed through a third party.Advancing E

- file Study Phase 1 Report 167 Internet

- Based E

- filing Options **12.4.3** 

## Internet Option 3: **IRS**

**- Provided Preparation and**  **Filing**

The two IRS

- Provided Preparation and Filing option variation s discussed in this Section expand the preparation methods available to taxpayers to include IRS

- provided tools that would also utilize direct filing for return transmission. By requiring the IRS to offer (and own/manage) tax preparation and filing services within the e

- filing progr am , options in this category eliminate the taxpayer cost burden for self

- prepared return preparation and filing. These options are designed with the individual taxpayer in mind. Although preparers could use these methods, they typically use a different cla ss of software to accommodate their business needs.
Figure 12

- 4 illustrates how Internet Option s 3 a and 3b operate compared with the current system shown in Figure 12

- 1

.

Figure 12

- 4 Internet Option 3 : IRS

- Provided Preparation and Filing
There are at least two ways for the IRS to offer IRS

- Provided Preparation and Filing: through fillable forms or through applications using a guided interview approach. Each of these options is considered separately below, including descriptions of the feat ures and functions of each. Conceptually, these options are similar and share many considerations. They are distinguished by their potential user base and by the implications and complexity

— technical, operational, and political

— of the solution.

**12.4.3.1** 

### Interne **t Option 3a: Form**

**- Based Preparation Tool** 

Under Internet Option 3a, the IRS offers fillable forms that can be e

- filed directly to the IRS for free, which is an upgrade from the current IRS offering of fillable PDFs
, which can only be printed and mailed (i.e ., fill

- and

- print forms) . This option could include fillable PDF or web

- based forms that could contain check boxes, option lists and text boxes, automated calculations
, and hyperlinks to supporting material (e.g., instructions). This option is often referr ed to as I

- File among the State electronic filing programs

.Advancing E

- file Study Phase 1 Report 168 Internet

- Based E

- filing Options **12.4.3.1.1** 

### Targeted Population/Potential E

- file **Contribution**
The most likely target population for Internet Option 3a includes individuals who are comfortable using forms and do not need the additional assi stance of an interactive interface (guided interview). This group includes people who handwrite or type their
returns and forms on paper and V

- Coders who currently use IRS fill

- and

- print forms.

In TY2006, h andwritten or typed returns comprise d about 26% of paper returns (11% of all returns) 562 . Likely motivators for those filing this kind of return include comfort with paper, cost, objec tion to third party involvement, and availability ( e.g., access to a PC and the Internet ). Although the 26% of paper returns included some returns filed by preparers, this option is less likely to be used by preparers.

It is difficult to estimate the number of returns derived from fill

- and

- print forms because the IRS does not distinguish between form

- bas ed and tax

- software

– based V

- Coded
returns. The number of downloadable forms on IRS.gov

— 19.6 million between January and April 2006

— could serve as a rough approximation of the maximum number of fill

and

- print returns 563

. Likely motivators for the targeted population to adopt this option

are cos t and objection to third party involvement

. In both cases, closer examination of taxpayer motivations and concerns is required to obtain better estimates of the target population.

**12.4.3.1.2** 

### Considerations Technical Challenges

Internet O ption 3a requires that the IRS build on its current form development capability to provide fillable forms with automated calculations and hyperlinks to supporting material (e.g., instructions) and possibly develop a set of online form management services to allow the taxpayer to leave a session and continue at a later time. In addition, the option requires that the IRS build a solution for accepting the transmissions from these potentially e

- filed forms. The IRS would be required to provide end us er support for the forms ’ functions, calculations, and supporting material.

T his option requires the IRS to take on responsibilities that are new and significantly different from its current business operations . The IRS would need to plan and fund every aspect of forms development, systems management, and end user support

. In its April 2007 report, GAO expressed concern about “ whether IRS has the systems management capability needed to develop such a program” 564

. Despite the agency’s improvements since GAO designated IRS system modernization efforts as high

- risk in 1995, the IRS has yet to fully implement and institutionalize critical management controls and capabilities. 565

562 IRS (2006) Tax Year 2006 Taxpayer Usage Study
563 IRS (2006) IRS.gov Download Statistics Report: April 2006; IRS (2006) IRS.gov Download Statisti cs Report:

February 2006; IRS (2006) IRS.gov Download Statistics Report: January 2006; IRS (2006) IRS.gov Download Statistics Report: March 2006
564 Government Accountability Office (2007) Taxpayer Service: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Filing System with Net Benefits p. 30
565 Government Accountability Office (2007) Taxpaye r Service: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Filing System with Net Benefits p. 30Advancing E

- file Study Phase 1 Report 169 Internet

- Based E

- filing Options Effect on IRS

– Third Party Relationship

Eva luating this option requires considering its effect on the IRS’ s relationship with third parties. In particular, this option removes the need for third party transmitters since taxpayers can e

- file their completed forms directly to the IRS. In addition, th e tax preparation software industry could perceive this option as the IRS entering into competition with it

. An alternative would be to leverage the existing relationship between the IRS and third parties to provide e

- filing services. Working with third p arties may provide the desired result of offering taxpayers a free service for filing returns electronically with the IRS, while minimizing the impact on the taxpayer, preparers
, and the IRS. This would include pending legislation H.R. 3457 , which provides a fillable form solution through the FFA

. Costs Versus Benefits Although a detailed cost/benefit analysis is out of scope for this report, some basic considerations are worth mentioning. This option is essentially an “I

- File” capability for the IRS. The GAO noted that in 2006, 2 1 States offered I

- File , allowing taxpayers to prepare and file their returns directly on the State tax agencies’ Internet web site s

. Three State s have since discontinued their I

- File systems due to low usage and costs that exceed e d the benefits provided. The GAO report also discuss ed how potential cost savings to the IRS from an I

- File system are based on the number of taxpayers who convert from paper to electronic returns

. 566

Given the State experiences with I

- File solutions and th e low usage rate, the IRS would likely face a similar challenge in attracting e

- file users. Increasing the options for taxpayers to file electronically may increase voluntary compliance, but there is no guarantee that individuals will migrate to this servi ce. A report commissioned by the Computer & Communications Industry Association summarized its review of I

- File as follows: “Our review of the evidence suggests that any effort by the IRS to implement an I

- File program would generate costs far in excess o f any possible benefits. Accordingly, we recommend against pursuing such an effort” 567

. Note that the provision of government services to citizens should be determined on the basis of factors in addition to their cost.
Furthermore, as with Internet Option 2, t he IRS would incur costs to provide these capabilities that would ultimately be borne by the taxpayer.

**12.4.3.2** 

### Internet Option 3b: Interview

**- Based Preparation Tool** 
Internet Option 3b involves the IRS developing and supporting an application for taxpayers to prep are and transmit their returns. The application includes a guided

interview

– like software program

— an interactive interface that simplifies the preparation process, similar to most current commercial products

— accessed online or installed locally on the taxpaye r’ s computer. Other features of the new IRS application likely include interactive assistance, a printing capability, and the ability to save sessions. The taxpayer files the completed return over the Int ernet directly with the IRS.

566 Government Accountability Office (2007) Taxpayer Service: State Experiences Indicate IRS Would Face

Challenges Developing an Internet Fili ng System with Net Benefits p. 51
567 Litan, R. E. et al. (2008) The Benefits and Costs of I

- File p. 50Advancing E

- file Study Phase 1 Report 170 Internet

- Based E

- filing Options **12.4.3.2.1** 

### Targeted Population/Potential E

- file **Contribution**
Similar to Internet Option 2, the most likely target population for this option includes taxpayers and preparers who use the computer to prepare returns but do not take the final step of e

- filing (V

- Coders), primarily because they object to the cost, are c oncerned about sharing information with a third party (transmitter), or both. The distinguishing factor for this target population is that their cost objection is related to the preparation fee in addition to the e

- file fee. The target population is a port ion of the 38 million V

Coded returns (30% of all returns filed) shown in Figure 4

- 1

. More research is required to determine whether this target population can be

es timated more closely, bearing in mind that moving current e

- filers to this new method would have no effect on progress toward the 80% e

- file goal.

**12.4.3.2.2** 

### Considerations
To the extent that Internet Option 3b provides services beyond those noted for Internet Option 3a, many of the considerations from that option apply here as well. Taxpayer Preference The fact that there is a thriving tax preparation software industry offering products that simplify the tax code and preparation process through a series of multiple

- c hoice questions suggests that many taxpayers prefer this method to filling in a form. They are willing to pay for the step

- by

- step assistance of a guided interview because they see the value in this approach. The question then becomes
, would taxpayers pref er free government

- provided software over commercial alternatives ?

The current e

- file program offers free return preparation software services, using guided interview s , through the FFA. In addition, there are other tax preparation sites such as TaxAct and TaxNet that offer free online tax preparation software for the 1040 family of forms with few or no restrictions. The fact that there is low uptake for these free options suggests that a similar IRS

- provided free option may have simila r challenges attracting users. This option could force taxpayers to migrate to the IRS

- provided solution against their wishes if commercial tax return preparation vendors l eave this market en masse. The IRS must be prepared to effectively support current e

- filers that migrate to the government solution. Failure to meet taxpayer expectations could lead to taxpayers abandoning e

- file altogether due to dissatisfaction with the IRS

- provided solution and the lack of viable alternatives. Policy Implications Providing this tax return preparation software product will likely put the IRS in the position of being asked for tax advice by users of this product , although the IRS currently fields millions of taxpayer questions per year dealing with tax law and specific situations. While other tax authorities have balanced the roles of administering taxes and providing preparation and filing services to its citizens, it is not clear whether US citizens would embrace the IRS in this role , nor to what extent a perception of a conflict of interest may undermine adoption. Third party providers would likely position themselves as trusted intermediar ies and call attention to the potential conflict of interest. 

### It appears that some free
return preparation software alternatives exist , even outside of Free File.Advancing E

- file Study Phase 1 Report 171 Internet

- Based E

- filing Options Effect on IRS

– Third Party Relationship Given the potential economic effect on its industry, the return preparation software vendor community is likely to offer stiff resistance to this option . In addition, this option will likely negatively a ffect the Free File program , possibly to the point of its dissolution
, given the IRS agreement with the FFA . Current return preparation software vendors may abandon their offerings rather than face direct competition with the government. Others may position themselves as trusted third parties or offer other value

- added services and features to competitively differentiate themselves from an IRS offe ring. Other Challenges This option presents even greater technical challenges than those presented under Internet Option 3a, requiring the IRS to develop (or acquire), manage, and support the
tax return preparation software that is currently provided by it s private sector partners (see discussion of GAO report under Internet Option 3a). To field a product users would accept, the IRS must be prepared to not only provide annual updates that address any changes in tax law, but as a part of its annual release cycle, include ongoing usability enhancements and additional features as requested by its customers.
Furthermore, as with Internet Option 2, t he IRS would incur costs to provide these capabilities that would ultimately be borne by the taxpayer. 

### The IRS enter ing the software market would significantly alter its relationship with third party partners.Advancing E

- file Study Phase 1 Report 172 Internet

- Based E

- filing Options THIS PAGE INTENTIONALLY LEFT BLANK.Advancing E

- file Study Phase 1 Report 173 Phone

- Based E

- filing Options 

# 13. 

# Phone

**- Based**  E

- filing **Options**

This Chapter looks at the option of using telephone

- based technology to help the IRS reach the 80% e
- file goal. This option would serve taxpayers who, wi thout access to a computer or the Internet, cannot take advantage of other

e
-

fil ing options. This Chapter provides an overview of phone

- based e
- filing methods, a high

- level summary of the now
- defunct IRS Telefile program, a description of current State Tel efile efforts, and an introduction to a forward

- looking phone

- based e
- filing option. Themes identified in this Chapter include the following :
T he IRS experience with the cost

- effectiveness of Telefile highlights the importance of providing a broad group of taxpayers with a phone

- based e
- filing option. As a result of changes in demographics, user behavior, and technology, phone

- based e
- filing opportunities currently exist that did not during the original development of IRS Telefile. More research is required to explore ways to use mobile phone technology ( e.g., text messaging) to file taxes.



### 13.1 

## Overview

In this report, phone

- based e

- filing refers to using a phone

— an analog or digital landline or mobile phone

— to prepare and submit a return electronically. T he following mobile and landline phone capabilities are included as possible phone

- based methods for e

- filing : Using the numbers on the phone keypad with traditional touch

- tone phone input systems. Using spoken commands and keypad choices with interactive voice response (computer recognition of voice input) systems. Using the phone keypad/keyboard to text message. Using the phone keyp ad/keyboard to control the phone’s web browser (i.e., using the phone both as a platform for and connection to the Internet).

As discussed in more detail in Section 13.2 , the IRS had a Telefile program
, which was limited in its eligible population, usage, and technologies employed and supported. This Chapter recognizes that technology and usage have changed since the IRS and State governments deployed Telefile in the 1990s, including taxpayer behaviors and preferences and e

- file , mobile phone, and Internet adoption.
With limited capabilities compared with a computer with Internet access, phones more readily address the filing need s of taxpayers with relatively simple returns. A phone

based e

- filing option may even be attractive to taxpayers who do have computers and Internet access. A 2003 IRS study determined that 75% of users of Telefile

— the IRS’ s **Contents of Chapter 13**  **:** 13.1 Overview
13.2 History and Background
13.3 State Experiences
13.4 Phone

- Based E

- filing Options 13.4.1 Phone Option 1: Rethink Phone E

- filing



### Phone

- based e
- filing is another electronic filing ch annel besides the Internet

.Advancing E

- file Study Phase 1 Report 174 Phone

- Based E

- filing Options discontinued phone

- based e

- fil ing program
— had Internet access, and 84% of those had access in their homes 568

.



### 13.2 

## History and Background

Between 1997 and 2005, the IRS ran the telephone

- based e

- filing progr am Telefile
, which allowed a set of pre

- qualified 1040EZ filers to file by phone 569 . Telefile accounted for about 3% of the e

- filing rate, and loss in the e

- filing rate due to the Telefile termination was perhaps 1 % to 2%, based on TIGTA estimates of the per centage of Telefile users who reverted to paper filing 570

. Through the Telefile program, pre

- qualified individuals received a Personal Identification Number (PIN) to use along with their Taxpayer Identification Number (TIN) to authenticate to the Telefile s ystem. Eligible taxpayers also received an instruction booklet as part of their tax package s . The number of Telefile packages mailed varied, from 24.5 million in 1995 to 15.1 million in 2005, as the IRS attempted to improve its prediction of which taxpayer s would use the service 571

. The Telefile program included a joint Federal/State capability such as the Fed/State program for Internet

- based e

- fil ing . Seven State s participated in this portion of the program: Georgia, Indiana, Kentucky, Maryland, Missouri, Oklahoma, and West Virginia 572 . The capability allowed the taxpayer, after filing a Federal return, to enter additional information necessary for the State return and file the State return during the same telephone call. The Telefile program met with initial success and in fact allowed greater e

- file usage among Self

- Simple taxpayers than the Internet. According to TY2003 e

- file research , only 38.7% of taxpayers in the Self

- Simple category e

- filed , compared with an overall e

- filing rate of 48.4% 573 . For the sam e period, 45.9% of taxpayers eligible for Telefile used the
program 574

. However, the number of taxpayers using Telefile declined over the life o f the program from 6 million in 1998 to 3

. 3 million in 2005 575 . In March 2003, TIGTA issued a report on Telefile addressing the eligibility limitations of the program and suggesting possible expansions 576

. In terminating the program in April 2005, the IRS cit ed the decline in usage as well as high operating costs :

568 IRS (2003) TeleFile Survey Report pp. 19

- 20
569 Telefile also supported submission of Form 4868 (Request for Automatic Extension) and Form 941

(Employer’s Quarterly Tax Payment), though these are not discussed in this report.
570 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile In creased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 7
571 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 17
572 Ebersole, N. (2002) Federal/State Telefile p. 3
573 IRS (2005) Tax Year 2003 IRS E

- File Research p. 17
574 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 17
575 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 17
576 Treasury Inspector General for Tax Administration (2003) Opportunities Exist to Expand the TeleFile

Program 

### Telefile served a specific population well

— 3 .3 million to 6 million taxpayers.

The IRS cited cost and low usage in terminating Telefile, a decision that was criticized by oversight bodies

.Advancing E

- file Study Phase 1 Report 175 Phone

- Based E

- filing Options Despite its initial success, the program has since experienced a decline in use for most forms as other electronic filing alternatives have become available. This, coupled with increasing costs to m aintain the Telefile infrastructure, led the IRS to decide to discontinue the program. 577
The decision to terminate the Telefile program was criticized by Congress and consumer organizations, mainly on the grounds that the IRS eliminated a free direct

- file program while not addressing the shortcomings (in their view) of the Free File program 578

. In a 2007 audit, TIGTA also criticized the Telefile termination, arguing that the IRS improperly ended it before comparable free filing alternatives were available; that the IRS, by limiting the number of Telefile packages sent to taxpayers, adversely affected the level of participation in the program; and that IRS’s cost analysis used to support the decision was incomplete and inaccurate 579

. While TIGT A’s own cost analysis found a lower breakeven point (5.4 million returns) than the IRS’s (10 million returns )
, actual Telefile usage in 2005 was still about 2.1 million returns below even TIGTA’s breakeven point 580

. As shown in Figure 1 3

- 1 , the number of returns filed, as a percentage of the number of packages mailed, remained relatively steady. The number of returns filed, as a percentage of those eligible for Telefile, while declining during the period 2002 to 2005, was nevertheless almost the same at the end of the program (42%) as at the beginning (41%) 581

.

Figure 13

- 1 Trends in IRS Telefile Usage (1998

– 2005)

577 IRS (2005) In ternal Revenue Bulletin: 2005

- 17: Announcement 2005

- 26: IRS to Discontinue TeleFile p. 1
578 Fox, J. A. et al. (2006) Letter to the Honorable Charles Grassley, Chairman and The Honora ble Max Baucus,

Ranking Member of Senate Finance Committee; U.S. Senate (2006) Grassley, Baucus Express Concern Over Continued Tax Free File Program Problems
579 Treasury Inspector General for Tax Administration (2007) Eliminating Tele File Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers pp. 1

- 3
580 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxp ayers pp. 12

- 13
581 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 17Advancing E

- file Study Phase 1 Report 176 Phone

- Based E

- filing Options TIGTA’s audit also highlighted the increased burden to taxpayers as a result of discontinuing Telefile. Based on an analysis of a survey of Telefile users, TIGTA concluded the following : In 2006, more than 541,500 taxpayers who would have remained eligible to use Telefile for free spent an estimated $23.6 million to file their tax returns 582

. Regardless of the actual cost saving s from discontinuing the Telefile program , the result, in effect, was to shift those costs from the IRS to taxpayers because former T elefile users paid almost $24 million to file their tax returns in 2006 583

. TIGTA asserted that “the Telefile Program was discontinued before comparable free alternatives were available” 584

. When the Telefile program was terminated, the IRS estimated that pro cessing costs for a Telefile return were greater than those for a paper 1040EZ return. Annual savings from discontinuation were estimated at $17 million to $ 23 million 585

. As shown in Figure 13

- 2 , a 200 7 TIGTA study found that 5 2 % of former Telefile users e

filed by other methods, including 3 2 % who used Free File 586

.

Figure 13

- 2 Filing Methods Used by Former Telefile Filers (as of 2006)

582 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 5
583 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cos t and

Burden of Filing a Tax Return for Many Taxpayers p. 11
584 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 7
585 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 2
586 Treasury Inspector General for Tax Administration (2007) Eliminating T eleFile Increased the Cost and Burden of Filing a Tax Return for Many Taxpayers p. 7Advancing E

- file Study Phase 1 Report 177 Phone

- Based E

- filing Options 

### 13.3 

## State Experiences

According to TIGTA, 31 State s had Telefile programs in 2005 . Nine State s eliminated their programs prior to the Federal Telefile discontinuation, and 12 more discontinued their program s after the Federal Telefile program was terminated. Several of these States cited the Federal Telefile discontinuation as a factor in closing their Telefile programs. Most of the State s that participated in the joint F ederal/State Telefile program discontinued support for Telefile when the IRS program was discontinued. 587
As of May 2008, only eight State s operated a Telefile pro gram, and only three of those
programs
— the ones operated in Massachusetts, Ohio, and Pennsylvania

— were considered by the FTA to be “significant” 588

. It appears that a larger proportion of taxpayers is eligible for State Telefile programs than was eligible for the discontinued Federal program. Colorado, for example, asserts on its web site that “most full

- year Colorado residents who file a Colorado income tax return” use Telefile 589 . One reason for broader eligibility may be that State returns are generally s impler than Federal

. Other ways in which State programs differ from the discontinued Federal Telefile
program and offer broader eligibility include the following 590 :
Most of the State Telefile programs do not require pre

- qualification. Connecticut, Nebraska , and Ohio are exceptions.
In several State s, taxpayers can contact a customer

- service line prior to using Telefile to obtain a PIN or change an address , which increases the eligible population. Unlike most offerings, Massachusetts allows first

- time filers to Telefile.

There seems to be limited research on State s’ experience s with Telefile. Understanding the elements that contribute to States’ success or failure with their Telefile program s could offer insights to the IRS for developing any future pho ne filing option.



### 13.4 

## Phone

**- Based**  E

- filing **Options**
Technology and its users have changed since the days of Fe deral Telefile. In its March 2008 report, the Pew Internet & American Life Project noted the pace of change since 2002 , which indicate s “a sharp reversal in how people viewed these technologies” 591

. Mobile phone usage has continued to grow, and people are in creasingly connecting to the Internet wirelessly. Mobile phone usage in the United States has reached 255 million users 592

. The percentage of users logging on to the Internet with a wireless connection

— a laptop computer, a handheld personal digital assistant (PDA), or mobile phone

— grew from 34% to 41% in just the space of a year (December 2006 to

587 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpay ers p. 14
588 Duncan, H. T. (2008) State Electronic Filing: Recen t Performance p. 7
589 Colorado (2008) Colorado Department of R evenue: Telefile
590 Massachusetts (2008) Massachusetts Department of Revenue: Telefile
591 Pew Internet & American Life Project (2 008) Data Memo: Mobile Access to Data and Information p. 1
592 Cellular Telecommunications and Internet Association (2008) Wireless Quick Facts: Year End Figures 

### As of May 2008, eight States had a Telefile program, though only the programs in Massachusetts, Ohio, and Pennsylvania were considered “significant” by the FTA

.

User behaviors and technology have changed considerably since the IRS closed Telefile in 2005, let alone since Telefile was designed in the 1990s.Advancing E

- file Study Phase 1 Report 178 Phone

- Based E

- filing Options December 2007) 593 . Pew reported that “58% of adult Americans have used a cell phone or PDA to do at least one of ten mobile non

- voice data activities, such as texting, e

mailing, taking a picture, looking for maps or directions, or recording video” 594

. As noted previously, phone

- based e

- filing may be attractive to those filing simple returns, but the phone may be t he only electronic channel available to those without access to a computer and the Internet. The population of taxpayers without computers or Internet access is significant. In 2003, the Census Bureau estimated that among households with an income below $2 5,000, 59% did not have computers and 69.2% did not have Internet access 595 . While these percentages are declining, for the foreseeable future, there will be a sizeable group of taxpayers for whom filing taxes using a computer and Internet access is not an o ption. Although taxpayers without computers or an Internet connection at home may be able to access these at other locations (public libraries, work) or take advantage of Taxpayer Assistance Centers or VITA facilities, these options have a number of limita tions as TIGTA and others have pointed out 596

. Interestingly, research shows that the population less likely to have a computer and Int ernet access at home is more likely to have a mobile phone

. Pew found that “Cell phone users are more likely to be found in groups that have generally lagged in Internet adoption, such as senior citizens, blacks, and Latinos” 597 . As a result of these advances in technology and demographic trends, phone

- based e

- filing opportunities exist that did not during the development of Telefile in the 1990s. However, given this changed landscape, further research is required to evaluate the best option to take advantage of phone

- based technology to increase e

- filing and to balance that goal with service to taxpayers.

**13.4.1** 

## Phone Option 1: Rethink Phone E

- filing
The first step in the pursuit of a phone e

- filing option is careful evaluation of current and cutting

- edge technology as well as research on usage trends and the behavior of various target populations 598 . As noted previously, groups that ha ve generally lagged in Internet adoption are more likely to be mobile phone users, making these populations important targets for potential new phone e

- filing options. In addition, Pew found that young adults, Hispanics, and African Americans lead the way on wireless access. The approach to a future phone e

- filing option should take into consideration the trends and behavior of these user segments.

593 Pew Internet & American Life Project (2008) Data Memo: Mobile Access to Data and Information p. 1; Pew

Internet & American Life Project (2008) Data Memo: Wireless Internet Access p. 1
594 Pew Internet & American Life Project (2008) Data Memo: Mobile Access to Data and Information p. 1
595 Census (2003) Computer and Internet Use in the United States: 2003 p. 2
596 Treasury Inspector General for Tax Administration (2007) Eliminating TeleFile Increased the Cost and

Burden of Filing a Tax Return for Many Taxpayers p. 8
597 Pew Internet & American Life Project (2008) Seeding The Cloud: What Mobile Access Means for Usage

Patterns and Online Content p. 1
598 Pew Internet & American Life Project (2008) Da ta Memo: Wireless Internet Access p. 5 

### People lacking computer and Internet access at home are more likely to have a mobile phone than those who have

access.

A phone

- based e
- filing option could leverage the widespread use of mobile phones an d text messaging.Advancing E

- file Study Phase 1 Report 179 Phone

- Based E

- filing Options Future options could leverage the widespread use of mobile phones and other portable networked devices . Some avenues to explore include the following :
Use of web

- based forms on PDAs and mobile phones. Use of SMS (text messaging) to prepare and file tax returns and pay balance s due and receive refunds.

**13.4.1.1** 

### Targeted Population/Potential E

- file **Contribution**
Phone Option 1 targets the population of paper filers who have access to a landline or mobile phone but do not have access to a computer. The projected contribution of any phone

- based e

- filing option to the 80% e

- file goal depends on how scope and eligibil ity are defined . Historical data on Telefile usage makes clear the impact of eligibility on participation. In the context of reaching the 80% e

- file goal, the key benefit of a new phone

- based e

filing option is that it reach a population not easily served by any other e

- filing option: taxpayers who lack access to a computer and the Internet and who cannot or choose not to use options that involve computer

- based filing solutions outside their homes. The 69.2% of low

- income households without Internet access could be well served by such an option 599

.

**13.4.1.2** 

### Considerations

A phone

- based e

- filing option could also help the IRS achieve broader taxpayer service goals in the sense that it may offer an extremely simple and easy

- to

- use method well

suited to simple self

- prepared return s

. Historically, a key challenge for the success of Telefile was the limited pool of eligible

users. Figure 13

- 1 shows the decrease in eligible Te lefile users between 2002 and 2005. To maximize the eligible taxpayer population, several approaches could be considered : Allow taxpayers to determine for themselves whether they can file by phone. Eliminate the pre

- qualification process used by Telefile.
Use a model similar to the one in Massachusetts, allow ing first

- time filers and those whose address es have changed to file by telephone. Investigate applications of new technology and innovative business practices that would expand the eligible population ( e.g., allowing taxpayers with dependents to file by telephone )

. Including virtually all 1040A filers would require the IRS to develop innovative solutions to a number of challenges. For example, a mechanism would have to be provided for taxpayers to decla re their dependents 600

. In addition to increasing the e

- fil ing rate, broader eligibility resulting in broader participation is critical to driving down the cost per return. Referencing the discontinued

599 Census (2003) Computer and Internet Use in the United States: 2003 p. 2
600 Voice recognition or voice capture might be used, in addition to keyp ad entry, to address this problem.

Alternatively, taxpayers could provide selected information through the IRS call centers prior to filing a Telefile return. In addition, support would have to be provided for the schedules commonly included with Form 1040 A (Interest income, Child and Dependent Care), and mechanisms would have to be provided for issuing PINs (or other identification/authentication mechanisms) to first

- time filers.Advancing E

- file Study Phase 1 Report 180 Phone

- Based E

- filing Options Telefile program, the IRS concluded that it would have had to process 10 million returns to reach the point in which the cost per return would equal that of paper returns 601

. Other organizations have had some success using phone

- based technology as a channel for financial transactions. Western Union’s recent ann ouncement of a U.S.

- based mobile phone remittance service offers an interesting model for the IRS. The service targets Hispanic immigrants, who are more likely to have a mobile phone than an Internet connection at home, according to the Washington

- based Hi spanic Institute 602

. Similarly, a successful company in South Africa is aim ing its mobile banking product at the 48% of adults who do not have bank accounts or who have difficulty accessing formal financial services 603

. Security could be a key issue in terms of any phone

- based e

- filing option. Internet

- based solutions can use technologies

— such as Secure Sockets Layer encrypt ion

— to secure ly transmit data between the user’s browser and the destination web site (e.g., a vendor’s online return preparation software product) but voice communications and text messages are generally unencrypted and may be less secure

. Research is needed to provide the data required to determine the case for a new phone

based e

- filing option. Among the points of consideration are the cost to the IRS of the service benefits to an underserved population and whether those benefits can be achieved more efficiently and as effectively through such actions as increased marketing and use of community

- b ased preparers. Former Telefile users have migrated to new filing methods, including e

- filing . It may be difficult to convince those who reverted to paper to return to a phone

- based option. If this option is pursued, new phone

- based e

- filing options should take into account both the new technology and the behavior of potential users. To pursue a phone

- based

e

-

filing option to boost the overall e

- filing rate, the system should be capable of serving a population significantly larger than those eligible for the discontinued Telefile
program.

601 IRS (2003) Submission Processing Visioning: TeleFile p. 9
602 Kang, C. (2008) Three Firms Combine on Cellphone Remittances
603 Ivatury, G. & Pickens, M. (2006) Mobile Phone Banking and Low

- Income Customers: Evidence from South

AfricaAdvancing E

- file Study Phase 1 Report 181 Paper

- Based Filing Options 

# 14. 

# Paper

**- Based**  **Filing Options** 

This Chapter introduces paper

- based filing options, not as method s for contributing to the 80% e
- file goal, but rather as means for achieving the efficiency and cost

- saving outcomes typically associated with e
- filing. Even as the IRS comes closer to meetin g its e
- file goal, it will need to address the significant number of paper returns that it will continue to process for the foreseeable future. Th is Chapter defines ways of automating paper return processing to realize efficiencies (e.g., 2D barcodes, Char acter Recognition), discusses current IRS and State experiences with these technologies, and describes the potential impact and trade

- offs between the paper

- based filing options. It also introduces the Modernized Submission Processing (Msp) project, which the IRS recently selected as its method of automating paper return processing
, and places this project in the overall context of paper

based filing options. Themes identified in this Chapter include the following : The IRS will need to process a vast number of paper returns for the foreseeable future, even after it achieves the 80% e
- file goal. Relatively mature technologies exist to automate paper processing
, and the IRS has begun to plan an automated paper processing solution
, pending funding

. 2D barcodes only work for V

- Coded returns and impose a greater stakeholder burden than Character Recognition, which works for all paper returns with no stakeholder burden.



### 14.1 

## Overview
The foundational purpose of e

- filing is to give taxpayers flexibility and convenience in submitting their taxes while creating operational efficiencies and cost reductions for the government. This Chapter addresses options for achievi ng e

- file

– like results (i.e., government efficiency and cost savings) for paper returns, specifically by automating the processing of paper return submissions. By modernizing antiquated manual paper transcription systems, the IRS can save millions of dolla rs annually and fully integrate residual paper return data with e

- file return data in a unified tax processing infrastructure.

Return processing automation solutions ( two

- dimensional [2 D ] barcodes and C haracter R ecognition [CR] ) do not qualify as electroni c filing solutions. However, the IRS will need to process residual paper returns for the foreseeable future, and the question is how best to do this. Processing Residual Paper Returns
Investing in paper

- based filing technology may seem counterproductive re garding the IRS’s goal of increasing e

- filing . However, with paper returns continuing to be a significant percentage of individual taxpayer returns

— 46% in 2006

— reliance on costly **Contents of Chapter 14**  **:** 14 .1 Overview
14 .2 History and Background 14 .2.1 Current Submission Processing 14 .2.2 Current Barcode Use at the IRS 14 .2.3 Modernized Submission Processing
14 .3 State Experiences
14 .4 Paper

- Based Filing Options 14 .4.1 Paper Option 1: 2D Barcodes 14 .4.2 Paper Option 2: Character Recognition



### The IRS projects that individual paper returns will exceed 38 million ea ch year through 2014

.Advancing E

- file Study Phase 1 Report 182 Paper

- Based Filing Options legacy transcription operations to process these returns is detrimental to the government efficiency associated with e

- filing 604 . IRS projections through 2014 (see Table 3

- 2 ) show a decrease in paper, but the issue of residual paper will persist even when the 80% e

- file goal is met. Additionally, continuation of legacy paper return processing costs the IRS $67 million annually in manual transcription processing, paper file and archive management, and system maintenance 605 . It is 8 8 % less expensive per return to proce ss electronic returns ($0.35 per return) than paper returns ($2.87 per return) 606 . The ongoing investment in the legacy manual transcription of paper returns represents an opportunity cost in that if paper submission processing becomes more highly automated, resources could be redirected to higher priority initiatives.
Modern tax processing operations around the globe have replaced labor

- intensive transcription processes with less costly technology

- based strategies that integrate electronic filing capabilitie s with automated data extraction for paper returns. Automated data extraction is accomplished using document imaging systems that employ intelligent software capable of decoding data embedded in special 2D barcodes and/or reading text directly from returns through C haracter Recognition

. The two most common ways to automate the processing of residual paper returns are through 2D barcodes and CR , as defined below.

2D Barcodes Barcodes are everywhere in our global economy

— nearly everything one can purchase has a Universal Product Code (UPC) (a kind of barcode) like the one shown in Figure 14

- 1 . Barcodes were originally nothing more than machine

- readable license plates. Each label contained a relatively short unique identifier encoded in one

- dimensional (1D) black

- and

- white bars of varying width. For 1D barcodes, the da ta associated with the identifier (e.g., the price of an item, the title of a book, the manufacturer name and model) is stored in a separate database; the identifier merely acts as the unique key for look ing up additional information. However, the developm ent of 2D barcodes provided a much greater data density (quantity of information per square unit area), as can be seen in the visual complexity of the barcode in Figure 14

- 2 . Because 2D barcodes allow much more information to be directly encoded in them, they reduce or eliminate the need for the related database for look ing up the full information.

Figure 14

- 1 Example o f 1D Barcode (UPC

- 12 Type )

604 IRS (2007) Calendar Year Return P rojections for the United States and IRS Campuses CY 2007

- 2014 p. 9
605 IRS (2008) Modernized Submission Processing (Msp)

- Solution Concept Definition

- Domain: Submission

Processing p. 14
606 IRS (2005) Summary for Weighted Averages of the Paper Form 1040, 1040A, 1040 EZ and e

- File Form 1040,

1040A, & 1040 EZ for Submissions Processing Costs Labor costs (FY 2005 IRM 3.30.10) 

### Paper return processing costs the IRS $67 million annually; paper returns cost eight times more to process than electronic returns

.

The 2D barcode is truly a portable data store, printable on virtually any document or surface.Advancing E

- file Study Phase 1 Report 183 Paper

- Based Filing Options Figure 14

- 2 Example of 2D Barcode (PDF 417 Type )
Character Recognition CR provides another approach to automated data extraction from printed documents that do es not require end user s to use specialized computer applications or software to prepare their documents. CR involves the application of specialized al gorithms to recognize the shapes and correlate them with letters and words 607 . CR involves digitally photographing (or scanning) original documents into an equivalent electronic image. Once converted, the CR solution analyzes (reads) the electronic image and translates the many shapes ( which we see as letters) on the page into their equivalent characters. CR does this by employing multiple algorithms of neural network technology to analyze stroke edge s , the line s of discontinuity between the text characters, and the background. Allowing for irregularities of printed ink on paper, each algorithm averages the light and dark along the side of a stroke, matches it to known characters
, and makes a best guess as to which character it is. The software then averages o r polls the results from all the algorithms to obtain a single reading. For purposes of clarity in this report, we use the term “ CR ” to refer to any/all of the various machine recognition subtypes ( e.g. , Optical Character Recognition [OCR], Intelligent Cha racter Recognition [I CR], Handwritten Character Recognition [HWR]), and note that it is by design necessary to first create a digital image of a paper document before CR can be applied to it

.



### 14.2 

## History and Background

This Section discusses how submission processing of paper returns currently works within the IRS environment and sets the context for the IRS ’s recognized need for modernized submissions processing.

**14.2.1** 

## Current Submission Processing
The IRS operates large regional proces sing centers to receive and process paper returns, remittance, and correspondence. Because the percentage of e

- file returns has

607 The family of Character Recognition technologies includes: Optical Character Recognition (OCR) which

reads machine print; Intelligent Character Recognition (ICR) sometimes referred to as HWR, or Handwritten Character Recognition, which reads handwriti ng; and Optical Mark Recognition, which reads specific symbols, such as the circles one fills in with a #2 pencil on standardized tests. The ability of the U.S. Postal Service mail routing system to read even messy handwritten addresses on letters is an ex ample of a robust CR implementation. 

### Character Recognition does not require end user s to employ additional specialized technology to prepare their document s.Advancing E

- file Study Phase 1 Report 184 Paper

- Based Filing Options increased
, several of these centers have been closed. By 2012, the IRS plans to consolidate the original 10 centers in to the fol lowing five centers 608 :

Austi n Processing Center

. Fresno Processing Center

. Kansas City Processing Center

. Cincinnati Processing Center

. Ogden Processing Center

. The 1040 family of returns that are filed on paper are processed at the Austin, Fresno, and Kansas City centers. These returns go through an elaborate manual process from mail room receipt and sorting
, remittance processing
, “ code and edit
, ” transcription data extraction
, and finally
, filing and archiving

. Of particular interest to this study is the transcription function
, which requires about 5,000 seasonal workers to manually key

enter taxpayer returns and payment data into a tax return database 609

. Currently
, the IRS processes the 1040 family of returns that are filed on paper using the Integrat ed Submission and Remittance Processing (ISRP) key

- from

- paper transcription system. In 1998 , when ISRP was deployed, transcription, which had been used for decades to extract data from tax returns, was still the best way to process paper tax returns. Since that time
, advances in automated document processing have been made. The ISRP contract is d ue to expire in 2012
, and after 14 years its serviceable life is limited. 610

**14.2.2** 

## Current Barcode Use at the IRS
Even though 2D barcodes have greater capacity than 1D barcodes, 1D b arcodes can still be useful for form identification and inventory control

. In the current IRS environment, the IRS uses barcodes in a number ways , including to accomplish the following 611 : Control work on Form 5546 (Ex amination Return Charge

- Out Sheet). Control Automated Underreporter (AUR) work.
Control the inventory of computer equipment. Route envelopes faster.
Process Schedule K

- 1s (business form s ) that are voluntarily barcoded.
The IRS attempted a voluntary 2D barc ode program on K

- 1 forms (business returns), but without a mandate, only 3.2% of the more than 820,000 forms have acceptable barcodes. T he number of accepted 2D barcode d K

- 1s fell this year because two software companies that could program the bar code lost the ir certification . ( The IRS requires authorized e

- file providers

— EROs, Intermediate Service Providers, Transmitters, Software Developers, and Reporting Agents

— complete an application process including fingerprinting and a suitability background check ; once all criteria are met, the IRS formally accepts the candidate and only then can they identify and act as an

608 Treasury Inspector General for Tax Administration (2007) Consolidation of Tax Return Processing Sites Is

Progressing Effectively, but Improved Project Management Is Needed
609 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 3
610 IRS (2008) Introduction to ISRP & SCRIPS
611 IRS (2007) Bar Coding and e

- Filing Mandates p. 8 

### Without a mandate for 2D barcode use, the IRS saw only single

- digit adoption of 2D barcodes for K

- 1 (business) forms

.Advancing E

- file Study Phase 1 Report 185 Paper

- Based Filing Options authorized IRS e

- file provider 612 .) The Service Center Recogn ition/Image Processing System (SCRIPS) program office indicated that the number of K

- 1s with barcodes was previously about 10%
, although the office could not provide historical data. 613
SCRIPS is a legacy mission

- critical
, high

- speed electronic document imaging system used at four of the IRS Submission Processing Service Centers (Aust i n, Cincinnati, Kansas City, and Ogden) to process returns and deposits. SCRIPS processes more than 120 million submissions annually
, including Federal Tax Deposits (FTD) totaling more than $63 billion ; Information Return Processing (IRP) forms; 1041, 1065
, and 1120S Schedule K

- 1 forms; and Form 940/941 returns.

**14.2.3** 

## Modernized Submission Processing
The IRS recognizes that even as it comes closer to meeti ng its 80% e

- file goal , residual paper returns exist

. E ven if the 80% e

- file goal is met in 2014 , there would still be nearly 30 million paper returns submitted that year. To address this critical problem, the IRS has established the strategic goal of repl acing ISRP legacy transcription operations with a document imaging system that utilizes automated data extraction through 2D barcodes and CR . This will give taxpayers the freedom to file paper returns if they choose while still enabling the IRS to accompli sh e

- file

– like results of reducing operating costs and improving efficiencies.

The IRS has proposed several paper processing modernization projects. The IRS continues to pursue modernization to address the following critical operational

concerns:
Paper V olume

— Although electronic filing has been steadily increasing, more than 52 million individual taxpayers filed paper returns in 2006 614 . The IRS projects that individual paper returns will exceed 38 million through 2014 , and

e ven if the 80% e

- file goal is met in 2014, there would still be nearly 30 million residual paper returns (see Table 3

- 2 ) 615

. Transcription Costs

— The cost of processing paper returns through legacy transcription systems is high. Transcription is labor

- intensive
, and despite a very effective workforce, the IRS spends approximately $30 million annually on transcribers alone. The IRS also spends $16 million on maintenance of transcription systems and a pproximately $21 million on filling and archiving
paper

. 616 Transcription Limitations

— Transcription incurs an error rate of approximately 10%
, resulting in extensive correction processing. Additionally, transcription captures a subset of taxpayer

- complete d form fields, which is sufficient for tax processing but imposes limitations on data availability for compliance operations. Furthermore, the transcription system does not export data to the Modernized Tax Return Database (MTRDB)
, thus preventing retireme nt of the legacy Generalized Mainline Framework (GMF)

.

612 IRS (2007) Beco me an Authorized e

- file Provider
613 IRS (2008) Total Bar Code Counts for 2008 (K1s)
614 IRS (2008) 2008 Filing Season Data

- Returns/Refunds for Week Ending: 6/21/2008

615 IRS (2007) Calendar Year Return Projections for the United States and IRS Campuses CY 2007

- 2014 p. 9
616 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 5 For more information on mandates, s ee Chapter 11

.



### To address the remaining paper returns, the IRS has established a strategic goal of replacing legacy submissions processing with a modernized system. Failure to modernize prevents the IRS from retiring legacy information systems.Advancing E

- file Study Phase 1 Report 186 Paper

- Based Filing Options Return Availability

— Paper returns, checked out from the files manager, impede customer service, compliance, and criminal investigation operations. It can take several weeks to obtain tax return docum ents , and paper files are often lost in the process.
Msp is planned to optically scan paper returns, extract taxpayer data using 2D barcodes (if they exist) and CR , and export the data to the MTRDB for processing in the same manner as MeF data. The electronically imaged submission will become the official
return

- of

- record, allowing for destruction of paper originals. 617



### 14.3 

## State **Experiences**

Many State governments have implemented the use of 2D barcodes as part of their electronic filing strategies for tax processing. According to the FTA, many State s have chosen t o pursue 2D barcoding over “high

- speed imaging with optical character recognition options 618 ,” but data is not readily available on which State s have used CR to process returns, and additional research is needed in this area.
According to the FTA, while Stat e s recognize that barcodes are not as efficient as electronic filing, they have reported the following high

- level benefits from their barcode
programs 619 :
Reduction in errors and rework that comes from manual data entry/transcription

. Decrease in time and ef fort for processing paper returns (an estimated 50 % to 90%
, depending on the State program)

. Provision of a “bridge technology” to increase efficiencies while encouraging electronic filing

. In addition, State experience suggests that barcode programs at the State level have “not required major investment from the State s ” 620

. Similarly, State s report ed that they have “worked with the software developer comm unity to develop standard s for barcode printing to minimize developer costs ” 621

. Conversations with State s were for the most part in line with FTA testimony and confirmed the assertion that additional information is needed in the CR area. For example, in discussing its pilot 2D barcode effort for State returns submitted by large

volume preparers, New York described its 2D pilot as a limited tactical effort
, but it is not part of its long

- term strategy. 2D b arcoding was initially imposed as part of a mandate on preparers , and tax software companies provide d systems that print barcodes on a separate page of the return

. In the future, the State intend s to use CR to capture and export paper return data as XML files to be consistent with electron ically filed returns. 622

617 IRS (2008) Modernized Submission Processing (Msp): Submission Pro cessing Executive Steering Committee

p. 5
618 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 12
619 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 12
620 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 12
621 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 12
622 Digman, B. (2008) Interview of Chief Information Officer, En terprise Services Division, New York State

Department of Taxation & Finance Further research is needed to determine States’ use of CR and l ong
- term plans for CR and 2D barcodes. 

### 33 States have implemented 2D barcodes for V

- Code d returns; however, state data on the number of States using CR is unavailable.Advancing E

- file Study Phase 1 Report 187 Paper

- Based Filing Options In California, however, 2D barcodes are not used
, a ll paper returns are imaged
, and data extraction is accomplished through CR

. Only data required for tax processing is extracted at the point of receipt. Additional data needed for co mpliance operations is available through an electronic enterprise return retrieval system

. 623
Based on a 2006 IRS study of State 2D barcode use, Table 14

- 1 provides statistics on the usage of 2D barcoding and other return processing methods by States 624

. Note that even though electronically filed and transcribed returns are included in the table
, returns processed by CR are not

— though CR is a valid processing method used by a number of States . Whether this was a result of the study focusing on barcodes , or whether returns processed by CR were included in one of the named categories
, is unclear. R egardless,

a dditional research is required on States’ use of CR and long

- terms plans for both CR and 2D barcodes as paper return processing methods.

Table 14

- 1 State Experiences with 2D Barcodes and Return Processing Methods (as of 2006)

State Total Returns 2D Barcode d Electronically Filed Transcribed Quantity % Quantity % Quantity %
Alabama 1,823,105 366,504 20% 914,406 50% 542,195 30%

Arizona 2,433,435 408,357 17% 1,015,547 42% 1,009,531 41%
California 14,362,960 163,838 1% 6,188,766 43% 8,010,356 56%
Colorado 2,158,870 123,515 6% 940,223 44% 1,095,132 51%

Connecticut 1,610,736 62,417 4% 763,442 47% 784,877 49%
Delaware 458,244 106,197 23% 200,956 44% 151,091 33%

D.C. 291,181 9,285 3% 109,930 38% 171,966 59% Georgia 4,062,008 612,909 15% 2,044,537 50% 1,404,562 35%

Hawaii 595,035 3,268 1% 164,400 28% 427,367 72%
Idaho 593,209 53,705 9% 308,601 52% 230,903 39%
Illinois 5,733,989 1,177,895 21% 2,434,201 42% 2,121,893 37%
Indiana 2,814,332 609,617 22% 1,351,212 48% 853,503 30%

Kansas 1,406,512 43,156 3% 694,199 49% 669,157 48% Kentucky 1,701,902 223,853 13% 858,042 50% 620,007 36%

Louisiana 1,929,659 126,693 7% 860,919 45% 942,047 49%

Maine 640,244 37,360 6% 264,590 41% 338,294 53% Maryland 2,787,248 230,406 8% 1,136,571 41% 1,420,271 51%
Massachusetts 3,231,658 1,180,338 37% 1,589,931 49% 461,389 14% Michigan 4,774,860 606,290 13% 2,740,314 57% 1,428,256 30%

Missouri 2,695,793 549,832 20% 1,338,746 50% 807,215 30%
Nebraska 847,693 11,276 1% 454,502 54% 381,915 45% New Jersey 4,172,851 631,435 15% 1,729,555 41% 1,811,861 43%

New Mexico 903,946 152,529 17% 444,292 49% 307,125 34%

623 Beach, C. (2008) Interview of Director, Filing Methods Bure au, California Franchise Tax Board
624 IR S (2006) States’ Experience with Tax Return Bar Code Technology p. Appendix 3Advancing E

- file Study Phase 1 Report 188 Paper

- Based Filing Options State Total Returns 2D Barcode d Electronically Filed Transcribed Quantity % Quantity % Quantity %
New York 10,532,948 1,869,122 18% 3,101,647 29% 5,562,179 53%
North Dakota 324,219 66,564 21% 147,295 45% 110,360 34%
Ohio 5,278,678 303,511 6% 2,745,270 52% 2,229,897 42%
Oklahoma 1,434,947 272,889 19% 711,589 50% 450,469 31% Oregon 1,642,918 197,526 12% 749,496 46% 695,896 42% Pennsylvania 5,835,518 344,394 6% 2,496,654 43% 2,994,470 51%
Rhode Island 630,429 47,567 8% 185,154 29% 397,708 63%
Utah 974,116 69,342 7% 476,566 49% 428,208 44% Virginia 3,774,326 739,199 20% 2,227,134 59% 807,993 21%

Wisconsin 2,743,537 92,018 3% 1,592,395 58% 1,059,124 39%
Total 95,201,106 11,492,807 12% 42,981,082 45% 40,727,217 43%

Note s: FTA data suggests that percentages have gone up in many State s (e.g.
, Alabama, Delaware, Indiana, Missouri, North Dakota
, and Massachusetts)
, and discussions with the State s have shown that some, like California, use Character Recognition instead of 2D barcodes.
As shown in Table 14

- 1 , as of 2005, 33 State s use d 2D barcodes. Thus, the capability for generating barcodes exists in some form in current tax preparation software. A number of these State s used barcodes as part of their opt

- ou t provisions for their mandate s on preparer s to electronically file ; preparers who elected not to electronically file had to barcode their returns.



### 14.4 

## Pape **r -**  **Based Options** 

There are two major option categories for address ing the automation of paper return submission processing: 2D barcodes (implemented on fill

- and

- print forms or in tax preparation software) and CR . As with other Chapters in this report , the option categories should not be considered exclusive of one another

. I n fact, multiple options or a hybrid

— such as Msp

— may be required

. The TY 2006 Taxpayer Usage Study provides information on the manner in which returns are prepared and is instructive in segmenting the paper returns into categories that may be addressed by a 2D barcode or CR option. Table 14

- 2 provides this segmentation and shows that almost three

- quarters of paper returns are computer prepared but printed on paper (V

- Coded) 625

.

625 IRS (2006) Tax Year 2006 Taxpayer Usage StudyAdvancing E

- file Study Phase 1 Report 189 Paper

- Based Filing Options Table 14

- 2 Perce ntage of Paper Returns by Preparation Method (as of TY2006)

Method of Preparation % of Paper Returns % of All Returns Computer Prepared (i.e., computer printed or V

- Code d) 74.03% 89.02%
Handwritten 25.42% 10.75% Typed (i.e., typed on a typewriter) 0. 52% 0. 22% Computer Prepared or Typed (i.e., cannot distinguish) 0.0 3% 0.0 1%
Of the preparation method s listed in Table 14

- 2 , only returns that are computer prepared and printed on paper will be eligible for 2D barcode, because the computer programming is needed to print the barcode on the return. Because CR does n ot rely on marking the return by computer, any of the methods listed could potentially be applied to a CR option. Options for 2D barcodes and CR are discussed in more detail below.

**14.4.1** 

## Paper **Option 1: 2D Barcodes**
In 2006, the majority

— 74%

— of paper returns were V

- Coded (i.e., prepared using third party tax preparation software but printed and filed on paper). For filers in this category who cannot be induced to e

- file , the use of barcodes would greatly improve submission processing for a large segment of paper returns.
At a high level, any 2D barcode option would have taxpayer

- entered data encoded into 2D barcodes , which is then extracted with specialized techno logy and merged into the same processing pipeline as e

- filed returns. It is important to note that every 2D barcode solution not only has a barcode creation component (at the time the return is printed, based on pre

- designed software capabilities) but also a barcode capture component (at the time of submission processing). Therefore, any 2D barcode solution is dependent on the IRS establishing the capability to ingest 2D barcodes as well as the ability of the filer to create them using solutions specificall y designed for this purpose by the IRS and/or a third party

. Not only does 2D barcoding reduce front

- end processing costs
, it also allo ws the IRS to establish a unified system architecture with full electronic access to complete tax return data across the IRS . However, taxpayer s and preparer s must use specialized computer applications that will generate a barcode on the printed return. Th ere are two ways 2D barcodes may be implemented:

Fill

- and

- print forms

— For example, by the IRS updating the 1040 family of downloadable forms on IRS.gov to include 2D barcodes. One way to obtain barcodes on tax returns is by using open standards

- based PDF electronic fill

and

- print forms. Tax preparation software

— For example, by return preparation software vendors updating their products to allow for this capability on IRS forms.
For clarity, the discussion below notes the common issues with 2D barcoding and points out differences between 2D barcoding and CR as required.

**14.4.1.1** 

### Targeted Population/Potential E

- file **Contribution**

Because the filing of machine

- friendly paper returns is not co nsidered e

- filing
, Paper Option 1 does not directly contribute to the 80% e

- file goal . However, as noted above, 

### 2D barcodes, while promising, are limited to V

Coded returns and impose a stakeholder burden

.

For more information on the difficult y of convincing e
- file holdouts to convert to e
- file , see Chapters 4, 5, and 6.Advancing E

- file Study Phase 1 Report 190 Paper

- Based Filing Options there are significant cost savings and efficiency benefits from automating the extraction of data from paper tax returns. Discussion with stakeholders suggests that there may also be a perception that 2D barcode options do not directly contribute to the 80% e

- file goal and actual ly detract from goal. That is, adopting a 2D barcode strategy may send the mixed signal that even while the IRS is working actively toward its 80% e

- file goal
, it is endorsing a solution other than e

- filing that seems to encourage (or at least accept) taxpayers and preparers continuing to file on paper. Whether this would actually have a negative effec t on e

filing volumes is unclear (though the electronic filing rates of states which also use 2D barcodes do not appear to support this concern) and may need additional research.

2D Barcodes in Fill

- and

- Print Forms The potential effect of this option may be esti mated by examining the current number of 1040 forms downloaded from IRS.gov and using that number as a ceiling for the possible number of 2D barcode

– enabled forms that could be returned. For the 200 6 filing season, January through April 2006, approximately 19.6 million individual tax return forms were downloaded from the IRS web site 626

. Table 14

- 3 breaks down those downloads by form.

Table 14

- 3 Downloads of 1040/A/EZ from IRS.gov (as of TY2006)

Month 1040 1040A 1040EZ
January 1,401,955 341,844 1,013,154 February 2,721,945 601,087 2,389,095
March 2,373,016 416,621 1,687,239 April 3,245,227 963,728 2,425,944
Totals 9,742,143 2,323,280 7,515,432
The precise number of downloaded forms that were submitted as tax returns is not known. However, it is believed that a relatively small portion of the approximately 44 million machine

- print ed returns (in 2006) were prepared from downloaded forms
, because most computer

- prepared returns are the result of tax return software (see Table 14

- 2 ). Although this represents a smaller portion of the paper return population, it has no effect on tax return preparation software vendors (no changes to existing software would be required) and less effect on taxpayers and preparer s (relatively few use fill

- and

- print forms), though the IRS would need to red esign the 1040 forms to accommodate the 2D barcode. However, the increasing trend toward use of preparer s indicates that the potential population that would adopt this option is significantly less than the population that would adopt the option below, whic h uses tax preparation software to generate the barcodes if the return is paper filed instead of e

- filed

.

626 IRS ( 2006) IRS.gov Download Statistics Report: April 2006; IRS (2006) IRS.gov Download Statistics Report:

February 2006; IRS (2006) IRS.gov Download Statistics Report: January 2006; IRS (2006) IRS.gov Download Statistics Report: March 2006 

### The potential effect of embedding 2D barcodes in forms available on IRS.gov is difficult to estimate, but as much as 70% of paper returns may be affected if all return preparation software embeds 2D barcodes

.Advancing E

- file Study Phase 1 Report 191 Paper

- Based Filing Options 2D Barcodes in Tax Preparation Software The potential effect of this option may be estimated by taking the 74% of paper returns that are V

- Coded and c onsidering the average read rate for 2D barcodes ( assume 95% for this calculation ) , which yield s an upper estimate that 70% of paper returns could be processed by 2D barcodes rather than transcription.

**14.4.1.2** 

### Considerations

There are a number of considerations regarding implementing 2D barcodes:
The relative accuracy of 2D barcodes compared with CR

. The relative stakeholder burden imposed by 2D barcodes compared with CR

. The technology required for 2D barcodes compared with CR

. Accuracy Barcode accuracy is somewhat different from CR accuracy. Whereas a CR system conducts human

- like interpretation of printed charact ers, 2D barcode systems recognize binary patterns of dots. If the barcode image is legible (i.e., the recognition solution can successfully detect and read [ decode ] it ) , the data extraction is 100% accurate. Therefore, the accuracy rating of a barcode is more a measure of the percentage of a quantity of barcodes that are legible

— i.e., a real

- world read rate

— than a measure of the accuracy of extracted data. For 2D bar codes, data extraction is an all

- or

- nothing proposition and wholly dependent on whether they can be read to begin with. States’ experiences with processing 2D barcodes on tax forms illustr ate the net effect of real

- world problems, because their read rates are in the range of 93 % to 96% 627

. Potential causes of a less

- than

- perfect read rate include the following : Design issues such as correctly setting the level of built

- in error correction and the physical attributes

— size, aspect ratio

— of the 2D barcode. Printing issues such as insufficient native resolution of the user’s printer, insufficient print quality, and print margins impinging on the barcode

. Handling issues such as folds, tears, w riting, and other marks that occlude or damage the integrity of the barcode

. Processing issues such as insufficient scan resolution, insufficient image cleanup, and insufficient software capabilities regarding recognizing the barcode in the scanned image a nd decoding it

. In a 2006 survey, respondents reported the first pass accuracy rates for 2D barcodes and CR , as shown in Table 14

- 4 628

.

627 California (2004) Proposed Process: Implement New 2D Barcode Format for Scannable Retu rns; Federation

of Tax Administrators (2007) 2

- D Barcode Frequently Asked Questions
628 The Association for Work Process Improvement and Harvey Spencer Associates (2006) Forms Processing

Data Capture Study 2006: An Analysis of Forms Processing, Data Capture and Document Capture Systems, Operations and Trends 

### 2D barcodes have read rates in the mid

- 90 s. If a 2D barcode can be successfully read, all of the encoded data will be extracted with 100% accuracy

.

Character Recognition is discussed as Option 2 in this Chapter

.Advancing E

- file Study Phase 1 Report 192 Paper

- Based Filing Options Table 14

- 4 First Pass Accuracy Rates for 2D Barcodes and Character Recognition

Technology First Pass Accuracy Rate

2D Barcode 99% Character Recognition

— Machine Print 91% Character Recognition

— Handprint 74%
To properly understand the accuracy rates , some explanation is required. These rates are based on first pass results, meaning that multiple passes will improve results, particularly with CR. In fact, modern CR systems commonly use three recognition engines that compare and “vote” on characters to achieve significantly higher accuracy. Voting takes the output from two or more recognition engines and compares the results, voting on the most likely character s . Voting takes the recognition results from multiple , integrated CR engines and compares them

— in some cases eliminating an engine’s result and in others combining them to improve the result. Voting is designed to eliminate errors and increase accuracy percentages at the same time and can boost
accuracy dr amatically

. 629
In 2006, Forrester Research noted an average CR accuracy rate of 98% 630 . This 2006 report also found that voting reduces overall errors by up to 65% 631

. Thus, considering all the factors that help or hinder 2D barcode and CR accuracy, most robust solutions for either technology should yield comparable results.

Stakeholder Burden

2D barcodes require forms designers and/or end user application (i.e., return preparation software) designers to add IRS

- specific capabilities to their software products to enable end users to print the desired 2D barcodes on the return. Barcode

based options must address the difficult issue of form layout if the 2D barcode is to be placed directly on the form. Even if a separate barcode page is used, there is the issue of additional processing costs associated with an increased number of pages to be imaged. A dditionally, gaining the benefits of 2D barcodes requires implementation of a system to read the barcode and export the data. There also must be a certification process established by the organization receiving 2D barcoded forms to validate that forms
comp ly with specifications 632 . Regarding the burden on the taxpayer, if the barcode is not integrated into the form (i.e., it is appended as an additional page), the filer must remember to include the page with the barcode along with the return. In addition, if the filer makes handwritten changes to the return after it is printed, those changes will not be captured in the barcode. Only returns with barcodes can be processed by a barcode scanning solution; all others must be manually transcribed or processed throu gh CR.

629 Breithaupt, M. (2001) Th e Value of OCR Voting; Forrester Research (2006) ICR/OCR: It’s Time To Vote

630 Forrester Research (2006) ICR/OCR: It’s Time To Vote p. 3
631 Forrester Research (2006) ICR/OCR: It’s Time To Vote p. 6
632 See barcode standards for tax processing from Federation of Tax Administrators (2007) Tax Forms

Processing: 2

- D Bar Coding Standards, Revision 2007v2 

### 2D barcoding imposes a stakeholder burden: it requires not only an IRS processing solution but also a solution to create 2D barcodes at the time of printing

.Advancing E

- file Study Phase 1 Report 193 Paper

- Based Filing Options Capture Technologies Required

U nlike standard 1D barcodes used for simple item identification, 2D barcodes cannot be read by a traditional laser scanner. Rather, they must be scanned by a camera capture device or advanced handheld optical scanner. Handheld scanners that are passed over the barcode by an operator may be employed . Typically, however, high

- speed bulk photo

- scanners are used to image the entire document for large volume op erations such as those at the IRS. Most imaging solutions can be configured to recognize the existence of 2D barcodes, read them, decode them, and output the results. It is not necessary to image the entire page or return to extract data from a 2D barcode.

**14.4.2** 

## Paper **Option 2: Character Recognition**
Paper Option 2 involves the use of CR as the primary means of processing paper returns. CR requires that the IRS implement a document imaging capability but does not place any additional burden on filers. The IRS plans to use CR as the primary approach for its Msp project (Msp also supports 2D barcodes )
, which is described in Section 14.2.3

.

**14.4.2.1** 

### Targeted Population/Potential E

- file **Contribution**

Because filing machine

- friendly paper returns is not considered e

- filing
, Paper O ption 2 does not directly contribute to the 80% e

- file goa l . However, as noted above, there are significant cost savings and efficiency benefits from the imaging and CR of tax returns.

Because Paper Option 2 is unencumbered by a requirement for forms designers and tax preparation software vendors to incorporate 2D barcodes for V

- Coders, the adoption of this option is not limited by the absence of 2D barcodes on returns (i.e., CR can process all paper forms rather than the less than 100% of paper forms with 2D barcodes ) . The nature of a CR option lends itself to a potential use on all paper returns. If only capable of recognizing computer

- printed and typewritten information, CR would be able to process about 74% of all paper returns, including 100% of V

- Coded returns . If, as is the case with most modern CR systems, handwriting recognition is possible, the entirety of paper returns could be automatically processed.

**14.4.2.2** 

### Considerations
Similar to Option 1, there are a number of considerations regarding the implementation of the CR option:
The relative accuracy of CR compared with 2D barcodes. The relative stakeholder burden imposed by CR compared with 2D barcodes. The technology required for CR compared with 2D barcodes.
In addition, this Section considers the Msp effort currently in advanced planning stages at the IRS, which would apply CR to paper returns but also recognize barcodes. Accuracy As noted above, CR provides accuracy rates in the 90s , and voting algorithms provide greater accuracy in results. Whereas 2D barcodes constitute an all

- or

- n othing option, CR provides an extract of all imaged information, using a computed confidence to characterize the relative accuracy of the recognition of any given imaged word or character

. Therefore, in the case of a damaged (e.g., creased, crumpled, stain ed, marked up) return, CR provides an extract, even at low confidence, whereas 2D barcodes 

### 2D barcoding requires specialized technology for process ing

.

Character Recognition precludes the mixed signal of endorsing e
- file while providing a seemingly government

- acceptable option to paper file as long as a 2D barcode is used

.

Because Character Recognition can be applied to all paper returns, not just V

- Coded ones as is the case with 2D barcodes, its potential benefit is much greater.

For m ore information about accuracy and the comparison between CR and 2 D barcodes , s ee Section 10.4.1.2

.Advancing E

- file Study Phase 1 Report 194 Paper

- Based Filing Options provide nothing . In this case, the tradeoff is whether one wants something with less

than

- perfect accuracy or nothing at all

. Stakeholder Burden

CR imposes no burden on the taxpayer because all the processing required for automated extraction of data is on the IRS side and does not require the taxpayer or preparer to do anything differently. Advances in CR

— such as the ability of CR to recognize zon es and objects on the form that it must perform specific actions on or treat differently, use relative versus absolute locations, and to identify similar but not identical items

— mitigate the level of consistency and specificity previously required in for ms design to ensure good CR results
, because these advanced CR capabilities can account for a range of variation.

Some perceive the availability of 2D barcodes as undermining e

- filing (e.g., because 2D barcodes are visually prominent and signal that the go vernment is endors ing a solution other than e

- filing , even as the government markets e

- filing

. However, CR is discreet in that the filer does not have any basis for knowing that the technology is being used and thus will not be conflicted or de

- motivated r egarding e

- file . However, if filers can be encouraged to submit high

- quality machine

- print ed returns, CR operations will greatly benefit. Compared with CR , which requires only a sufficiently capable processing solution to obtain desired benefits, 2D barcoding has a greater stakeholder burden: it requires not only a processing solution but also design and point

- of

- creation solutions. Technology Required

CR requires that the entire document be converted into an electronic image. However, as with the us e of barcodes, CR can identify specific portions of a return to process . A large additional benefit of imaging the entire return is the ability to eliminate paper handling from downstream processes. By designating the electronic image as the
return

- of

- reco rd, original paper submissions may be destroyed
, further reducing costly file management operations and facilitating easier search and retrieval from archives

. IRS Plans Regarding Msp

The IRS has selected CR as its preferred paper return processing option , and the Msp project was ranked by IRS senior executi ves as the number one new modernization priority

. Msp meets the need to eliminate transcription as a primary data capture method, provides 2D barcode scanning as needed, reduces system cost by retiring legacy systems, reduces cost by eliminating paper file management, unifies paper and e

file data management processes, and increases the availability of return data for customer service and compliance operations. As currently planned, Msp will begin implementation with a proof

- of

- concept pilot focusing on 104 0EZ forms at a single processing center. Upon successful completion of the pilot, the f ull 1040 family of forms will be developed . Msp is planned for release at a later date, followed by deployment in two additional processing systems. Upon completion of each of these phases, planned retirement of the legacy submission processing systems will be enabled.
According to the IRS, Msp benefits include the following (note that all p roject cost estimation was performed for Msp as part of the I RS Modernization Vision & Strategy [ MV&S ] technolo gy portfolio management process and w as not validated for the purposes of this study ) : 

### Character Recogni tion imposes a significantly lower stakeholder burden compared with 2D barcodes

.

The IRS is in the planning stages of its Msp project, which will reco gnize 2D barcodes as well as apply Character Recognition to paper returns, and has made this project a top modernization priority

.Advancing E

- file Study Phase 1 Report 195 Paper

- Based Filing Options Elimination of primary transcription for all machine

- and hand

- print ed paper 1040 family returns 633

. The ability to also process 2D barcodes 634

. Conversion of all paper returns into electronic “official record” images
, allowing elimination of paper processing, filing
, and archiving 635

. The ability to work in tandem with MeF 636

. Integration of paper return data into the MTRDB 637

. Facilitation of the retirement of legacy Submission Processing and GMF systems 638

. Improvement in customer service and compliance operations by providing increased access to return data 639

. Retirement of legacy paper processing systems 640

. An estimated $67 milli on per year saved in transcription, paper handling/filing, and system maintenance costs 641

. Recovery of the entire capital investment for system development in approximately 1 year of full operation 642

. The IRS has identified the following costs and challenges associated with Msp : Msp requires a new capital investment for system development and acquisition. IRS staffing costs must also be considered. 643 Obtaining Business System s Modernization (BSM) funds for paper return processing has been difficu lt in recent years. Implement ing Msp will require significant reengineering of campus business
processes , which may result in labor contract renegotiation.
Commercial off

- the

- shelf ( COTS )

– based solutions could have difficulty handling 1040 return volume

.

633 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 5
634 IRS (2008) Modernized Submission Processing (Msp)

- Solution Concept Definition

- Domain: Submission

Processing p. 40
635 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 5
636 IRS (2008) Modernized Submission Processing (Msp)

- Solution Concept Definition

- Domain: Submission

Processing pp. 44,45,68
637 IRS (2008) Modernized Submission Processing (Msp)

- Solution Concept Definition

- Domain: Submission

Processing p . 40
638 IRS (2008) Modernized Submission Processing (Ms p)

- Solution Concept Definition

- Domain: Submission

Processing p. 14
639 IRS (2008) Modernized Submission Processing (Msp)

- Solution Concept Definition

- Domain: Submission

Processing p. 18
640 IRS (2008) Modernized Submission Processing (Msp)

- Solution Concept Definition

- Domain: Submission

Processing p. 14
641 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Commi ttee

p. 5
642 IRS (2008) Modernized Submission Process ing (Msp): Submission Processing Executive Steering Committee

p. 5
643 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 5Advancing E

- file Study Phase 1 Report 196 Paper

- Based Filing Options Establishing electronic return images as official records requires the consent of the IRS Records Officer and Chief Counsel , a policy change the IRS is pursuing

. Breakeven Analysis: Additional Research Needed In its 2007 Filing Season Report, the GAO recommended that the IRS consider a barcode strategy, among other options, but made additional recommendations that would fa cilitate the planning of such an effort and would provide overall guidance as to the costs and benefits of e

- filing

. The GAO also recommended a breakeven analysis in which the IRS would do the following : Determine the benefits, in terms of processing costs and improved enforcement, of having all returns filed electronically [and] Determine how much electronic filing would have to increase, either through electronic filing mandates or bar coding, for the benefits of transcribing all remaining paper
retu rns to exceed the costs. 644

Other considerations in such an a nalysis could include determining how much data from the 1040 forms and schedules exists and is actually transcribed
, determining the business needs for additional data
, and evaluating the cost/ben efits of obtaining a complete data set. S uch a detailed breakeven analysis is outside the scope of this report , however, the output from this analysis will not only benefit the paper

- based options, but all options for advancing e

- file

. Additional research is needed to address the breakeven analysis

.

644 Government Accountability Office (2007) Tax Administration: 2007 Filing Season Continues Trend of

Improvement, bu t Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 35 Further research is needed to define and an alyze the breakeven point between electronic filing and transcription costs and benefits

.Advancing E

- file Study Phase 1 Report 197 Other Options and Research Opportunities 

# 15. 

# Other Options and Research **Opportunities**

Looking forward to the next phases of the IRS effort to advanc e e
- file , this Chapter reviews possible options for co nsideration ( aside from those discussed in this report ) and areas of study in which additional research may be desirable or necessary

. After identifying these additional possible options, organized by provider (IRS or a third party), the Chapter lists oppo rtunities for future research. These research opportunities are categorized to address the following: obtaining a better understanding of filer motivators and concerns
, refining target populations for each option
, learning from State and international expe riences
, and evaluating detailed option

- specific considerations. Themes identified in this Chapter include the following : There are numerous options, or combinations of options, in addition to those described in Chapters 10 through 14, and research and

ana lysis are required to better understand and evaluate these. Prioritizing future research is one of many steps the IRS may need to take as it moves into subsequent phases of its effort to achieve the 80% e
- file goal.



### 15.1 

## Other Options for Future Consideration

While the scope of this report was limited by design to those options analyzed in Chapters 10 through 14, research and discussion with stakeholders identified a number of other potential options or variations of option s worth mentioning. The phased design of this report precludes any significant analysis of the potential options at this time; however, these options are described here brie fly to acknowledge their existence and potential merit for further study. For the purposes of this report, no inquiry was made into the state of research on these topics

— whether a significant body of information already exists or new, original research i s required. These options are provided in two categories: new government

- provided incentives and third party

– provided incentives/products.

**15.1.1** 

## Government

**- Provided Options** 
The following potential new options could be provided by the IRS or the Federal government to entice e

- file holdouts to switch to electronic filing. With the exception of the last
, which focuses more on technology, additio nal examples of incentive s were suggested by stakeholders during research for this report and are a subset of Incentive Option 5: Deve lop New Benefits

. These options have not been prioritized or validated for applicability within the IRS environment. To be seriously considered, ad ditional research is needed for any of the following options. **Contents of Chapter 15:**
15.1 Other Options for Future Consideration 15.1.1 Government

- Provided Options 15.1.2 Third Party

– Provided Options 15.2 Research Opportunities 15.2.1 Research Opportunities for Taxpayer and Preparer Motivators 15.2.2 Research Opportunities for Refining Target Populations for Opt ions 15.2.3 Research Opportunities for State and International Experiences 15.2.4 Research Opportunities for Option

- Specific Considerations



### There is room for i n novation and creativity in developing new options to help the IRS reach the 80% e
- file goal.

Many of these options focus on developing new benefits, as illustrated in Incentive O ption 5.Advancing E

- file Study Phase 1 Report 198 Other Options and Research Opportunities **15.1.1.1** 

### Mandate Free E

- file **for All Taxpayers**
Similar to Incentive Option 3 ( Increased Marketing for Free File) and Incentive Option 4 (Expand the Free File Program), this option appeals to cost as a perceived barrier to e

filing. As part of this option, governmental authority would be used to prohibit third parties from charging taxpayers to e

- file (separately or bundled in the cost of preparation), essentially requiring that third parties absorb costs related to operating e

fil e . Different from Incentive Options 3 and 4, this free opt ion would benefit all taxpayers, not just those who meet eligibility criteria.

**15.1.1.2** 

### Expand Current **Acknowledgment**
This incentive provides e

- filers with additional information about their tax situation s along with traditional acknowledgment that their returns have been received by the IRS

. For example, upon receipt of an individual return, the IRS could send acknowledgment of receipt of the fi le (as is currently done) along with other available information (e.g., whether part or all of the refund would be held to pay for outstanding debts to other Federal agencies, possible audit flags ) . The timing and type of information to be provided are amo ng the many factors to be considered.

**15.1.1.3** 

### Make **E**

**- s**  **ignatures Easier to Obtain**

The focus of this incentive is to make e

- signatures easier to obtain (e.g., remote signature capability). The current signature process for returns prepared by preparers can require a second visit to the preparer from the taxpayer. While paper return signatures can be handled by mail

— taxpayers simply sign the ir return s and mail them in

— e

- file requires taxpayers to review the return and sign a Form 8879 or enter a PIN into the computer. In 2006, GAO referred to a proposal to expand eServices by creating a “secured electronic mailbox where tax preparers could send in a return, the taxpayer could return and sign it, then submit it to the IRS electronic ally or return it to the preparer for additional work and subsequent electronic filing to IRS” 645 . This option looks at possibilities for making the e

- signature process more convenient for taxpayers.

**15.1.1.4** 

### Offer a Lottery for E

- filers **as a Monetary Incentive**
During the first 5 years of its electronic filing program, the Singapore Ministry of Finance encouraged electronic filing with a lottery offering one prize of $50,000 and 2,000 prizes of $50 each, open to all who filed electronically, either by Internet or phone. To persuade people to file early, more chances to win were awarded to early filers . Extra lottery chances were also give n to those electronic filers who in turn convinced paper filers to file via the Internet. After 5 years of successfully increasing acceptance of electronic filing, the lottery was suspended 646

.

**15.1.1.5** 

### Contact Lapsed E

- filers **to Suggest Using It Again**

A variation o n Incentive Option 2 (Targeted Marketing of E

- file ), this option specifically refers to contacting lapsed e

- filer s to suggest using new electronic channels.

645 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to

Improve, but Opportunities Exist for Additional Savings p. 13
646 Carter, P. (2006) Review of HMRC Online Services p. 33 For more information about Increased Marketing for Free File
, see Section 10.4.3, and for more information about Expand the Free File P rogram , see Section 10.4.4

.

For more information about current acknowledgments (or acknowledg m ent as a motivating factor ), s ee Section 10.2.2.4.



### During its first 5 years, the Singapore electronic filing program encouraged uptake through a lottery offering a $50,000 prize.Advancing E

- file Study Phase 1 Report 199 Other Options and Research Opportunities **15.1.1.6** 

### Allow Preparers to Defer Corrections **to** E

- filed **Returns Until After Tax Deadline** 
Similar to the example provided under Incentive Option 5: Develop New Benefits to extend the return deadline for e

- filers , this option allows preparers to defer corrections until after the tax deadline.

**15.1.1.7** 

### Expand IRS Walk

**- in Centers** 
While many existing IRS walk

- in centers allow individuals to e

- file, this option specifically refers to offering and promoting e

- file assistance at walk

- in centers, along with kiosks and other methods of making on

- the

- spot e

- filing convenient and attractive to e

- file hold outs who use the walk

- in centers.

**15.1.1.8** 

### Use New Technologie **s**

Similar to Phone Option 1: Rethink Phone

- Based E

- filing , this option broadly addresses exploiting new and emerging technologies for the purposes of e

- filing . One example of such an option is to embed Web 2.0 widgets on popular social networking sites.

**15.1.1.9** 

### No Longer Accept **V**

**- Coded**  **Returns**
Based on the approach used in the United Kingdom, the IRS, through a change in Federal law, would no longer accept V

- Coded paper returns (barring specific exceptions). This approach is designed to force those who prepare their return on a computer to file it electronically or manually transcribe the final results to a paper form; computer

- printed returns would no longer be accepted.

**15.1.2** 

## Third Party

**– Provided Options** 
Similar to the provision of bank products such as RALs and RACs, this option explores the possibility of looking to third party organizations to continue to provide innovative products or services to persuade taxpayers to e

- file . While the se options are not necessarily under the control of the Federal government, they are mentioned below to acknowledge their potential to increase e

- fil ing

.

**15.1.2.1** 

### Encourage Commercial Businesses to Provide E

- filing **Products for Free as an Incentive for**  **Doing Busine ss with**  **Them**
Commercial businesses sometimes provide e

- file products for free to entice new or retain existing customers. For example, as an incentive to open a new account, banks may provide free tax preparation software or other tax

- related products to customers.

**15.1.2.2** 

### Encourage Employers to Provide E

- filing **Products for Free as an Employment Benefit** 
Employers sometimes provide tax assistance as a benefit to their employees. This includes setting up tax clinics with local tax preparation f irms, providing direct assistance to employees, and even establishing a temporary, dedicated area with computers for completing taxes. For more information about extending t he return deadline, s ee Section 10. 4.5.



### T

hird party organizations can offer products or services that provide direct or indirect incen tives to e
file

.Advancing E

- file Study Phase 1 Report 200 Other Options and Research Opportunities 

### 15.2 

## Research Opportunities

The remainder of this Chapter addresses opportunities for additional study and, in some
cases, original research, that were noted during the course of preparing this report. These research opportunities are based on noted gaps in current literature and/or logical next steps to better understand a particular topic. Addressing these opportunities woul d provide a more complete picture of e

- file and would be beneficial

— and in a number of cases, necessary

— to developing a detailed strategy for achieving the 80% e

- file goal. Each of the opportunities for additional study is categorized below. The first speaks to general taxpayer and preparer motivations and concerns, while the remaining three opportunities speak research on refining the target population s /estimated contribution s to the 80% e

- file goal, related State /international experiences, and option

- specific considerations. As noted in the introduction to this report, the detailed, option

- specific analysis of cost and benefit , risks, and implementation/technology considerations will be addressed separately. Therefore, the research opportunities descr ibed in this Chapter do not include these areas of future analysis, though such in

- depth feasibility/cost analysis (and other efforts) will likely be a part of future IRS efforts to advance e

- file

.Advancing E

- file Study Phase 1 Report 201 Other Options and Research Opportunities **15.2.1** 

## Research Opportunities **for Taxpayer and Preparer**  **Motivat ors**  One of this report’s key themes is that meeting the 80% e

- file goal requires a more complete and ongoing understanding of taxpayer and preparer motivators and

concerns. This is particularly important for convincing late adopters in the technology adopt ion curve. The opportunities for research identified in Table 15

- 1 address the additional research that may be needed to further that understanding.

Table 15

- 1 Research Opportunities for Taxpayer and Preparer Mo tivators

ID# Refer ence Research Opportunity Description

1.1 Chapter 4 Updated data on taxpayer and
preparer perceptions More current s urvey s and interview s of taxpayers and
preparers
— particularly e

- file holdouts

— should yield

a better understanding of what would convince them to

e

-

file and how to remove barriers to this change.

1.2 Chapter 4 Obtain data on taxpayer and preparer behaviors D irectly observ ing taxpayer and preparer behavior ( as opposed to rely ing on self

- reported data) sh ould yield real

- world information about e

- filing motivators and

concerns that can be correlated with perceptions

. 1.3 Chapters 5 and 6 Awareness , understanding, and acceptance More r esearch is needed to assess to what extent filers understand e

- file ( not just whether they are aware of it) and how this affects acceptance.

1. 4 Chapter 5 Fear of audit More research is needed on b oth the perception and reality of potentially increased audit risk from e

- filing

. 1.5 Chapters 5 and 10 Acknowledg m ent s

as a benefit More research is needed on the awareness about and importance of acknowledg m ents as an e

- file benefit.

1.6 Chapters 5, 6, and 10 Holdouts’ perceptions of

m arketed e

- file benefits IRS identifies and markets benefits associated with e

- file to taxpa yers and preparers. More research is needed about the perception and effect of these benefits on e

file holdouts and about other potential m essages that may better resonate with holdouts

. 1.7 Chapter 6 Business c ost of e

filing More research is needed on the business models that enable preparers to e

- file at the ideal balance point between quality and cost efficiency.Advancing E

- file Study Phase 1 Report 202 Other Options and Research Opportunities **15.2.2** 

## Research Opportunities **for Refining Target**  **Populations for Options**
Subsequent phases of the advancing e

- file effort will require resear ch to refine the target population for any given option. F or many of the options, this report provides narrative

- based fo rmula s for identifying their target population s ; to the fullest extent possible in the next phase
, these formula s will need to be used to calculate the options’ estimated numerical contribution s toward the 80% e

- file goal. These calc ulations have not been performed to date
, because additional research is needed to identify the necessary data

. Table 15

- 2 identifies opportunities for research that could facilitate better understanding of a particular option’s contribution to the 80% e

- file goal.

Table 15

- 2 Research Opportunities for Refining Target Populations for Options

ID# Reference Research Opportunity Description

2.1 Chapter 10 Effectiveness of

m arketing e

- file and incentives More research is needed to determine the correlation between marketing and uptake of e

- file and which messages are most effective.

2.2 Chapter 10 Target population for Free File
program To reach the population elig ible for the Free File
program the IRS will need to better understand the motivations behind filing for free and/or specifically using (or not using) the Free File program.

2.3 Chapter 11 Threshold calculation for Federal e

- file mandates To calculate how many returns would be affecte d by a particular preparer mandate threshold, updated data on preparer segmentations is needed (the most recent complete data set is 2005).

2.4 Chapter 12 Contribution of Internet

- based e

- file option s M ore research is required to calculate the potential contribution of the three Internet Options : understanding preparers who do not file because of unavailability of forms; V

- Coders; filers concerned with cost (for preparing and/or transmitting); filers concerned with third party involvement ; filers who pref er forms and/or use downloadable PD F s; and filers who prefer interview

- based tax software

. 2.5 Chapter 13 E ffect of paper

based filing option s

on an advancing e

file strategy Discussions with sta keholders suggest the perception that paper

- based filing op tions may detract from advancing toward the 80% e

- file goal. Whether this would actually have a negative effect on e

- filing volumes is unclear and more research is needed

. 2.6 Chapter 14 Effect of p hone

based e

- file options The target population for this option depend s on how the scope and eligibility of such a program is defined. Additional research is required to evaluate the best approach for exploiting phone

- based technology to increas e e

- fil ing and for reaching target populations.Advancing E

- file Study Phase 1 Report 203 Other Options and Research Opportunities **15.2.3** 

## Research Opportuni **ties for**  **State and International Experiences** 
For each of the options, State and international experiences were considered in this phase of the report. In subsequent phases, these experiences and their relevance to the Federal arena may need to be considere d in greater depth. Table 15

- 3 identifies opportunities for further study in the State and international areas.

Table 15

- 3 Research Opportunities for State and International E xperiences

ID# Reference Research Opportunity Description

3.1 Chapter 7 Updated State information More research is needed to obtain updated and validated information on State e

- filing practices, statistics, and plans

3.2 Chapter 8 Detail behind international summary table Table 8

- 1 provides a snapshot of information from more than 20 countries. To the extent that there is interest in more detail about any of these countries , additional research is required.

3.3 Chapter 8 Comparison of U nited S ta tes , U nited K ingdom
, Canada
, and Australia To the extent that there is interest in additional comparisons among the United States, United Kingdom, Canada, and Australia (e.g., other features, role of third parties, future direction of filing system), addit ional research is required.

3.4 Chapter 10 Incentives employed at the State level With the exception of a few examples (e.g.
, South Carolin a has a deadline extension for electronic filers ),

no research on State experience s with incentives was found; more research is required

. 3.5 Chapter 11 Federal/State relationship concerning mandates More information is needed to determine how various thresholds for a F ederal e

- file mandate on preparers may affect State electronic filing programs or provide

an opportunity for threshold consistency.

3.6 Chapter 12 S tate experiences with I

- File The GAO surveyed 8 State s with I

- File. For information

on other State s with I

- File
, research is needed.

3.7 Chapter 13 Character R ecognition and 2D barcodes There is limited information available concerning State usage of character recognition for automating paper return processing as well as long

- term plans for use of 2D barcodes . Further research is needed.

3.8 Chapter 14 State experiences with Telefile The re is limited information avai lable concerning usage of or factors contributing to the success or failure of State

- run Telefile programs.Advancing E

- file Study Phase 1 Report 204 Other Options and Research Opportunities **15.2.4** 

## Research Opportunities for Option

**- Specific**  **Considerations**

Table 15

- 4 outlines other pertinent research on option

- specific considerations beyond the thorough cost/benefit and systems engineering analyses that would be performed for each option.

Table 15

- 4 Research Opportunities for Option

- Specific Considerations

ID# Reference Potential Area for Future Study Research Opportunity

4.1 Chapter 10 O ffer ing e

- services to draw new users
to e

- file More research i s needed to determine how other e

services influence filers’ behavior (i.e., through making them comfortable with online transactions).

4.2 Chapter 10 Historical d irect monetary incentives Research turned up little information about the historical proposals to provide direct monetary incentives. More research is needed should the cost/benefit of these options justify further consideration.

4.3 Chapter 11 Need for and impact of standards and certifications Further research is needed on the scope and effect of potential standards to professionally certify preparers and ERO s.
4.4 Chapter 12 Establish an analog to what IRS would face for customer service /support should it offer direct filing or preparation solutions More research is needed on the nature and degree of customer interaction that may be expected, such as : T otal customer contact volume during tax season
or year by channel (e.g., phone, e

- mail
, chat, web)
C ost per contact by channel
Ti me/effort per contact by channel Disposition (was contact topic IRS

- appropriate or IRS

- inappropriate [ i.e., redirectable to software vendor or paid preparer ] )
O ther ( e.g., how customer contact data is used for product development) Foreign countries, State s, and tax preparation software vendors may be able to provide this information.

4.5 Chapter 13 Breakeven analysis Additional research is needed to define and analyze the breakeven point between e

- filing and transcription of all return data.

4.6 Chapter 13 2D Barcodes in Fill

and

- Print Forms Data is needed on the proportion of IRS fill

- and

- print PDFs ( versus software

- generated forms ) among paper returns flagged as computer

- generated

. 4.7 Chapter 14 Phone

- based e

- filing options Significant research is required to explore ways to use phone technolog ies such as SMS or features of mobile devices to e

- file taxes.
4.8 Chapter 15 Other Options More research is needed if other options are to be considered.Advancing E

- file Study Phase 1 Report 205 Contributors 

# Appendix A. **Contributors**

**A.1. Outreach** 

MITRE would like to thank the staff of the following States and organizations for participating in the outreach meetings and /or contributing to the report :
States California Franchise Tax Board
Connecticut Department of Revenue Services Massachusetts Department of Revenue New York Department of Taxation and Finance
Oklahoma Tax Commission Organizations American Institute of Certified Public Accountants (AICPA)
Council for Electronic Revenue Communication Advancement (CERCA) Electronic Tax Administration Advisory Committee (ETAAC) Free File Alliance (FFA)
Federation of Tax Administrators (FTA) IRS Oversight Board National Taxpayer Advocate (NTA) Taxpayer Assistance Blueprint (TAB) UK All Party Parliamentary Taxation Group



## A.2. **Acknowledgements**

MITRE extend s special thanks to Dave Williams and the ETA team for their contributions, leadership, and support: Laurie Barrett, Lisa Burch, Grace Davis, Tracey Davis, Alison Doone, Phyllis Gattos, Jim Kurdzie l, Paul Mamo, Crystal Philcox, Karen Taylor, and Theresa Washington. In addition, this report would not have been possible without the advice or assistance of the following: Eric Baltas, Diane Bonciolini, Susan Carroll, Michelle Chu, Joyce Colbert, Cassand ra Daniels, Andrew LeBold, Cynthia Lee, Blase Mozdzen, Katherine Prager, Mary Rekus, Shenorva Richie, Pete Stipek, Keith Wallace, Derrick Wilson, and George Yu. MITRE recognizes with appreciation the work of project co

- leads Ted Sienknecht and Meredith McC ullough
, program manager Peter DeCastro , deputy program manager Ren Resch, and lead writer Melissa Hardin. MITRE also extends heartfelt thanks to Paul Devlin, international lead; Rich Dodson, research lead; Chuck Lewis, internet lead; Frank Maginnis, phone lead; Andy Taylor, paper lead; Melony Katz, motivators lead; Harvey West, Joe Hawley, and Roger Fires tone, contributors; Susan Gogos, Deanna West, Josephine Cavallo, and Mary Przewlocki, researchers; Raye Anne Harris, Eric Etter, and Rene Young, fact chec kers/copyeditors; Beth Rosenfeld, editor; Gina Lofaro, illustrator ; and Charles Hone, Vance Kauzlarich, and Jim Cook, executive reviewers.Advancing E

- file Study Phase 1 Report 206 Contributors THIS PAGE INTENTIONALLY LEFT BLANK.Advancing E

- file Study Phase 1 Report 207 Acronyms 

# Acronyms

Acronym Expansion

1D One

- D imensional [as in 1D barcode]

2D Tw o

- D imensional [as in 2D barcode]

A2A Application

- to

- Application

AGI Adjusted Gross Income

AICPA American Institute of Certified Public Accountants

AIIM Association for Information and Image Management

AJCA American Jobs Creation Act of 2004

AMT Alternative Minimum Tax

ASP Accountancy Service Provider

ATO Australian Taxation Office

AUR Automated Underreporter

BMF Business Master File

BSM Business System s Modernization

CADE Customer Account Data Engine
CalFile [ California electronic filing system for individual taxpayers]

CEM Center for Enterprise Modernization

CERCA Council for Electronic Revenue Communication Advancement

COTS Commercial Off

- the

- Shelf

CPA Certified Public Accountant

CR Character Recognition

CRA Canad a Revenue Agency

CY Calendar Year

DA Disclosure Authorization

e

-

file Electronic File [IRS]

EFILE Electronic File [Canada]

EAR Electronic Account Resolution

ECM Enterprise Content Management

EFT Electronic Funds Transfer

EFTPS Electronic Federal Tax Payment System

EGTRRA Economic Growth and Tax Relief Reconciliation Act of 2001

EIC Earned Income Credit [synonym of EITC]

EITC Earned Income Tax Credit

ELF Electronically Filed Return

ELS Electronic Lodgement System

EMS Electronic Management System

ERO Electronic Return OriginatorAdvancing E

- file Study Phase 1 Report 208 Acronyms Acronym Expansion

ETA Electronic Tax Administration

ETAAC Electronic Tax Administration Advisory Committee

ETARC Electronic Tax Administration and Refundable Credits [formerly ETA]
FAQ Frequently Asked Question

FBI Filing by Internet Fed/State Federal / State [ electronic filing] Program

FFA Free File Alliance

FFRDC Federally Funded Research and Development Center

FMS Financial Management Service

FTA Federation of Tax Administrators

FTD Federal Tax Deposit

FY Fiscal Year

GAO Government Accountability Office

GDP Gross Domestic Product

GOL Government On

- Line [Canada]

GMF Generalized Mainline Framework

GST Goods and Services Tax

HM Her Majesty

HMRC Her Majesty ’ s Revenue & Customs

HST Harmonized Sales Tax

HWR Handwritten Character Recognition

I

- File Internet Filing

ICAS Internet Customer Account Services

ICR Intelligent Character Recognition

ID Identification

IFA Internet Filing Application

IRP Information Return Processing

IRS Internal Revenue Service

ISRP Integrated Submission and Remittance Processing

IT Information Technology

JCWA Job Creation and Worker Assistance Act of 2002

JGTRRA Jobs and Growth Tax Relief Reconciliation Act of 2003

LITC Low Income Taxpayer Clinic

MeF Modernized e

- F ile

MICR Magnetic Ink Character Recognition

MITS Modernization Information and Technology Services

MP3 Modernized Paper Pipeline Processing
Msp Modernized Submission ProcessingAdvancing E

- file Study Phase 1 Report 209 Acronyms Acronym Expansion

MTRDB Modernized Tax Return Database

MV&S Modernization Vision & Strategy

NACTP National Association for Computerized Tax Processors

NAEA National Association of Enrolled Agents

NATP National Association of Tax Professionals

NETFILE [Canada’s internet electronic fi ling program Canada]

NPL National Public Liaison

NTA National Taxpayer Advocate

OECD Organisation for Economic Co

- operation and Development

OCR Optical Character Recognition

OMB Office of Management and Budget

PAYE Pay A s Y ou Earn

PAYG Pay as you g o
PBI Practitioner Business Impact

PC Personal Computer

PDA Personal Digital Assistant

PDF Portable Document Format

PIN Personal Identification Number

PIT Personal Income Tax

PKI Public Key Infrastructure

PSA Public Service Announcement

PY Processing Year

RAC Refund Anticipation Check

RAL Refund Anticipation Loan

RRA98 [ Internal Revenue Service ] Restructuring and Reform Act of 1998

RRSP Registered Retirement Savings Plan

SA Self

- Assessment

SCRIPS Service Center Recognition/Image Processing System

SIN Social Insurance Number

SL Stakeholder Liaison

SMS Short Message Service

SP Submission Processing

SP ESC Submission Processing Executive Steering Committee

SPEC Stakeholder, Partnerships, Education, and Communication

SSN Social Security Number

T1 Income Tax and Benefit Return [Canada]

TAB Taxpayer Assistance Blueprint

TAC Tax payer Assistance CenterAdvancing E

- file Study Phase 1 Report 210 Acronyms Acronym Expansion

TCE Tax Counseling for the Elderly

TDS Transcript Delivery System

TEC Taxpayer Education and Communication

TFOP Tax Forms and Outlet Program

TIGTA Treasury Inspector General for Tax Administration

TIN Taxpayer Identification Number

TIPRA Tax Increase Prevention and Reconciliation Act of 2005

TIRNO Treasury Internal Revenue National Office [a contract identifier]

TY Tax Year

UPC Universal Product Code

VAT Value Added Tax

V

- Code [ Tax returns prepared on computer but printed and filed on paper ]

VITA Volunteer Income Tax Assistance

WFTRA Working Families Tax Relief Act of 2004

XML eXtensible Markup LanguageAdvancing E

- file Study Phase 1 Report 211 Glossar y 

# Glossary

Term Definition
1D Barcode A machine

- readable unique identifier encoded in a one

- dimensional black and white bar pattern of varying width.

2D B arcode A machine

- readable representation of information encoded in a pattern of two dimensions ( in contrast with e.g., a UPC product barcode consisting of parallel lines encoding the SKU in one dimension)

. 2D Barcode Programs State programs that allow computer

- pro duced returns that are filed on paper by either individuals or practitioners where the return data is also captured and printed in a 2

- dimensional barcode capable of being read by either hand

- held or high

- speed scanners.

80% e

- file Goal A goal established in the Internal Revenue Service Restructuring and Reform Act of 1998. Paperless filing should be the preferred and most convenient means of filing Federal tax and information returns, [and] it should be the goal of the Internal Reve nue Service to have at least 80% of all such returns filed electronically by the year 2007 Advanced Filing A transaction between the IRS and a taxpayer/ preparer in which the information is exchanged digitally or in a machine

- readable form
American Institute of Certified Publi c Accountants (AICPA) Professional organization for all Certified Public Accountants which provides resources, information, and leadership to members to enable them to provide valuable services in the highest professional manner to benefit the public as we ll as employers and clients.
Calendar Year A year ending December 31; e.g., CY2008 ends December 31, 2008

. Cash Incentive A government

- provided direct monetary payment for taxpayers to electronically file their tax returns. Character Recognition (CR) The application of specialized algorithms to recognize the shapes and correlate them with letters and words. Involves digitally photographing (or scanning) original documents into an equivalent electronic image. Once converted, the CR solution analyzes (re ads) the electronic image and translate the many shapes (letters) on the page into their equivalent characters.
Circular 230 The set of Treasury Department regulations governing the practice of attorneys, certified public accountants, enrolled agents , enr olled actuaries, and appraisers before the IRS. Commercial Preparer An individual who is paid by a taxpayer to prepare (and file) their return but is not a practitioner. Like practitioners they may be members of corporations or partnerships, or self

- emplo yed individuals. Preparers are not Electronic Return Originators (EROs) but may be a member of an ERO firm.
Commercial Tax Return Software A software application used to prepare Federal and State income tax returns. Some applications offer filing solution s as well as online preparation assistance. Community

- based Preparer An individual that provides free tax preparation (and filing) services to taxpayers at designated support locations through IRS sponsored programs such as Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), Tax Forms and Outlet Program (TFOP), and Low Income Taxpayer Clinics (LITC).Advancing E

- file Study Phase 1 Report 212 Glossary Term Definition Congress (Senate and House of Representatives) National legislative body consisting of the Senate and House of Representatives that has the lawmaking power of the United States.

Council for Electronic Revenue Communication Advancement (CERCA) Trade association representing a broad cross

- section of the electronic tax filing, IRS systems modernization, and S tate electronic revenue

comm unities.

Department of the Treasury Executive branch agency which serves the American people and strengthens national security by managing the Federal government’s finances effectively, promoting economic growth and stability, and ensuring the safety, sou ndness, and security of the US and international financial systems. Direct Filing An Internet

- based e

- filing transaction from the source computer to the tax agency (e.g., IRS). Direct Filing using Free Tax ATO Software (e

Tax) (Australia) A tax program where the taxpayer can download the e

- Tax software for free from the ATO web site.

Direct Internet Filing Programs State programs that allow individual taxpayers to file State income tax returns directly with the State through a State

- developed and administered web site.

e

-

file (also e

- filing
, e

- filed ) Refers specifically to the IRS

- branded electronic filing program.

e

-

file Holdouts Individuals or preparers who have yet to adopt electronic filing. They are generally unconvinced of the marketed and/or studied benefits of e

- file

. E

- Form An electronic form. Examples include web

- based forms, forms based on Adobe’s PDF standard, smart forms, and proprietary electronic forms. Early Adopters A user segment that consists of approximately 13. 5% of the population. These users tend to be educated opinion leaders. Early Majority A user segment that consists of approximately 34% of the population. These users are careful consumers who tend to avoid risk.

EFILE (Canada) EFILE On

- Line allows a tax agent to transmit their clients’ returns individually over the Internet. Acknowledg m ent of receipt of the electronic return is immediate.
EFILE Plus (Canada) EFILE On

- Line Plus allows an agent to transmit from 1 to 60 of their

c lients’ returns at one time over the Internet. Acknowledg m ent of a batch transmission takes a few hours. Electronic filing The process of submitting a tax return from a filer to a tax

- collecting entity in which the return information is transmitted digita lly (also: electronic filing).
Electronic Return Originator These entities initiate the electronic submission of income tax returns to the IRS. An ERO may originate the electronic submission of income tax returns that are either prepared by the ERO firm, or collected from a taxpayer. EROs may also apply to be transmitters and transmit return data themselves or they may contract with registered transmitters who will transmit the data for them.Advancing E

- file Study Phase 1 Report 213 Glossary Term Definition
Electronic Tax Administration Advisory Council (ETAAC) Council authorized under public law providing input into the development and implementation of the IRS’ strategy for electronic tax administration.

Extend Filing Period A later tax deadline for electronic filers.
Federation of Tax Administrators (FTA) Organization to improve the quality of S tate tax administration by providing services to S tate tax authorities and administrators. Free File Alliance (FFA) A group of tax software companies who provide free commercial online tax preparation and electronic filing services for the IRS.
Filer Any person or entity that prepares and files tax returns (on their own behalf or for someone else). If a taxpayer prepares and files their own return, they are a filer. If they delegate the filing to a preparer, the
pre parer is the filer on their behalf.
Fillable Form An electronic form that allows the user to enter, using the computer, the required and optional information directly into the form fields shown on the screen, and allows for transmission of the completed r eturn to the intended party electronically or by printing the form as completed by the user. Filing by P hone (Australia) The phone file service is an option for those individuals who use the short version of the individual tax return in Australia

. Filing through a R egistered T ax A gent (Australia) A n Australian taxpayer can file a return through a registered tax agent for a tax

- deductible fee. To check that a tax agent is registered, a taxpayer can visit the Tax Agents’ Board web site or inquire by phone.
Fiscal Year An accounting period year ending on a date other than December 31. For example, the Federal government fiscal year begins October 1 and ends on September 30. Generational Segments Part of the taxpayer segmentation framework that includes Mill ennial taxpayers, Generation X taxpayers, Baby Boomer taxpayers, and Senior taxpayers.

Government Accountability Office (GAO) Independent, nonpartisan agency that supports the Congress in meeting its constitutional responsibilities and helps improve the p erformance and ensure accountability of the federal government. Hardship Exceptions These exceptions are intended for preparers who are not able to convert to electronic filing in the time prescribed by a mandate. This is a temporary exemption that allows for gradual implementation and acknowledges the potential hardship that smaller preparers may face in transitioning to e

- file (computer costs, learning how to use new tax preparation software, business process changes, etc.). High Opportunity Preparers P reparers who do not currently e

- file or who e

- file under 50% of their returns or who e

- file over 50% of their returns. High Opportunity Taxpayers Taxpayers who were offered e

- file by their preparers but did not choose it. Income Segments Part of the taxpayer segmentation framework that includes low income taxpayers, moderate income taxpayers, moderate high income taxpayers, and high income taxpayers.Advancing E

- file Study Phase 1 Report 214 Glossary Term Definition
Information Return R eports used to transmit information to the tax collector about income, receipts, or other matters that may affect tax liabilities. Information returns do not compute the tax liability. Examples include W

- 2 (wages and withholding), 1099

- INT (non

- wage interest income), 1099

- DIV (non

wage dividend income), and 1098 (mortgage interest).

I nnovators A user segment that consists of approximately 2.5% of the population. These users are well informed risk

- takers who are willing to try an unproven product.
Intermediate Service Provider These entities receive tax return information from EROs or from taxpayers who file electronically from home using their personal computers, either online or by using commercial tax preparation software. Intermediate Service Providers process the tax return information and either forward the information to a transm itter or send the information back to the EROs or taxpayers.
Internal Revenue Service (IRS) Agency within the Department of Treasury serving America's taxpayers by helping them understand and meet their tax responsibilities and by applying the tax law wit h integrity and fairness to all. IRS Oversight Board Independent body charged to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. Late Majority A user segment that consists of approximately 34% of the population. These users are somewhat skeptical consumers who acquire a product after it has become commonplace. Laggards A user segment that consists of approximately 16% of the population. These users are those who avoid change and may not adopt a new product until traditional alternatives no longer are available.
Mandates Federal and State programs in which certain types of taxpayers and/or preparers are required to file the returns they prepare electron ically.
National Association for Computerized Tax Processors (NACTP) Nonprofit association that represents tax processing software and hardware developers, electronic filing processors, tax form publishers, and tax processing service bureaus.
National As sociation of Enrolled Agents (NAEA) Association of independent, licensed tax professionals called e nrolled

a gents dedicated to helping its members maintain the highest level of knowledge, skills and professionalism in all areas of taxation.
National Assoc iation of Tax Professionals (NATP) Nonprofit professional association serving professionals who work in all areas of tax practice, including individual practitioners, enrolled agents, accountants, CPAs, attorneys, and financial planners. National Taxpayer Advocate Service Independent organization within the IRS to assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems, or who believe that an IRS system/procedure is not working as it should.

NETFILE (Canada) E le ctronic filing service designed for individual taxpayers only, for filing their own personal income tax and benefit returns with the CRA

. Office of Management and Budget (OMB) Office within of the Executive Office of the President which oversees preparati on of the federal budget and supervises its administration in Executive Branch agencies.
Online Account Access The ability to view and/or edit tax information through a government web site.Advancing E

- file Study Phase 1 Report 215 Glossary Term Definition Online Banking The use of the Internet as a delivery channel for banking services such as balance inquiry, statement printing, funds transfer, and bill payment through that institution (versus, for example, directly with the biller). Online Bill Pay The use of the Internet that expands online banking service to inclu de bill payment not only with one’s banking institution, but also with billers (via their web site) and through bill payment portals. Online Filing Programs Program for electronic filing of returns by individual taxpayers using PCs and approved commercial tax return software routed through transmitters

. Opt

- Out Provisions These exceptions are intended to provide an option for individual taxpayers who, for wh atever reason, do not want their preparers to file electronically on their behalf. Unless otherwise indicated by an opt

- out mechanism, mandated preparers must file the return electronically. Such mechanisms include using specially designed forms, the signe d paper return, or other methods defined by the S tate

. Paid Preparer A subset of Preparer that excludes community

- based preparers. Includes paid practitioners and commercial preparers. Paper Filing Using the TaxPack Taxpayers can file returns through the mail by using TaxPack 2007. Most tax refunds or debts are issued within six weeks. TaxPack 2007 is available from newsagents or can be ordered online or by phone. Phishing In computing
, phishing is an attempt to criminally and fraudulently acquire sensitive information, such as usernames, passwords and credit card details, by masquerading as a trustworthy entity in an electronic communication.
Phone

- Based Filing A program where the individual taxpayer enters return information using a touch

- tone telephone.

Practitioner An individual who is paid by a taxpayer to prepare (and file) their return, is governed by Circular 230, and is authorized to represent taxpayers legally before the IRS. Practitioners include attorneys, certified public
accountants , enrolled agents, and enrolled actuaries. (Also called Paid Practitioner)

Pre

- Filling (begins 2007

- 2008 income year) (Australia) A form used by the ATO for pre

- fill returns with salary, wages, allowances and other information.

Pre

- Filled Form A form us ed by a preparer or practitioner who prepares taxpayers returns on their behalf using available data then provides the form to the taxpayer to correct or accept it as is.
Preparer Any third party that helps complete a return. Includes practitioners,

comme rcial preparers, and community

- based partners. Processing Year (PY) The calendar year in which a return is filed and processed. In the case of individual returns, PY2008 will mostly include returns for TY2007 processed in CY2008. Other returns such as lat e filed returns for other tax years (a lso k nown a s prior year returns) and amended returns will also be processed in PY2008. A good rule of thumb is the relationship between PY and TY is TY = PY

– 1. For example, in PY2008, TY2007 returns will be processed

. Refund Anticipation Check (RACs) A service in which a financial institution sets up a temporary account for a taxpayer to which the IRS can direct deposit refund money.Advancing E

- file Study Phase 1 Report 216 Glossary Term Definition Refund Anticipation Loans (RALs) A very short

- term loan offered by banks and preparers that are secured by F ederal and/or S tate refunds.

Return A ny tax or information return, declaration of estimated tax, or claim for refund required by, or provided for or permitted under, the provisions of U.S. Code Title 26 which is filed with the Treasury Secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, including supporting schedules, attachments, or lists which are supplemental to, or part of, the ret urn so filed. Return Preparation Software Vendor An organization that sells self

- assisted software products for tax preparation, for individuals and often commercial preparers. They also may provide similar products to certain taxpayer segments for little or no cost.
Stakeholders A person, group, organization, or system that effects or can be affected by an organization's actions . Stakeholders include professional, commercial, and government entities that interact with the IRS and play an important role in the IRS’ delivery of quality services such as e

- filing

. Smart Form An electronic fillable form that includes features such as embedded hyperlinks to relevant instructions and publications, automated calculations, and some level of validation or error checking. At its core, the interface is still largely similar to the relevant tax form.
Software Includes tax preparation applica tions as well as fillable and “smart” (i.e., those that automate calculations) e

- forms. Tax Preparation Software A browser

- or client

- based computer application that guides the user through a series of questions with the goal of simplifying the process of creating their tax return.

Tax Return A formal tax statement on the required official form, filed with the appropriate tax collection agency, that reports taxable income, allowed deductions, exemptions, the computed tax that is due (the tax liability),

a nd tax payments (including withholding). The term “tax return,” while it encompasses “information returns,” is colloquially used to refer to income tax returns. Examples include Forms 1040 , 1040A, and 1040EZ (individual income tax return s ), Form 1065 (part nership income tax return), and Form 1120 (corporation income tax return).

Tax Year Also known as the tax period of the return. For individual returns

— almost always filed for a calendar year tax period

— tax year is displayed as TYYYYY (e.g., TY2007). A good rule of thumb is the relationship between TY and CY is TY = CY

– 1. For example, in CY2008, individuals file their TY2007 return, which covers CY2007 tax period (1 January 2007 to 31 December 2007).
Taxpayer The individual or head of household responsible for meeting their tax filing obligations through preparing and filing an individual tax return as required.
Tech Followers A group of users (25% of taxpayers) that is fairly comfortable with technology, but not the first to try new technology, and generally are not comfortable putting financial information on a computer. Tech Laggards A group of users (32% of taxpayers) that is the least comfortable with technology, sometimes scared of computers, and would definitely not put financial informat ion on a computer.Advancing E

- file Study Phase 1 Report 217 Glossary Term Definition
Tech Leaders A group of users (44% of taxpayers) that is the most comfortable with using technology. They tend to be the first to try new technology, to trust technology, and wish they could do more of their dealings by computer.

TEL EFILE (Canada) TELEFILE is an interactive computer program that allows a taxpayer, if eligible, to electronically file their tax return for free using a touch

- tone telephone. Using the service requires a touch

- tone telephone. Telefile Programs Federal and State programs where the individual taxpayer enters return information using a touch

- tone telephone. Third Party An entity external to the taxpayer

— IRS relationship that helps the taxpayer prepare, file, and/or transmit their return. Includes preparers, return preparation software vendors, and transmitters.

Transmitter An entity that sends the income tax data to the IRS once the return is prepared. Transmitters must have software and hardware that allow them to directly connect with IRS computers.
Treasury Inspector General for Tax Administration (TIGTA) Organization established by RRA98 to provide independent oversight of IRS activities.

V

- Coder A filer who had their return prepared on a computer but filed it on
paper.Advancing E

- file Study Phase 1 Report 218 Glossary THIS PAGE INTENTIONALLY LEFT BLANK.Advancing E

- file Study Phase 1 Report 219 References 

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