Internal Revenue Service

Advancing E-file Study

Phase 1 Report

Achieving the 80% E-file Goal Requires 

Partnering with Stakeholders on New 

Approaches to Motivate Paper Filers

September 30, 2008

Approved for Public Release; Distribution Unlimited.

Case Number 08-1062.

Version 1.3

Document Number 0206.0210

The views, opinions, and/or findings contained in this report should not be construed as 

official Government position, policy, or decision unless so designated by other 

documentation. No warranty or guarantee, expressed or implied, is made concerning the 

accuracy, authoritativeness, completeness, or currency of data herein. 

© 2008 The MITRE Corporation. All Rights Reserved.
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Advancing E-file Study Phase 1 Report i Table of Contents

Table of Contents

Table of Contents...........................................................................................................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................................................................................................................52
Advancing E-file Study Phase 1 Report ii Table of Contents

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 Tax 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......................................................................................110
Advancing E-file Study Phase 1 Report iii Table of Contents

9. Introduction to Option Chapters..........................................................................113

9.1 Overview .............................................................................................................113

9.2 Summary of Options ...........................................................................................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 Background......................................................................................155

12.2.1 E-filing Individual Federal Tax Returns in the Current Environment.............156

12.2.2 Modernized e-File .........................................................................................157

12.3 State 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........................................................178
Advancing 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 Preparer 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................................................................................................................219
Advancing 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

Figure 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 Online 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/State 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 Former 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) ......................................................183
Advancing E-file Study Phase 1 Report vi List of Figures

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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 Paid-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 Electronic 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) ............................93
Advancing E-file Study Phase 1 Report viii List of Tables

Table 8-6 Free Electronic 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 in 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 Experiences 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 Considerations........................204
Advancing E-file Study Phase 1 Report 1 Introduction

1. Introduction

The Internal Revenue Service (IRS) Advancing E-file 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 expansion — to help the IRS validate and launch future studies, research,

and other activities to meet the congressionally-set goal of an 80% e-file

rate. As Phase 1 of a multiphased approach 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 merit 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 remaining 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.

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 motivators, concerns, and 

relative positions 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 in 

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-filing

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 GENERAL.—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 Conventions
Advancing 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 80% 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 point 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 — 60% of individual tax returns were e-filed during the 2008 

tax filing season2

. 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 The MITRE Corporation, a not-for-profit organization that

operates three Federally Funded Research and Development Centers (FFRDC), one of 

which — the Center for Enterprise Modernization (CEM) — serves the IRS. The report

was prepared pursuant to guidelines and specifications 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 conduct 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) identify, 

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 areas 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 provide 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 2008
Advancing 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 technology adoption 

on e-file (including a comparison of the IRS and banking industry experiences in 

promoting online service).

Taxpayer and preparer perceptions of e-file and motivations to file 

electronically.

Experiences of States and foreign countries 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 filing 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 purpose, 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

Establishes 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 States, 

and provides a synopsis of IRS e-file since it began in 1986.

3. IRS E-file and Technology 

Adoption

Introduces the concept of technology adoption as a driving 

force behind e-file (and other technology) use, provides 

historical and projected IRS e-file statistics, and compares efile 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 synthesizes information that characterizes taxpayers 

and their motivations to file electronically.

6. Preparer Motivators and 

Inhibitors

Topically synthesizes information that characterizes preparers 

and their motivations to file electronically.

7. State Electronic Filing 

Experiences

Summarizes the various electronic filing efforts States 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 United 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 Chapters (10 through 14), explains the structure of the 

option Chapters, 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 

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).

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 contribution 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 options for possible analysis/consideration in 

the future (by design, these options do not have the depth of 

analysis or consideration as those in preceding Chapters). 

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 synthesizing existing information in the preceding areas, this report represents the 

first step of an iterative 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 concrete 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.

Other 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 proceeds 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, Chapterspecific 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 uses the most current authoritative data 

available for a given subject. Unless noted otherwise, the inclusion of slightly older data 

for a given subject may be because: it was the most current authoritative data available 

(authoritative data is preferred to draft, unofficial, projected, proprietary, or estimated 

data); and/or it 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 Chapter
Advancing 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 to 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 returns 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 most 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 

footnote 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 footnote2

.

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-filer,” “e-filers,” and “e-filing” all refer to the IRS-branded 

electronic filing program.

“V-Coders” prepare their returns on a computer but file on paper. 

“Preparers” are persons who assist taxpayers in completing their tax returns. 

References to States as a group are not exclusive of the District of Columbia, because its 

electronic filing programs “operate exactly like those in the States”3

.

 

3 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 1
Advancing 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 already 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 States 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 required. The goal cannot 

be achieved without stakeholder engagement.

2.1 80% E-file 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 paper 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 million5

. 

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-file 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 filing 

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 interpretations. 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 

them, see Chapters 4, 5, and 6.

The scope of the 80% e-file

goal from RRA98 has 

various interpretations. For 

the 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 Timeline
Advancing 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.

Interestingly, 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 

staff 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 the 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 information 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 electronically”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, businesses and tax exempt organizations”

11.

For the purposes 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 phone-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 Legislation 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 Trend 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 individuals, 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 TY2006, the most recent data 

available13. 

Figure 2-1 Federal Individual Income Tax Return Preparation and Filing Data (as of TY2006)

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 into three main combinations 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-Coders14. Regarding 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 

processing 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 that 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 letter V was associated with computergenerated 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 VCoders — those who 

prepare their returns 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 demands 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 and 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 looks more closely at three key relationships —

with a wide range of third party partners, with the 42 States (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 modernization 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 century,” 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 States). In 

general, the IRS tends to operate on this model, creating the forms that tell people what 

information is needed 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 and 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 parties 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 preparation software20. 

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 returns), as summarized in Table 2-121. 

Table 2-1 Taxpayer Use of Paid Preparers (1997–2006)

Tax Year 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 tax system, and research suggests that these

partners also add value to the overall tax process22. 

 

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 Taxpayer 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 Operations, 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 the 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 likely 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 

process, 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 form. An individual taxpayer uses 

a preparer, who in turn uses tax software to prepare State and Federal tax forms, or the 

taxpayer uses tax software to self-prepare the returns. The returns are then submitted 

electronically to a transmitter. The transmitter then sends both returns to the IRS if the 

State participates in the Federal/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 States after the returns 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 Providers, 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, transmitters, EROs, and Intermediate Service Providers must complete an 

application with the 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 efiling 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 partnerships. 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 returns, 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 EROs.

As the program developed, third party roles and offerings grew. Large commercial 

preparers, commercial software developers, 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 eStrategy 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 working 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 efile adoption was a direct result of the business opportunity from increased efiling 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 efile.

25

Congress seems to recognize the relationship between the IRS and its third party 

partners and the value of leveraging that relationship 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 motivates 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 efile. 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 Sections provide detailed descriptions 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 relationships 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 commercial 

preparer and a transmitter).

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 taxpayers

prepare, file, and/or transmit their returns. Includes preparers, return 

preparation software vendors, and transmitters.

Preparer Any third party that helps complete a return. Includes 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 sends 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.

Paid Preparer A subset of “preparer” that excludes community-based preparers. Includes 

practitioners, and commercial preparers.

Communitybased PreparerAn 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), and Low Income Taxpayer 

Clinics (LITC).

Third Party

Preparer Transmitter

Paid Preparer

Return 

Preparation 

Software 

Vendor

CommunityBased 

Commercial Preparer

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 taxpayers to prepare (and file) their returns, 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 taxpayers to prepare (and file) their returns but is 

not a practitioner. Similar to practitioners, commercial preparers may be 

employees of corporations, members of partnerships, or self-employed 

individuals. Commercial preparers are not Electronic Return Originators (ERO) 

but may be members of an ERO firm.

Table 2-3 adds a layer of detail to the roles described in the model above, providing a 

list of some key stakeholders in the private sector and describing their purpose (i.e., 

charter) and roles in the tax system27. 

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 provides

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.

Works with State CPA organizations and 

serves as national CPA representatives

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.

Provides stakeholder input into IRS decisionmaking. 

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

Federation of Tax 

Administrators 

(FTA)

Organization to improve the 

quality of State tax 

administration by providing 

services to State tax authorities 

and administrators.

Serves 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. 

Represents 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 

Accountants; 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 Enrolled 

Agents (2008) National Association of Enrolled Agents; National Association of Tax Professionals (2008) 

National Association of Tax Professionals
Advancing 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 provides free 

commercial online tax 

preparation and electronic filing 

services for the IRS.

Works 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

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.

Promotes standards in tax processing and 

efficient, effective tax filing. Provides

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 

“Enrolled Agents” (EA) 

dedicated to helping its 

members maintain the highest 

level of knowledge, skills, and 

professionalism in all areas of 

taxation.

Fosters the professionalism and growth of 

members, serves as an advocate for

taxpayer rights, protects the interests of its 

members, and enhances the role of the 

Enrolled Agent among government 

agencies, other professions, and the public 

at large. 

NAEA web site: http://www.naea.org

National 

Association of 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.

Provides 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 organizations, 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 and provide hands-on 

assistance to help them comply with 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 Foundation29. 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

The Free File Alliance (FFA) is an important IRS–third party relationship because it 

currently provides the only widespread mechanism for electronically 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 free through participating return 

preparation software vendors30. Current eligibility rules limit this program to taxpayers 

with an Adjusted Gross Income (AGI) of $54,000 or less (as of TY2007)31. The fact that 

each vendor may have additional eligibility requirements (and these vary by vendor) 

further reduces the number of eligible taxpayers. For example, numerous vendors do 

not offer Free File to taxpayers over age 5032. The FFA estimates that 95 million 

Americans — 70% of all taxpayers — were eligible for Free File in 200733. 

The IRS manages the agreement under which FFA vendors — not FFA itself — provide 

tax return preparation software and filing solutions. The IRS does provide links to these 

services from the IRS.gov web site. In States 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 with 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 clearly 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 agreements 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 who file an individual tax return35.

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 

monitoring 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 

requirements (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 Tax 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 providing 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 FFA37. The 2006 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 recommended that the government make it possible for all taxpayers to 

prepare and file their returns electronically without incurring fees and has noted the 

distinction between the government serving those comfortable enough to self-prepare 

their returns and professionals serving those who seek greater assistance39. 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 

products, 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 Understanding on Service Standards and Disputes p. 2 37 George, J. R. (2006) 2006 Tax Return Filing Season And The 2007 Budget Proposal For The Internal Revenue 

Service; Olson, N. E. (2006) Tax Return Preparation Options for Taxpayers 38 George, J. R. (2006) 2006 Tax Return 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 the two is 

important. Table 2-4 describes State stakeholders and their roles in the tax system. 

Table 2-4 State Stakeholders 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 Federal 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 same 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 requirements42.

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 States. 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 States that collect personal income taxes participated in the program. The 

remaining five States receive their returns directly from the transmitter, effectively 

requiring two transactions. These States are California, Illinois, Maine, Massachusetts,

and Minnesota. Although Illinois receives most of its returns directly, the State 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 State returns 

are submitted to the IRS,

after which the IRS 

forwards the State returns 

to the States.

For more information on e-file

providers, see 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 government also play key roles. As 

shown in Table 2-5, these roles are primarily legislative, regulatory, and/or oversight44. 

Table 2-5 Selected Federal Government Stakeholders in US Tax System

Organization 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 

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, soundness, 

and security of the US and 

international financial systems.

Manage Federal finances; collect taxes, 

duties, and monies paid to and due to the 

United States; pay all bills of the United 

States; make currency and coinage; manage 

government accounts and the public debt; 

supervise national banks and thrift 

institutions; advise on domestic and 

international financial, monetary, economic, 

trade, and tax policy; enforce Federal

finance and tax laws; and investigate and 

prosecute tax evaders, counterfeiters, and 

forgers.

Department of the Treasury web site: 

http://www.ustreas.gov

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 Administration (2008) Treasury 

Inspector General for Tax Administration; U.S. House of Representatives (2008) United States House of 

Representatives; U.S. Senate (2008) United States Senate
Advancing E-file Study Phase 1 Report 21 E-file Goal, Stakeholders, and History

Organization Purpose Role in Tax System

Government 

Accountability 

Office (GAO)

Independent, nonpartisan 

agency that supports the 

Congress in meeting its 

constitutional responsibilities 

and helps improve the 

performance and ensure the 

accountability of the Federal

government.

Provide Congress with timely information 

that is objective, 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 

comply 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 

overseeing 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 

hardships, who are seeking help 

in resolving tax problems, or 

who believe that an IRS 

system/procedure is not 

working as it should.

Protect individual 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 supervises

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 provide independent 

oversight of IRS activities.

Provide audit and investigative services that 

promote economy, efficiency, and integrity 

in the administration of tax laws. 

TIGTA web site: 

http://www.treas.gov/tigta
Advancing 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 Center45. 

Electronic filing has grown substantially since its inception. Twenty years later, more 

than 73 million or 54% (refund and balance due) individual returns were received 

electronically46. 

The IRS has also experienced a number of other changes related to or affecting its 

delivery 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 134,421,40047. Table 2-6

shows the extent of major legislation that has affected the IRS since 198648.

Table 2-6 Selected Legislation Affecting the IRS and/or E-file (1986–2008)

# 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)

13. 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 Electronic 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 Enacted 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 within 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 still 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 split 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 1990s.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 strategic 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 program in 1986, with the electronic transmission of only

25,000 individual returns from a handful of preparers through third party transmitters52.

 

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 - Returns/Refunds for 

Week Ending: 6/21/2008

RRA98 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 still today), 37 States 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 the 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 returns 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 States could use the Fed/State Telefile 

system.

2003 More than 53 million individual returns were filed electronically; nearly 37 million were 

filed by tax professionals. 

2004 Modernized e-File (MeF) was launched. This new, improved, award-winning e-file program 

enabled the electronic filing of some returns from corporations and exempt organizations. 

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

2008 More than 87 million individual tax returns were filed electronically, a 60% e-file rate.
Advancing E-file Study Phase 1 Report 25 IRS 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 

compares 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. Themes 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 increasing 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 helpful 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 discusses how 

users generally adopt technology, introduces the concept of segmentation based on 

how quickly users adopt technology, and describes 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 Innovations

A number of people have written on technology adoption trends. Foremost is Everett 

Rogers, whose Diffusion of Innovations is based on research by Joe Bohlen and George 

Beal53. 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 resembles a classical normal distribution or bell curve (see Figure 3-1). 

 

53 Bohlen, J. M. & Beal, G. M. (1957) The 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 

Adopters of technology is 

different from even the 

Early Majority that follows

them. Because each group’s 

motivators and concerns 

vary by type and degree, a 

tailored marketing 

approach is required to 

reach and affect each 

group.
Advancing E-file Study Phase 1 Report 26 IRS E-file and Technology Adoption

Figure 3-1 Technology Adoption User Segments

Rogers’ model describes five user segments and their attributes as follows54: 

Innovators — Approximately 2.5% of the population, these users are wellinformed risk-takers who are willing to try an unproven product.

Early Adopters — Approximately 13.5% of the 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 skeptical 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 

model (e.g., Geoffrey Moore proposes a chasm between the Early Adopters and Early 

Majority55), 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 Innovations, Fifth Edition

For more information about 

marketing and education, see 

Chapter 10.
Advancing E-file Study Phase 1 Report 27 IRS 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 relatively 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 example, 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 another 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 adoption rates. Increasing Adoption 

►

Increasing Time ►

Cumulative Adoption "S-Curve"

The technology adoption Scurve 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 this

expected slowing of e-file

adoption; new methods for 

achieving additional growth 

will be required.
Advancing E-file Study Phase 1 Report 28 IRS 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-filed individual tax returns between 1990 and 200657. Figure 3-3

illustrates this 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 rates 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 technologies, as discussed in Section 3.2.358. However, 

consistent with the Diffusion of Innovations model, the 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 3-359.

 

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 2007-2014
Advancing E-file Study Phase 1 Report 29 IRS 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 # Paper %

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-file goal 

established by RRA98. The IRS e-filing trend closely tracks the technology adoption Scurve discussed in Section 3.1.1 and illustrated in Figure 3-2.

Figure 3-3. Actual and Projected E-file Adoption (1990–2014)

The IRS utilizes the technology adoption curve (i.e., Diffusion of Innovation model) in its 

methodology for calculating these projections60:

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 tentative 

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 2010

Adoption (Millions of returns)

Adoption of Federal Individual E-filing 

n 1040/A/EZ — 80% E-file Goal - - - Trend

actualƒ „ 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 IRS E-file and Technology Adoption

The recently released IRS Oversight Board Electronic Filing 2007: Annual Report to 

Congress recommends that the 80% e-file goal deadline be extended to 201261. 

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). This is largely 

due to the nature of technology adoption and existing constraints (see Section 3.2 for 

additional details). Some have questioned whether the 80% e-file goal is attainable62. 

The discussion of technology adoption in Section 3.3 shows 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 

home63. The adoption rates of both these e-file–enabling technologies illustrate the 

classic technology adoption S-curve.

Figure 3-4 Household Adoption of PCs 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 these trends 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 from the IRS efile 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 2010

Adoption Rate (%)

Cumulative Adoption of PCs, Internet

u PCs l Internet - - - Trend

As many as 65 million adults 

will not have a computer or 

Internet 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 IRS 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 homes (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 returns electronically65. If members of this 

group want to self-prepare their returns, 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; points 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 Chapters 4, 

5, and 6; and illustrates 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 sites) 

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, the IRS has 

seen e-file adopted at a 

greater rate to date 

compared with online 

banking and online bill pay.

For more information 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 IRS E-file and Technology Adoption

constantly introducing new financial products, 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 relative 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 models and customer interactions, as illustrated by some online-only 

banks.

Although both the banking industry and the IRS are bound by nondiscrimination laws, the IRS cannot choose its customers and must serve all 

taxpayers, whereas banks may select their 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 adoption 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 informational interactions (e.g., checking

account balances) as well as transactional interactions (e.g., transferring money). The 

more appropriate and likely less frequent analogues to e-filing are transactional 

interactions. Forrester Research has tracked similar 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 

adoption68.

 

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 adoption 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 2006: 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 IRS 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 holding 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, “Online 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 slowing annual growth rate for online banking adoption is consistent 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 population71. 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 customers72.

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 institutions are common to both studies). 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 2005

Adoption 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 IRS E-file and Technology Adoption

Forrester defined online bill payers 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 illustrated in Figure 3-6 as well as a generally slowing annual growth 

rate in later years73.

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 segmented those who do not use online bill pay into three groups and

surveyed the reasons why Holdouts and Fence-sitters do not use it74:

Holdouts — 71% of non-adopters aligned with the statement “no, and I do not 

intend to pay bills online in the future.”

Fence-sitters — 23% of non-adopters aligned with the statement “no, but I 

plan to in the 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 nonadopter 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-Sitters, 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 2011

Adoption Rate (%)

Adoption of Online Bill Pay

¬ Forrester - - - Trend

Non-users 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 IRS 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 need to retain paper bills for 

their records. 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 category 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 accounts before bills are due — highlighting the 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. Eliminating and reducing cost represent the two 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 banks77.

3.3.1.3 Technology Adoption and E-filing

The 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 IRS E-file and Technology Adoption

effect, a ceiling to this computer- and Internet-dependent technology) and above online 

banking and online bill pay78. 

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 technology 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) Computer 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 & American 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 2010

Adoption 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. What 

has worked to date to 

attract e-file users will 

become less and less 

effective in the future.
Advancing E-file Study Phase 1 Report 37 Introduction to Research on Filer Motivators

4. Introduction to Research on Filer 

Motivators and Concerns

This Chapter provides an overview 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 14 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 to the next step.

The complementary techniques of primary 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 motivate 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 taxpayers and tax 

preparers”79. The IRS spent between $2 million and $10 million dollars on 

communications in past filing seasons80. 

The IRS has conducted a great deal of research into the concerns and motivations of 

taxpayers and preparers, 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 2002-03 tax season, $10.6 million in 2003-04, $5.9 million in 2004-05; see IRS 

(2005) Findings From The 2004-05 Taxpayer Communications Tracking Study.

The 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 Tracking 

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 

Study
Advancing E-file Study Phase 1 Report 38 Introduction to Research on Filer Motivators

Taxpayer Assistance Blueprint (TAB).

Taxpayer Communications Tracking Studies.

Taxpayer 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 

preparer 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 matter of the report provides bibliographic 

information for these studies and the many other sources cited in this report. The 

purpose of this Chapter is to introduce this research and provide selected summaries or 

key findings from each study. The next two Chapters — 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 assistance.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 $36,000 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 Introduction to Research on Filer Motivators

The TAB also defined two additional population segments that span all income and 

generational segments: limited English proficiency and disabled taxpayers.

Related to e-filing specifically, the TAB considered five filing characteristics across the 

income and generational segments: number of returns filed, percentage of 

electronically filed returns, percentage of returns prepared by a paid preparer, 

percentage of refund returns, and percentage 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 segments82.

Table 4-1 Five Filing Characteristics by Income and Generational Segment (as of TY2003)

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 Introduction 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 lowest percentage of refund returns.

E-filing is least prevalent among Seniors and most prevalent among Generation 

X.

4.3 Taxpayer Communications Tracking Studies

Launched in 2003–2004 and repeated in 2004–2005, 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 program 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 

appears on the return. 

o Paid-Preparer Return — A paid-preparer identification number 

appears 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 Behavior

o “As Soon As I Get My W-2 Forms”

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 definitions are shown in Table 4-284.

 

83 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 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 Introduction 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 data on taxpayer usage are as follows:

Outreach and communications can improve e-filing rates and decrease VCoding, 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 preparers.

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 4-385. 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 Schedules 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 Of The 2004-05 Taxpayer Communications Tracking Study

Non-Triers of e-file are the 

least likely group to be 

offered e-filing by their 

preparers.
Advancing E-file Study Phase 1 Report 42 Introduction 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 Educated 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-file and decrease the 

number of V-Coders (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 indicates again that 

preparers provide a key role in increasing e-filing.

The study also compared V-Coders to e-file Users and paper filers and found that86:

V-Coders’ use of a preparer is higher than other groups (76% for V-Coders 

versus 58% for e-filers and 28% for others).

Only 44% of V-Coders indicated that their preparers offered them e-file, 

compared with 91% of e-filers.

Most V-Coders (61%) have never tried e-file, although the 31% of V-Coders who 

are lapsed e-filers 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 preparers.

 

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 filers have not 

been offered the option to efile by their preparers.
Advancing E-file Study Phase 1 Report 43 Introduction to Research on Filer Motivators

4.4 Taxpayer Attitudinal Tracking Studies

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 addition to looking at the segments such as e-file usage, return type, filing 

behavior, and V-Coders, this study also analyzed taxpayers according to the following 

technology acceptance segmentation87:

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 

with 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 computers, and would 

definitely not put financial information on a computer.

Table 4-4 shows past e-file usage trends for Tech Leaders, Tech Followers, and Tech 

Laggards across some of the usage categories seen in other studies, including NonTriers, Lapsed Users, and Quitters88. 

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 Laggards were 

much less likely to use or have used e-file, whereas Tech Leaders were more likely to 

have recently used e-file).

 

87 IRS (2003) Findings From The 2003 Wave Of The e-file Taxpayer Attitudinal 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 Introduction to Research on Filer Motivators

4.5 Taxpayer Satisfaction Studies

The IRS conducts customer satisfaction research among taxpayers to gauge their 

satisfaction with various e-filing options, understand non-user interest in e-file, and 

understand taxpayer satisfaction with IRS instructions and communications. Following 

are some findings from the 2005 study89:

Current e-file Users are very satisfied with 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-Triers and Lapsed Users include 

lack of belief in the products (concerns about ease of use, accuracy, and 

privacy/security) and preparers 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 Analyses

The ETA conducts an annual nationwide analysis of individual taxpayers. The most 

current study available is for PY2006. This study segmented returns based on relative 

complexity of the returns and use of a preparer and introduced the intermediate level of 

complexity90:

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 with 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 TY200591.

 

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

Preparers 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 efile by their preparers.
Advancing E-file Study Phase 1 Report 45 Introduction 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 in moving 

returns away from paper and V-Coding and toward e-filing, about one-third of 

paid-preparer returns are V-Coded. 

“States with electronic filing mandates, on average, have a higher percentage 

of electronically filed returns and a lower percentage of V-Coded returns when 

compared to all States 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-Coders,

preparers who V-Code at least 75% of their returns.

PBI-2, conducted in June 2005, broadened the range of preparers being studied 

to preparers 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 

preparers 1 year later.

 

92 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis 93 IRS (2005) Findings From Practitioner 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 Introduction to Research on Filer Motivators

The PBI-1 study produced the following key findings94:

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 seemed 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 findings95:

53% of all preparers who filed at least 100 returns V-Coded at least 25% of their 

returns.

The preparers indicated that lack of demand and lack of good software stopped

them from e-filing more returns, but the study determined that lack of demand 

was something the Committed V-Coders overcame through taxpayer education 

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 

regarding 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 Committed 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 businesses, 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-Coder group from 

2004 to 200596:

29% migrated from V-Coding to e-filing.

The move to e-filing seems to be related to an improved attitude toward efiling and an increased belief in its benefits, such as faster refunds, paper/cost 

savings, 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 Research PBI-2 and PBI-3 96 IRS (2005) Findings From Practitioner Business Impact Research PBI-2 and PBI-3
Advancing E-file Study Phase 1 Report 47 Introduction to Research on Filer Motivators

4.8 One-on-One e-file Research Among Taxpayers and 

Preparers

In 2003, a study consisting of 375 in-depth telephone interviews of “high opportunity” 

taxpayers and preparers segmented interviewees as follows97: 

“High opportunity” taxpayers were taxpayers 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 currently e-file, those who e-filed less than 50% of their 

returns, and those who e-filed more than 50% of their returns.

Taxpayers who chose not to e-file when they were offered it by their preparers were 

older, with predominantly complex returns. They had preconceived notions about e-file,

including the following98:

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 (which they 

generally were not).

Additional findings are as follows:

Preparers who did not use e-file perceived it as involving more time and work 

for them, and even though 89% said that their clients ask about e-file, they 

turned back inquiries and figured that taxpayers could “go elsewhere if they 

[wanted to] e-file”

99. 

The lower-usage preparers viewed e-file as more appropriate for certain 

taxpayers — those with refund returns, those with simple returns, and those 

who expressed an interest in e-file100.

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 Introduction to Research on Filer Motivators

4.9 E-file Practitioner Attitudinal Tracking Study

This study was conducted in 2003 to better understand preparers 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-file goal. The demographics of preparers who file 

100 or more returns a year were identified as follows102:

Typically male, in their early 50s.

Most (76%) approached tax preparation as an occupation (i.e., were not 

seasonal workers) and had about 20 years of experience.

Two-thirds worked in firms that had been in business an average of 32 years 

and where tax preparation was the primary service.

They filed a median of 225 returns per year; 79% were individual returns, and 

46% of these were e-filed.

In short, these preparers were older, more experienced preparers who were very 

focused on tax preparation. When asked about key benefits of e-filing, preparers 

focused on speed, with less recognition of accuracy and ease of use as e-file benefits. 

Non–e-file preparers (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 efile 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 because “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 Attitudinal Tracking Study p. 11 104 IRS (2003) Findings From The 2003 e-file Practitioner Attitudinal Tracking Study p. 11

Characteristics 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, Taxpayer Demand, Fear of Audit, 

Recordkeeping and Acknowledgments, and Perceived Benefits. The points of 

leverage for influencing behavior directly relate to the options discussed in 

Chapters 10 through 14 as they inform the likely perception and adoption of 

the options. Themes identified in this Chapter include the following:

Motivators and concerns drive or hinder 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 decision 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 

popular assumptions.

5.1 Overview

This Chapter will look at taxpayers’ perceptions of and motivations to file electronically, 

with an emphasis on self-preparers. As of TY2006, 37% of individual returns were selfprepared (whether manually or through use of computer software)

105. The other 63% of 

returns were prepared by a paid preparer. In addition to their own perceptions and 

motivations, taxpayers who use a paid preparer are strongly influenced by their 

preparers. Preparer motivators and their influence on taxpayers are discussed further in 

Chapter 6. This 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 taxpayers?

Accuracy — Is e-file perceived to produce an accurate 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 does 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 Taxpayer Demand

5.9 Fear of Audit

5.10 Recordkeeping and 

Acknowledgments

5.11 Perceived Benefits
Advancing E-file Study Phase 1 Report 50 Taxpayer Motivators and Concerns

Recordkeeping 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 issues. 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 perceptions 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-filers is also presented because this 

may help determine how to motivate non–e-filers.

Note that when this document discusses the approximately 42% (as of TY2005) of selfpreparers 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-file106.

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 5-1107. 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%, and 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 

most 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 differs from understanding, much less acceptance. 

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 Year 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. 88

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 Glossary), 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 

preparers who process any significant volume of returns (e.g., more than 100 per year) 

are likely to have a computer and Internet access109.

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 home110. 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 Life Project reported that in April 

2006, 73% of adults had Internet access, although not necessarily at home111. This 

implies that 27% still did not have access to technologies necessary for individuals to efile. The Pew study also reported that Internet usage 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 income is between $30,000-50,000”112. Some 

taxpayers may think that high-speed, as opposed to dial-up, access 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 47% of adults had high-speed Internet access from home113. Even 

taxpayers with home computers may not be able to use them to 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 offer 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-file. 

Furthermore, Pew reports that only 4% of adults use the Internet outside their homes

(including work locations)

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 computers 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 factors, 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 exploitation (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 as the additional travel time 

involved, availability of public transportation, the hours of availability 

overlapping with their work schedules, 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. Other 

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 Allowed to e-file” 

and “Extension Needed” as the third and distant fifth top reasons why taxpayers did not 

e-file116.

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. 

Because 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 the 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’ choices among return 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 from 

the accuracy of e-filing.
Advancing E-file Study Phase 1 Report 53 Taxpayer Motivators and Concerns

However, non-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 accurate117. In contrast, among Current e-file Users, 82% considered efile an accurate way to file118. The 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 Users, Lapsed Users, and 

Non-Triers and that accuracy, privacy/security, and ease of use had the greatest gaps 

between importance and acceptance119.

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 capabilities. 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 the reasons why taxpayers

who are comfortable using a computer to prepare their returns detour at the final step 

of using it to file their returns; this research should ideally address actual practices and 

behaviors rather than self-reported reasons.

5.5 Security 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 is supposed to be 

available to and when it is 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 electronically, 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 study 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 5-2122.

 

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 efile 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

NonTriers

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 study, 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 statement123. It is interesting to 

note that these statistics run contrary to other research; for example, the 2002 study 

found that technical sophistication (“computer self-efficacy”) tended to lower 

respondents’ perception of security (“perceived credibility”) rather than increase it124.

Although the IRS emphasizes the security of e-file in its communications, the existence 

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 taxpayers 

or even intercepted their refunds and redirected their refunds to the fraudsters’ own 

bank accounts

125. The more taxpayers hear about insecure transactions over the 

Internet, the more concern they are likely to have about any transaction over the 

Internet. 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 

disincentive to e-file126.

In a 2005 IRS study, 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

products “being private and secure,” 75% of users of software-based solutions were 

“very satisfied,” compared with 88% of Free File users and 77% of users of online

commercial software127. Moreover, although non–Current Users were concerned about 

software, concern about commercial third parties having access to their information 

was not identified specifically128.

 

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. 15
Advancing E-file Study Phase 1 Report 55 Taxpayer Motivators and Concerns

5.6 Ease and Convenience

When it comes to e-filing, measuring opinions about ease and convenience is far from

straightforward, partly because 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 the 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 returns 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 these were subsequently e-filed129. 

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 signing a return and authenticating one’s identity are not 

necessarily convenient 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 signature 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 return131. Given that the vast 

majority do have access to (or can get) the information necessary to sign and 

authenticate their e-filed return, the IRS plans to discontinue Form 8453OL in 2009.

One 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 records132. 

 

129 IRS 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 

correct 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-filing is perceived by some to be less convenient. A 2003 

IRS study 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-file135. 

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/convenient136. A 2007 survey of customers of one tax return 

preparation software company found that taxpayers who e-filed 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 efile 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 around 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 banks or credit unions

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, with 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 different 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. 8
Advancing E-file Study Phase 1 Report 57 Taxpayer Motivators and Concerns

Taxpayers must be able to predict their situations 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 software, an upgrade or purchase of a higherlevel 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

connectivity. 

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 must 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 taxpayers 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, and 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 refund”), paper preference, and security141. 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 inhibitor 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-file142. A 2007 study by Gallant et al. found that cost (along with convenience) was one 

of two statistically significant discriminators between those who e-file and those who do 

not, though their study had limitations143. 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 addition, a separate Forrester 

study found that banks with free online bill pay increased their active online bill payers 

150% more than the fee-charging banks145.

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 return 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 

leading 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 

without 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 Taxpayer 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 (2007) 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-file147. 

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 returns and e-file than use the free 

preparation and filing solutions offered by the FFA148. Section 10.2.2.9 discusses Free 

File adoption in greater detail.

5.8 Taxpayer Demand

Pocketbook decisions also drive demand for e-file. For example, approximately 20% of 

taxpayers owe a balance, and the misperception that electronic filing requires 

concurrent payment could be a hindrance to this group adopting e-file149. In fact, 

taxpayers have the option of having a balance due taken directly from their bank 

accounts 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 seems 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-file150. 

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 it151. 

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 accounts 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 undermines this goal152. 

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 IRS153. 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 

Resisters154. Taxpayers often want to get their refunds as soon as possible. (It is 

interesting that the same individuals who are willing to defer a constant 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 the 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 cost 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 returns155. 

However, it is less clear that taxpayers are highly motivated to e-file in order to get their 

refunds 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 index156. One study segmenting taxpayers as e-file Believers and

e-file Skeptics shows a stark difference between these groups about the statement “efile is a faster way to get your Federal tax refund” — 87% of the Believers agree with the 

statement while only 49% of Skeptics do157. 

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 will actually take; the benefits mention a minimum (“as little as 10 days”) but not 

a maximum158. 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 returns159. In one IRS report to Congress, it was noted that 

using e-file and direct deposit decreased the average length of time for receiving a 

refund by 75%, from 40 days to 10 days160. 

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 their chances 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. 

Taxpayers may be uneasy about giving the IRS their returns in electronic form out of 

apprehension that this may make an audit more likely, perhaps 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 can 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 Statistics - 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 Alternatives, and Use of Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax 

Refunds More Quickly 161 IRS (2007) 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 lack of information on 

both 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 Acknowledgments

Concerns over keeping appropriate tax records may impede taxpayers’ willingness to efile. Until there are clear statements about which form of record for e-filed returns is 

sufficient, taxpayers may continue to experience confusion regarding this aspect of efiling. 

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 challenge162.

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 site163. 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 online164.

On a related topic, one key difference between e-filed and paper-filed returns relates to 

acknowledgment that the return was filed. 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 or acceptance of 

the return; the delivery notification is at best a proxy for receipt acknowledgment. On 

the other hand, e-filers get an e-mail acknowledgment that their actual returns 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-file.

Additional research is needed on 

how e-file acknowledgments are 

perceived.

The fact that e-file provides 

acknowledgments 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 returns 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 filing, 

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 filing168. Potential Acceptors (those who are 

“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 findings170.

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 

electronically. 

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 gotten 

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 Table 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-filing173:

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 days 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 credit 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. 9
Advancing 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 and 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. 

The 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 actual 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 IRSmarketed benefits on e-file

holdouts.
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 overview 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 efile, and taxpayers are increasingly turning to third parties for 

preparation and filing assistance.

6.1 Overview

Taxpayers look to a variety of sources for assistance in preparing their returns —

practitioners, commercial preparers, return preparation software vendors, communitybased preparers, even friends and relatives. This Section focuses on the perceptions and 

behaviors of the two principal preparer categories — practitioners and commercial 

preparers. For purposes of this report, these two groups together are referred to as paid 

preparers. 

The majority of taxpayers rely on a paid preparer, and this use of paid preparers 

continues to increase. Between TY2000 and TY2005, 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 preparer175. Nearly 99% of income tax returns 

filed by tax professionals are computer-prepared, and about 67% of these are e-filed176.

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 2005177. 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 Cost

6.8 Preparer Influence and Client 

Demand

6.9 Perceived Benefits

Because preparers are the 

primary driver for taxrelated decisions, 

understanding their 

motivations, inhibitors, and 

business context is 

important.
Advancing E-file Study Phase 1 Report 66 Preparer Motivators and Concerns

2005178. The drop in 2005 self-prepared e-filers 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 2005179. 

As of 2007, 85% of returns were prepared and filed using third party assistance; this 

figure breaks down into 58% from preparers and 27% from individuals self-preparing 

using third party tax return preparation software180.

Among preparers, there are varying roles, business models, and client 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 preparers181. 

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 TY1998 and TY2005, the percentage of returns filed on paper by paid 

preparers dropped from about 34% to about 15% — these paper filers are a targeted 

group for influencing behavior184.

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 preparers?

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 will 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 preparers 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 preparers performed both before and after a communications 

campaign, 73% of preparers in November 2004 were aware of e-file communications, 

and after the communications campaign, in April and May 2005, 83% of preparers were 

aware of e-file communications185. Of those preparers aware of the campaign, 59% took 

action as a result of the campaign186. Their actions consisted of telling their clients about 

e-file (40%), discussing 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 awareness of e-file, awareness of e-file is 

not enough to ensure e-filing. Although 73% of preparers 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 2005188. 

Training and education may be the next step required to motivate preparers who are efile 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 preparers

in how to e-file 189. Preparers 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

easier190. A 2005 IRS study comparing preparers who e-file and V-Code also found that 

providing training was a priority for Committed V-Coders191. However, it is not clear 

exactly what additional training on e-filing is required or why they need it, as most 

preparers already 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 preparers are a lack of knowledge about e-file and a lack of belief and 

acceptance of the benefits of e-filing. V-Coding preparers 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 Study p. 13 188 IRS (2007) ETA Tax Year 2005 Full Year Database Analysis p. 19 189 IRS (2005) Findings From Practitioner 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 Impact 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 

preparers 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 preparers’ 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 preparers, those with more resources and well-established 

electronic 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 preparers 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, West, 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-filers

195. 

In a 2004 IRS study, preparers 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-file196. 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-filing197. 

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-file198, 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-file mandatory); and providing incentives to use e-file and ease the 

cost burden of e-filing199. 

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 CPA 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 Practitioner 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 preparers, 

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 preparers with the tools they need to establish an efile capability at their practices. One example is the IRS e-file Logo and Marketing Tool 

Kit, which contains everything from e-file logo decals for storefronts to marketing 

materials to hand out to clients201. The materials are available in both English and 

Spanish. Many of the materials are provided free of charge to preparers. The IRS also 

provides all registered preparers 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 efile package where no paper is required at all.202

Paper can be reduced or eliminated on the incoming side for preparers as well. 

Becoming an “Authorized IRS e-file provider” provides additional advantages to 

preparers because they are better able to stay informed about the tax code and tax 

practices through use of direct electronic channels203. Communicating electronically 

with paid preparers 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 electronically204. The 

preparers possess the necessities for e-filing, but other factors come into the picture 

when it comes time to transmitting the returns. 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 forms 

and schedules are used205. 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 that 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 TY2005 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 filing206:

 

200 IRS (2005) Findings From Practitioner Business Impact Research PBI-2 and PBI-3 p. 7 201 IRS (2007) 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 Oversight 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 Form 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 high 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-Coded207.

Table 6-2 Self-Prepared 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 period 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-Coded 25% or more returns. These preparers noted

that e-file was not appropriate for more complex returns209. 

6.4 Accuracy

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 placed accuracy as a distant third to speed and behind e-file being 

paperless210. A 2004 IRS study found that Committed e-file Users (preparers) rated the 

importance of accuracy as third behind e-file saving paper and yielding faster refunds211. 

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 nonadopters. The accuracy required to e-file appears to dissuade approximately 16% of 

preparers from using it because they feel this is a disadvantage of e-file213. 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 concern rates a 

distant third behind lack of demand and paper preference214.

6.5 Security and Privacy

Security and privacy does not seem to be prevalent in the minds of preparers 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 Preparers215. However, security concerns was not the most 

prevalent response of the preparers surveyed. The study found that 41% of V-Coders 

and 40% of Higher e-file Usage Preparers were more concerned with the difficulty of efiling, while 33% of Lower e-file Usage Preparers were more concerned with the cost216. 

In fact, 16% of Lower e-file Usage Preparers and 35% of Higher e-file Usage Preparers 

mentioned security as a benefit when they talked to their clients about the benefits of

e-file217. 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 required218. 

The issue of trust is often associated with security and privacy. A 2005 IRS study found 

that preparers who V-Coded 25% or more of their returns rated “Clients don’t trust [efile] yet” as the third most common reason they did not e-file219. The same study also 

found that Committed V-Coders shared this attitude220.

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 involved software to 

prepare the tax return221. However, only approximately two-thirds of these returns were 

then e-filed222. Decisions were clearly made by some not to e-file when the return was 

ready to be submitted to the IRS. The V-Coding process entails printing and mailing the 

 

213 IRS (2005) Findings From Practitioner Business Impact Research PBI-2 and PBI-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 Research 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 Research 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

determine 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 VCoding preparers face? What drives the decision to e-file or not? When preparers switch 

from V-Coding to e-file, what motivates them to switch?

In a 2003 IRS study, when 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 difficult224. These preparers cited their already 

enormous workload, with 33% of the respondents working from morning to midnight 7 

days a week during filing season225. 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, respectively226. 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 respondents227. 

A 2005 IRS study found a number of motivators and issues related to preparers 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 tended to work in 

older, smaller firms, and their companies tended to have less focus on tax preparation 

and more focus on other accounting or financial services. When asked why they did not 

use e-file, these V-Coders tended to cite two reasons: lack of demand from their 

customers and lack of software to support e-filing. As noted previously, the preparer 

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 Preparers229. Registering as 

an e-file provider was also noted as an issue among V-Coding Non-User Preparers230. 

These concerns that the e-file process is too stringent were shared by V-Coding 

preparers in a 2004 IRS study231.

 

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. 50 226 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 Practitioner 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 preparers who V-Coded at least 25% of their returns, 15% 

indicated that it cost too much when asked why they did not e-file more232. A 2005 IRS 

study explored several aspects of cost with preparers. Among the 62% of preparers who 

V-Coded at least 25% of their returns, only 6% had heard from other preparers that 

price/cost was a drawback of electronic filing233. Furthermore, only 12% of the preparers

who V-Coded 25% or more of their returns and expected e-file implementation to be 

“Less than very easy” had a perception that the software and added cost to e-file would 

be too expensive234. 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 lacked 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 clients 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 preparers 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 preparers V-Coding: even though they recognized

that e-file could provide a greater speed of filing, the V-Coding preparers simply did not 

find it in their best interests to upset their client relationships with a filing method that 

they were not wholly convinced was easy, uncomplicated, and affordable238. 

That same 2005 IRS study found that many of the V-Coding respondents continued 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 study239), and they found it easy to deflect the questions of the 89% of 

clients who asked about e-file240. 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 Preparers241. V-Coding preparers were

also more likely to always file via paper regardless of what the client wanted, with 55% 

 

232 IRS (2005) Findings From The 2004-05 Practitioner Communications Tracking Study p. 17 233 IRS (2005) Findings From 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 Research 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 costs 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 efiling 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 allowed their clients to decide the filing method) 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 spectrum 

between e-file resistors and full e-file adopters, preparers in the Lower e-file Usage 

Preparers segment decided 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 based its decisions mainly on client demand for e-file244. 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 it245. Lower e-file Usage Preparers felt confident 

in using e-file for refund returns, for simple returns, and when their clients expressed an 

interest in e-file246. 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 check247. 

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 with technology adoption theory related to Early Adopters248. 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 cited “lack of access” to software as a reason 

for not e-filing more249. 

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 believed in e-file, knew the benefits that efile could bring them, and were more likely to offer its use to clients251. The study found 

that 97% of Higher e-file Usage Preparers told their clients about the positive aspects of

e-file252. A very low percentage of Higher e-file Usage Preparers reported that their 

clients were not interested in e-filing253. When asked why they chose not to e-file in 

certain cases, Higher e-file Usage Preparers cited 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 (2003) 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 Taxpayers & 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 From 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 & Preparers 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; therefore, 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 6-3255.

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-file NonUsers

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 preparers 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 benefit256. 

Other studies had findings 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

were that it is simpler, easier, and faster257. A 2004 IRS study found that the top four 

positive aspects of e-file that Higher e-file Usage Preparers impressed upon their clients 

were, 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 respondents 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-file259. While this was the 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 demand260. Higher e-file Usage Preparers cited as second in importance 

(27%) that the IRS should have more advertising, promotion, and education about efile261. Among V-Coding Non-User Preparers, 36% wanted the IRS to make e-file easier 

and less complicated, 20% stated that they would move to e-file when the 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 IRS (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 preparers to e-file262. 

Regardless of the volume of use or non-use of e-file, the majority of preparers cited

speed as the primary benefit of e-file. The benefits of accuracy, ease of use, and e-file

being paperless were given “far less acknowledgment,” especially among non-users263.

Preparers who V-Coded also tended 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 practices, 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 Practitioner 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. 20
Advancing E-file Study Phase 1 Report 77 State Electronic Filing Experiences

7. State Electronic Filing Experiences

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. This 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 Chapters 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 IRS for e-filing

Federal returns; of those, preparer-filed returns are dominant.

Preparer-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 

recognize 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 filing 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 efile 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 States 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 each of the option categories in the 

Although Federal and State 

governments share the 

objective of increasing 

electronic filing, their 

approaches and contexts

differ. What 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 Electronic Filing Growth for 

State Returns
Advancing E-file Study Phase 1 Report 78 State Electronic Filing Experiences

Chapters 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 

opaque 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 was just becoming available as this report was produced, it was

generally not incorporated.

7.2 Electronic Filing Methods for State Returns

According to the FTA, “each of the forty-one States with a broad-based income tax 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 7-1267. 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 the 

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 downloading 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 programs in which the 

individual taxpayer enters return information using a touchtone 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 Statedeveloped 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 Technology; 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 Barcode 

Programs

State programs that allow computer-produced returns that 

are filed on paper 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) Program 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 mandates are not explicitly called out in Table 7-1; however, the overall 

effect 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 IRS268. 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

program, 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 “Both,” 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 forwarded to a State web portal).

Telefile — Filings are prepared via a touch-tone telephone interface (State or 

vendor maintained) and sent to the State.

2D Barcode — V-Coded returns must have a 2D barcode.

Mandate — A State mandate (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 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 Technology; IRS (2008) State E-file 

Analysis; IRS (2008) Summary of State Mandates for Individual Tax Returns

Preparer programs are 

responsible for 75% of 

electronically 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 Yes
Advancing 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 32 18 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’ filing 

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 conjunction 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 Chapter 

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 overall269. 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 Filing (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 electronic 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 affairs.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 returns, 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 2005273.

 

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. 16
Advancing E-file Study Phase 1 Report 86 State Electronic Filing Experiences

Figure 7-6 Proportion of State Returns Filed Electronically (as of 2005)

The option Chapters that follow 

include a Section on State 

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, this 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 

followed by a summary of each country’s electronic filing options and 

features, electronic filing 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 efiling Federal returns, there is no single approach that by itself 

stands out as a paradigm of electronic filing success.

Many variables affecting technology adoption overall and electronic 

filing 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 International 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 for 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 the table) that most closely resemble the nomenclature used 

in the United States. The three countries that will be looked at in greater detail later in 

this Chapter — the United Kingdom, Canada, and Australia — are emphasized with bold 

blue text. Note also that the table identifies electronic filing approaches for these 

countries but does not offer analysis of the return volume for each. The following 

definitions and notes should be helpful in understanding Table 8-1:

Pre-Filled Form — The tax agency prepares taxpayers’ returns on their behalf 

using available data and then provides the returns to them to correct or accept 

as is.

2D Barcode — Printing of a computer-readable symbol on the computerprepared 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 United 

States, United Kingdom, 

Canada, and Australia

8.2.1 Electronic Filing 

Adoption

8.2.2 Internet Adoption

8.2.3 Tax System 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 United 

States.

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 offered to electronic filers.

Cash Incentive — Government-provided direct monetary payments offered to 

taxpayers for electronically filing. 

Misc. Incentive — Other (miscellaneous) incentives to electronically file.

Free Tax Soft. — Government-provided free tax return preparation software.

Free E-file — Electronic filing with no cost for transmitting 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 PreFilled 

Form

2D 

Barcode 

Extend 

Filing 

Period

Cash 

Incentive 

Misc. 

Incentive

Free 

Tax

Soft.

Free 

E-file 

Online 

Acct.

Access 

Phone Text 

Msg.

Australia274 Yes Yes Yes Yes Yes Yes

Belgium275 Yes Yes Yes Yes Yes Yes

Brazil276 Yes Yes

Canada277 Yes No a Yes Yes Yes

Denmark278 Yes n/a n/a Yes Yes

Finland279 Yes n/a n/a Yes Yes

France280 Yes Yes Yes b Yes Yes

Germany281 Yes Yes Yes

Iceland282 Yes Yes Yes Yes

India283 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 - Ministério da Fazenda (2008) Centro Virtual de Atendimento ao Contribuinte – eCAC; 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 EGovernment 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 (2008) 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 Arrangements 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: Experiences from the Finnish Tax Administrations’ Pre-completed No-touch Return System 280 European Commission Directorate-General for Informatics (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 Electronic 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 13.

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 PreFilled 

Form

2D 

Barcode 

Extend 

Filing 

Period

Cash 

Incentive 

Misc. 

Incentive

Free 

Tax

Soft.

Free 

E-file 

Online 

Acct.

Access 

Phone Text 

Msg.

Ireland284 Yes Yes Yes Yes

Italy285 Yes Yes Yes c Yes d Yes Yes Yes

Japan286 Yes e Yes Yes

Netherlands287 No Yes Yes Yes

New Zealand288 Yes No Yes Yes

Norway289 Yes Yes Yes Yes Yes

Portugal290 Yes Yes f Yes Yes

Singapore291 Yes Yes Yes Yes Yes

South Africa292 Yes Yes Yes Yes Yes Yes

Spain293 Yes Yes Yes

Sweden294 Yes n/a n/a Yes

United Kingdom295 Yes Yes Yes Yes Yes

Notes: 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 

characters keyed in) to banks and post offices that act as preparers and €10 to union co-operatives that also 

assist in return preparation. (d) Legislative mandate for electronic filing by individuals. (e) ¥5000. (f) Electronic 

filing mandatory for certain self-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; epractice.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 eGovernment: The World's Most Successful Technology 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) Individual 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 (2008) 

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 EGovernment to Connected Governance p. 54 292 Accenture (2004) eGovernment 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 Administrative 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 Return
Advancing E-file Study Phase 1 Report 90 International Electronic Filing Experiences

8.2 Comparison of the United States, the United 

Kingdom, 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 Internet 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 implemented electronic filing capabilities 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 programs 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 obligations296.

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 information about these three 

countries or other countries would require additional research in subsequent phases as 

deemed necessary. 

8.2.1 Electronic Filing Adoption

For a high-level comparison of electronic filing adoption in these three countries, the 

following 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, 

future 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 United States, the United Kingdom, Canada, and Australia 

are summarized in Table 8-2.

 

296 Kirchler, E. (2007) The Economic Psychology of Tax Behavior p. 176

While the United Kingdom, 

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 

countries and the United 

States 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 Selected Country

Country Total Returns 2003 2004 2005 2006 2006 %

United States297 134,421,400 a 52,869,000 61,428,300 68,463,900 73,239,500 54.5%

United Kingdom298 9,000,000 b 700,000 1,100,100 2,000,000 2,895,482 36%

Canada299 23,606,102 c 9,940,000 11,180,000 12,050,200 12,650,000 54.7%

Australia300 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 as 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 filing programs and the first year of electronic filing 

operation for each country follows:

United States — The first year of electronic filing operation in the United States

was 1986, and its programs include e-file, Free File, and Telefile (retired in 

2005). 

United Kingdom — The first year of electronic filing operation in the United 

Kingdom was 2000, and its programs include the legacy 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 Australia was 1999, 

and its programs include e-Tax (direct Internet filing for individuals with free eTax software) and the legacy Electronic Lodgement System (ELS) for preparers 

filing for individuals301.

 

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 Projections 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 Report 2004 p. 10); 2005 data from (HM Revenue & Customs (2006) Annual Report 2005-06 

and Autumn 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 2007 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 continues to grow year-on-year. (Australian Taxation Office 

(2008) Taxation Statistics)

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 United States. Table 8-3 summarizes the population, 

number of Internet users, and the percentage of each country’s population that uses

the Internet302. 

Table 8-3 Internet Usage in the United States, the United Kingdom, 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

There is no commonly accepted measure of tax system complexity across 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 definition and role of preparers varies by country, and 

some countries’ tax laws are supplemented by regulations, 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 Returns for Selected Countries

Country PreparerFiled Returns

United States303 58%

United Kingdom304 53%

Canada305 48.6%

Australia306 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 and Population Statistics 303 IRS (2007) The 2007 Taxpayer Assistance Blueprint, Phase 2 p. 27 304United 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 United 

Kingdom 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 pages308. 

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, the number of pages for the United States

increased from 40,500 in 1995 to 66,498 in 2006309. (b) 2007 figure: 10,000.

The remainder of this Chapter takes a more detailed look at each of the three countries 

described here, providing a high-level 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 Kingdom Electronic Filing Summary

The primary tax authority in the United Kingdom is Her Majesty’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 following310:

Collect and administer direct taxes paid by taxpayers or their businesses 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 businesses 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 Child 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 United 

Kingdom, 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 United 

 

307 World Bank (2008) Paying Taxes 2008: The 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 6th of one year through 

April 5th of the following year, and 

is referred to using both the start 

and end calendar years.
Advancing E-file Study Phase 1 Report 94 International Electronic Filing Experiences

Kingdom differs from the United States 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 summary 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 taxpayers to comply with 

their tax obligations

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 an SA tax 

return (see below). In 2005, PAYE coding accuracy was 73.3%, and the estimated 

number of SA taxpayers affected in 2004– 2005 by coding errors was 1.4 million312.

Self-Assessment (SA) Tax Return Filing

A minority of taxpayers whose situations are too complex to be addressed solely with 

PAYE — usually those who are self-employed or have multiple sources of income — file 

an income tax SA to reconcile their tax obligations. 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 

2007–2008 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 using the FBI 

program, the deadline for online filers to submit their SA returns is extended to 31 

January.314

HMRC collects £16 billion a year from Income Tax SA315.

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 service 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. 

HMRC offers an extension of the tax filing period for those submitting their returns via 

the FBI service. Starting in tax year 2007–2008, returns submitted on paper must be 

sent in by 31 October; online return filers are given until 31 January. After April 2008, it 

 

311 House of Commons Committee of Public Accounts (2006) Filing of Income Tax Self Assessment Returns: 

Twenty-third 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 preparation 

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 VCoded returns in the United States)

317. This new mandate was based on 

recommendations from the 2006 Lord Patrick Carter review of HMRC online services318. 

As a result of this policy decision, preparers will either have to file applicable forms 

online or prepare paper forms manually (not on computer). There are very few 

exceptions, affecting less than 1% of filers319.

8.3.2 Electronic Filing History and Adoption

In 1998, 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 services320. By 2001, United Kingdom 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 designing easy to use on line products”

321.

Currently, HMRC’s electronic filing goal is considerably lower than the US goal of 80%.

The 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 million SA 

returns were filed online, a figure expected to increase to 4 million in the current tax 

year323. 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 more than 6,000 

returns per hour324. 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 Returns 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, some practical 

difficulties remain. For example, filers may not 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 2008, the 

United Kingdom will no 

longer accept computerprepared returns filed on 

paper — what the IRS calls 

V-Coded returns.

The United Kingdom 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 United Kingdom’s electronic filing program, Lord Carter 

recognized that adoption had been slow and lagged behind other countries pursuing 

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

HMRC online tax filing services for both individuals and businesses have faced 

challenges in terms of infrastructure reliability since their inception326. 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 

deadline328. The web site failed to work for nearly 6 hours on the busiest day of 

the tax year329.

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 enough330. 

A 2006 report by Lord Carter addressing the state of HMRC online services identified 

some of the problems, including the following331:

In 2004–2005, many individuals completing the online exit poll for SA Online 

were critical of service performance during peak filing periods, despite the fact 

that 88% were “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 provided 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 Crash 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 season. 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 preparers on a survey of preparers’ satisfaction with 

electronic filing332. While the survey indicated a high level of enthusiasm for e-services, 

it also underscored widespread concerns about HMRC’s ability to deliver reliable, robust 

systems with sufficient capacity to cope with predictable and inevitable peaks. A 

summary of the results follows333:

Need for Improved Functionality — 17.6% of respondents indicated that they 

used HMRC’s online product and would 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

were 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 believed that paper returns 

will be needed beyond 2008 for several reasons: 

o General lack of confidence in HMRC’s IT infrastructure.

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 out in Lord Carter’s report, which stated: 

“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 that 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 preparers saw as 

inhibiting electronic filing of personal tax returns335:

 

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 team. 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 Survey: 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, 

the 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 Association 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 eservices are enthusiastic but 

concerned about system 

dependability.
Advancing E-file Study Phase 1 Report 98 International Electronic Filing Experiences

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

8.3.3 Role of Third Parties 

Third parties in the United Kingdom tax system include accountants, auditors, tax 

advisers, bookkeepers, payroll agents, and tax consultants, which are authorized by 

HMRC and can register as Accountancy Service Providers (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 preparers. As of January 2006, 17,927 preparers had registered to 

electronically file on behalf of their clients. For the 2004–2005 tax year, preparers filed

approximately 600,000 returns on behalf of their clients337. 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, the HRMC has placed an emphasis on 

communicating with third parties. Following Lord Carter’s 2006 Review of HMRC online 

services, HRMC consulted widely with its customers, delivering presentations to 

accountants and tax professionals to raise awareness of online 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 Organization 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 gives 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 FIling
Advancing E-file Study Phase 1 Report 99 International Electronic Filing Experiences

software vendors, preparers, and HMRC on issues related to the implementation 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 web site specifically for tax 

professionals.339

A significant difference between third parties in the United Kingdom and United 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 taxpayers in the US file online at a fraction of 

the cost to the Department”340.

Reinforcing findings from an earlier review of HMRC’s online 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 provinces except Quebec and Alberta. 

Provincial sales taxes in New Brunswick, Nova Scotia, and Newfoundland and 

Labrador. 

The Ministère du Revenu du 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 sources 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 1st to December 31st 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 site342.

8.4.1 Filing Options and Features

Tax returns 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 taxpayers can access and manage their tax data 

via the CRA My Account capability on the CRA web site343.

Table 8-6 Free 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. Acknowledgment 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. Acknowledgment of a batch 

transmission takes a few hours.

TELEFILE TELEFILE is an interactive computer program that allows taxpayers, if eligible, to 

electronically file their tax returns 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 forms344. This is comparable to the US 

situation in which some forms cannot be e-filed. Unlike the United States, where even 

forms that cannot be e-filed are available online for downloading, CRA’s use of MICR 

technology means that these forms cannot be electronically downloaded and printed 

because consumer-grade printers do not support MICR345.

 

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; disability 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) credit 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 advanced 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 

the 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) 344Canada Revenue Agency (2008) Forms Available Only in Paper Format 345Certain 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 only in 
Advancing 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. This online 

system requires the use of a security code found on the mailing label affixed to the 

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 

developers must respect this limit for their software to be certified for NETFILE use346.

CRA randomly asks electronic filers to send in supporting documentation for their 

returns.347

A description of NETFILE characteristics follows:

Benefits — CRA claims NETFILE benefits such as security and confidentiality,

quick refunds (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 return348. The 

benefit of quick turnaround for refunds was confirmed in processing the 2004 

tax year returns, when the CRA surpassed 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 actual349.

Cost — Although NETFILE is free of charge, taxpayers 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/Harmonized Sales Tax) return are only available in pre-printed format.

(Institute of Chartered Accountants of Alberta and Institute of Chartered Accountants 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 software 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 2005-2006 p. 44 350 Wong, C. (2006) CRA Looks to Have More Than Half of Returns Filed Electronically
Advancing E-file Study Phase 1 Report 102 International Electronic Filing Experiences

The EFILE On-Line software program allows transmission of clients’ 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 return 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

TELEFILE 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 returns for free using a touch-tone telephone. 

Besides using a touch-tone telephone, the service requires the taxpayer’s social 

insurance number (SIN), a personalized access code, and a completed tax return. If 

taxpayers cannot use the TELEFILE service due to a disability or lack of access to a touchtone 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 charitable donations. The TELEFILE system does not 

accept more complex tax information, such as self-employment income, capital gains,

and rental income. First-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 information 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 taxpayers355. 

TELEFILE was introduced in 1998 and had 700,000 participants in 1999356. In 2006, there 

were 585,762 TELEFILE users, 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 Canada 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 356Inland Revenue (2000) Information Age Government: Benchmarking Electronic Service Delivery p. 140 357 CBCNews.ca (2007) E-filing Running Ahead of Last Year, Tax Department Says
Advancing 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 electronic 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 Return] 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 United 

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 (VCoding in the United States). 

The following table and figures provide additional insight into Canadian filing trends.

Table 8-7 displays the 2006 figures for paper and electronic filing, including the number 

of software-prepared returns printed out for submission360.

 

358 Canada (2007) Service Canada – A New Paradigm in Government Service Delivery 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 Internetliterate and Internetexperienced 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 2006361.

Figure 8-2 Canadian Electronic Filing Trends (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 2006

Adoption Rate

Returns (Millions)

E-Filing Adoption in Canada

# Returns % E-file
Advancing 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, respectively362. 

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, these

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 preparers364.

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 requires preparers to sign in with their own user ID and password. A preparer 

who wishes to use EFILE must first register online365. Before a preparer can file on 

another’s behalf, the preparer needs specific authorization from the client. This 

authorization does 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 site and use EFILE On-Line or EFILE On-Line Plus to represent another 

party367. 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 

information. 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 United States) are 

constrained in the fees they 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 government funds370. 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 taxes371. 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 reduced372.

For individual income taxes 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 taxes withheld from their paychecks as 

they are paid during the tax year, similar to employee withholding in the United States

and the PAYE program in the United Kingdom373. 

Personal Income Tax Returns

All those with income not taxed at the source (by employers [PAYG]) are liable for 

income tax; a small threshold applies374. As the largest group in the tax system, the 

individual taxpayer segment includes mostly salary and wage earners and contributes 

around 40% of Australian tax revenue375. For the 2006 financial year, 11.5 million 

Australian individuals filed tax returns376. These individuals represented 55.8% of the 

total estimated Australian population of 20.6 million as of 30 June 2006377. 

 

370 Australia raises the majority of its taxation revenue (62.8% in 2004) from direct taxation, which is levied on 

incomes: wages, salaries, payrolls, 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 added tax), excise and customs duties, and 

property taxes. The OECD average is 38.6%. Australia (2008) Appendix G: Australia's Tax System - Australia's 

Tax System Compared with the OECD 371Other 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, Sep 2007

The Australian financial year or 

income tax year runs from July 1st

of one year to June 30th 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 news 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 fee379. 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 situations. 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 owed380. There is no online access to account data for individual Australian 

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 October381.

Electronic Filing Using 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 the 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 returns 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 Office (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 Know
Advancing E-file Study Phase 1 Report 108 International Electronic Filing Experiences

complements the back-end system, the Electronic Lodgement 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 onthe-spot estimate of the tax refund or balance due. The 2007 version of e-Tax software 

permits users to download return data directly into their tax returns (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 government payments). Most tax 

refunds are issued within 14 days.383

An updated version of e-Tax was released in July 2008384. The standard processing time 

for returns filed through e-Tax is 2 weeks, compared with 6 weeks for paper returns385.

Tax Agent Portal (For 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 following386:

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 very useful. The individual functions viewed as 

being most useful were as follows387: 

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 use of the Tax Agent Portal continues to increase. In March 2007, 62% of 

preparers indicated that the Tax Agent Portal is their most frequently used channel for 

contacting the ATO388. The ATO notes that:

The 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 portal 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 (2008) Where's My Refund? 386 Australian Taxation Office (2008) Welcome to the Tax Agent 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. 59
Advancing E-file Study Phase 1 Report 109 International Electronic Filing Experiences

first released. There have been nine updates with tax agents involved in 

making improvements 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, including dividend information from share 

registries390. 

Pre-Filled Returns

The Australian Treasury plans to invest additional funding of $20 million in 2007–2008 

to enable the ATO to expand its pre-filled electronic tax returns for about 9 million 

taxpayers. This 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 returns

electronically or provide only a few additional pieces of information to the pre-filled 

information to complete their returns391. The ATO will pre-fill electronic returns with the 

following information:

Salary, wages, and allowances, where the employer has filed the employee’s 

payment summary electronically with the ATO.

Dividend and interest income and distributions from managed funds.

Payments from Centrelink; the Department of Education, Science and 

Technology; and the Department of Veterans’ Affairs.

Medicare out-of-pocket expenses and private 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 employers 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 taxpayers 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 

days.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 year393.

 

389 Australian Taxation Office (2007) A Long-Term Commitment 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) Budget 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. 1
Advancing 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 returns themselves using e-Tax and a third using the TaxPack (paper filing method). 

Filing via e-Tax (13.2%) almost overtook paper and telephone lodgments (14.0% or 1.6 

million) for the 2006 financial year394. Overall growth in electronic tax filing in that year 

grew by 17.2% to 1.5 million395.

In 2006, around 1.6 million people filed their financial year 2006 tax returns 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 

percentage 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 returns nor in the 

process of transmitting returns 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 preparers currently registered. Only registered preparers are permitted to 

offer and charge a fee for the provision 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 income 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 investigate 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 Statistics 2005-06] p. 1 395Australian Taxation 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 Board
Advancing 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, preparers 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 time this report was prepared, it is estimated 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 United States, however, Australian taxpayers most commonly choose a 

third party preparer to file their income tax returns (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 

2007 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 activity statements (equivalent to information returns in the United 

States) 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 

increasing proportion of non-salaried wage earners, an increasing number of taxpayers 

with non–bank investments such as stocks and rental properties, and a trend to buy 

services to increase free time or to deal with a more complex tax environment. 

In a 2007 speech to preparers, ATO Commissioner D’Ascenzo restated the importance of 

preparers’ role: “There is no doubt about the vital role of tax 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 

preparers, citing more than 5,000 visits to preparers and responses to more than 

153,000 calls from preparers 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 method. 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 guidance documents provided by the 

ATO. (Australian Taxation Office (2007) Community Perceptions Survey 2007 p. 132 ) 402 Australian Government: Inspector-General of Taxation (2008) Appendix C - Overview of the Tax 

Administration System
Advancing E-file Study Phase 1 Report 112 International Electronic Filing Experiences

conducted seminars, reaching hundreds of preparers. The ATO also works to 

incorporate the preparer’s perspective in the design of products and services.403

 

403 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
Advancing E-file Study Phase 1 Report 113 Introduction to Option Chapters

9. Introduction to Option Chapters

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 

technology adoption on progress toward the 80% e-file goal; taxpayer and 

preparer perceptions and motivations; and State 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 

research 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. 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.

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 motivators, concerns, and 

relative positions on the 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 preparer motivators and concerns, while the last three 

sets focus on technology-driven options. The first and second technology-based options 

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 considerations 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 Options
Advancing E-file Study Phase 1 Report 114 Introduction to Option Chapters

Table 9-1 Summary of Option 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, feasibility, 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 summary 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 current 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 efile holdouts, such as extending the payment 

deadline for e-filers beyond April 15.

In 2006, approximately 19.5 million 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 Option

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% efile 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 Phase

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 enhanced e-file features.

Targets only the preparer community because MeF 

is only available to registered preparers; primarily 

targets preparers who never or only sometimes efile 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 would continue to be an option.

Targets taxpayers and preparers who do not 

currently e-file, but who use a computer/tax return 

preparation software to prepare tax returns (VCoders); such returns constitute approximately 38 

million returns or 30% of all returns filed.

Future Phase Future Phase
Advancing 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 additional 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 Interview-Based 

Preparation Tool

Expand taxpayer preparation methods to include 

IRS-provided tools such as an interactive application 

for taxpayers to prepare and transmit their returns

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 (VCoders); 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 updates the 1040 

family of forms on IRS.gov to include 2D barcodes

when printed. 

Tax return preparation software — The return 

preparation software vendor community updates

its products to allow for this capability on IRS forms.

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 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 Phase
Advancing E-file Study Phase 1 Report 117 Incentive-Based E-filing Options

10. Incentive-Based E-filing Options

This Chapter focuses on strategies for increasing e-file volumes through 

incentives that offer monetary or value-added 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 

incentives 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 and 

preparer behaviors and motivations, rather than to a specific 

technology.

Incentives 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.

The 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-file 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 purposes 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-file Study Phase 1 Report 118 Incentive-Based E-filing Options

10.2 History and Background

Since the launch of electronic filing, the IRS and some 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 Sections 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 “implement 

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 preparers to e-file their returns404. 

In 1998, the IRS considered 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 report 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 and 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 mass communications and other means406. 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 preparers 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 benefits.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 typically 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 Incentive-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 preparers about the benefits of filing electronically. 

Marketing campaigns have been 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 public education campaign, online media, and directed

stakeholder outreach409. 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 Free 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 experiences with 

incentives to date, while Section 10.4 explores 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 refunds 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 days (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 time412.

 

408 IRS (2008) Marketing 409 The public education campaign for 2007 included press releases, online press kits containing fast facts, 

frequently asked questions 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 numerous 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 Management, 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 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 

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 Incentive-Based E-filing Options

In addition to promoting the direct deposit feature’s speed, 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 to 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 anticipated414. 

Beginning in 2007, for refunds paid through direct deposit, the taxpayer could choose to 

split the refund and direct deposit into multiple accounts; in this first year of offering 

the split refund option, the IRS processed 80,000 split refund requests415. This is an 

option that is also available to those who file on paper but only if a separate form (Form 

8888) is completed416.

10.2.2.2 Debit/Credit Card and Electronic Funds Transfer

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-file their returns. This feature 

— allowing taxpayers to use their debit or credit cards or to set up an EFT payment 

when a balance is due — was introduced to e-file 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 of 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 balances are deducted from their accounts 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 knows 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 Description 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 “several 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 Incentive-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 processing417. 

Approximately 600 validation controls check for errors on an electronic return, resulting 

in a 1.99% error rate for e-filed returns, compared with a 24.51% error rate for paper 

returns418. 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 ERO) 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 

into 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 

returns 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-saving 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 dependent Social 

Security Numbers (SSN) and invalid electronic signatures are the most frequent reject 

codes, resulting from errors in validating data such as SSNs and AGIs that cannot 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 because 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 Committee (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-filing

demotivator.

For more information on error 

checks as a perceived benefit, see 

Section 5.4.
Advancing E-file Study Phase 1 Report 122 Incentive-Based E-filing Options

10.2.2.4 Acknowledgments

One aspect of e-filing recognized as an incentive is electronic acknowledgment of 

receipt and acceptance of the e-filed return. A corresponding acknowledgment for 

paper filers is United States 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 signature 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 returns is perceived as a major convenience.

The IRS markets “quick confirmation” as a benefit of filing electronically. E-filers 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 prepare their tax 

returns online from a home computer where they can take advantage of the 24-hour-aday, 7-day-a-week availability and other convenience features424.

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 discussed e-filing within the context 

of a “comprehensive e-service vision”426. Although it currently offers a range of products 

and services, the IRS has not yet formally developed a broader strategy for egovernment.

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 services, e-filing will 

become a natural extension of their contact with the IRS. 

One of ETAAC’s strategies is to encourage e-filing as part of a larger package of services 

that help taxpayers more quickly understand and meet their tax responsibilities and 

thus reduce taxpayer burden. Over the years, the IRS has “made progress in providing 

 

422 IRS (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 Advisory 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 

attract individual taxpayers 

to e-file.

E-filers benefit from the 

convenience of a quick 

confirmation that their 

returns have been received.
Advancing E-file Study Phase 1 Report 123 Incentive-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 topicspecific articles428.

Where’s My Refund feature on the IRS web site introduced in 2003 allows 

taxpayers to check the status of their tax refunds (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 Minimum Tax 

(AMT) or qualify for Earned Income Credit (EIC).

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 Electronic 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 parties assisting taxpayers. Launched in 2004, this suite, 

called e-services, includes the following431: 

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 ability to resolve taxpayer account issues via 

secure e-mail. 

Initially, as an incentive to convert preparers to e-file, the IRS restricted access to eservices 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 past 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 IRS (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 electronic services 

available to preparers.
Advancing E-file Study Phase 1 Report 124 Incentive-Based E-filing Options

who wished to 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 eservices 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 preparers 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 AGI be $54,000 or less (for TY2007), the vendors’ 

products can and do impose additional criteria, which vary from vendor to vendor433:

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 considerations434: 

Some products do not inform taxpayers that they are ineligible 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 

available because of their State of residence.

Taxpayers residing in States that provide Federal government e-filing solutions 

that the FFA perceives as competition may have fewer or no Free File options 

available to them.

 

432 IRS (2008) Incentives to e-file 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, see Chapter 2.

Free File allows eligible

taxpayers to electronically 

prepare and file their tax 

returns free of charge.
Advancing E-file Study Phase 1 Report 125 Incentive-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-based design necessarily entails sharing personal information with a 

private company, although assurances of confidentiality are given.

The large number of FFA products, many of which are not highly recognized 

brand names, may be confusing, especially to less 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 Sections of this Chapter, it is instructive to consider the 

use of the Free File program to date, as shown in Table 10-1435. 

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%

Notes: (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 the adoption of Free File. As discussed in the upcoming 

Sections, 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-preparation). When 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 provides

 

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) RALs 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 

relationship between the IRS and 

the FFA, see Section 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 Incentive-Based E-filing Options

indirect monetary incentives to taxpayers filing individual returns through services 

offered by third party partners. Through the IRS Stakeholder Partnerships, 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 

organizations, and State or local governments that apply for annual partnership status. 

Although the partnerships themselves are non-monetary — the IRS does not offer 

funding 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 partners to promote e-filing.

10.2.2.10 Third Party Offerings — Bank Products

Millions of taxpayers take advantage of third 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 Checks (RAC) — A financial institution sets up a temporary 

account for a taxpayer to which the IRS can directly deposit refund money. 

RALs allow individuals to receive their anticipated refunds, 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 refunds436. In 2005, 10 million taxpayers — 14% of all e-filers — applied for 

RALs437.

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.

Some consumer advocates consider these third party products — available only to efilers — to be controversial due to their target population and the associated interest 

rates and fees. These 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). In its report to 

Congress, the IRS noted “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 Debit Cards for Refunds, Iincluding Recommendations on How to Deliver Tax 

Refunds More Quickly p. 6

For more information about SPEC, 

see Section 2.2.1.2.

10 million taxpayers — 14% 

of all e-filers — applied for 

RALs in 2005.
Advancing E-file Study Phase 1 Report 127 Incentive-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-filers)

439. As 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 same benefitbased incentives currently provided or planned for by the IRS, including the following440:

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 updates.

Automated extensions.

Free tax preparation software (through Free File or through a State offering).

Also similar to the Federal experience, FTA explains that “the greater the perceived 

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 returns electronically, extended 

the State electronic filing deadline to encourage filers to give up paper442. 

In the late 1990s, Oklahoma partnered 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 electronic filing rates could provide instructive lessons learned for the IRS. 

 

439 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. 18 440 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 [South Carolina] EFile methods have until May 1, 2008 to both file their return and 

pay any balance due with no penalty or interest being incurred. This special incentive does not apply to 

Federal returns or to [South Carolina] 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 Software 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 Incentive-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-filers directly (e.g., cash, tax credit).

Reinforce/Refocus E-file Benefits — Improve and increase marketing on 

existing e-file benefits and/or offer new value-added features to drive uptake.

The 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 

understands 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 credit) for filing electronically. This option inherently requires a 

disbursement of Federal funds or a reduction in Federal revenue. Examples include the 

following: 

The IRS provides a $5 to $20 tax credit to taxpayers who file electronically.

The IRS pays preparers/EROs based on a negotiated rate per return or flat fixed 

fee for each return filed electronically. In this scenario, preparers/EROs would 

provide 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 preparers who are still not filing electronically primarily because 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 currently e-file.

As pointed out on its web site, “the IRS does not charge a fee for electronic filing”444. 

Rather, e-filers 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 15 lists incentive-based 

options that may be viable but 

were out of scope for this report.
Advancing E-file Study Phase 1 Report 129 Incentive-Based E-filing Options

price, pocket some or all of the incentive, or raise their 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-filers, 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 the 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 could 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 available445. 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 identify the late adopters within the 39% of paper filers and then focus 

marketing attention on those who are more likely to convert.

10.4.2.1 Targeted Population/Potential E-file Contribution

In general, this option targets taxpayers and preparers who do not file electronically 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 

strategically target their 

concerns and motivations.
Advancing E-file Study Phase 1 Report 130 Incentive-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 Effect 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 

2006446.

60% of taxpayers who 

filed on paper received 

a refund in 2006447. 

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 

2006448.

33% of taxpayers who 

filed on paper had a 

balance due in 2006449. 

Offering Other 

Electronic Services to 

Individuals

§5.6 Ease and 

Convenience

IRS.gov had 176 million 

visits in FY2005450.

Where’s My Refund

feature had 22 million 

users in FY2005451.

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 eservices452.

Unknown effect. 

Surveys show that 

these are valued 

services, but whether 

these services attract 

new preparers to e-file

is unclear.

Error Correction §5.4 Accuracy 9% of returns are 

rejected yearly because 

of errors, though 80% 

of these are corrected 

without the need for 

time-consuming mail 

correspondence453.

An estimated 1.8 

million taxpayers 

intended to e-file but 

could not due to errors

they could not or chose 

not to correct454.

24x7 Availability §5.6 Ease and 

Convenience, §4.3 

Taxpayer 

Communications 

Tracking Study

39% of last minute 

filers preparing e-file in 

2005455.

Unknown effect. It is 

unclear how many lastminute paper filers or 

V-Coders could be 

encouraged to e-file.

 

446 IRS (2006) Tax Year 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. 26
Advancing E-file Study Phase 1 Report 131 Incentive-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-filing in the areas of 

privacy, security, and reliability of electronic transactions; risk of audit; and comfort with 

the status quo/comfort with traditional paper filing456. According to ETAAC, “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 still 

need a compelling reason to switch to electronic tax administration channels”458. 

Findings from a 2005 IRS study suggest that preparers would also respond well to 

increased marketing of e-file benefits. Key findings from re-contacting preparers who 

previously V-Coded but migrated to e-file point directly to marketing and education. 

Preparer “responses here showed that a critical mass of changes in attitudes toward efile had developed based on this segment’s learning (or learning more) about e-file —

especially its benefits in terms of fast refunds, 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 communications to the V-Coder audience. Highlighting these benefits would help 

fill the knowledge and belief gaps mentioned in the Key Findings... and educate VCoders about the benefits of e-file to their Business, Themselves, and Their Clients.”460

The same study asked preparers who were Committed Users of the e-file program in 

2004 and preparers 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 

following461:

Provide more training/information/promotion (e.g., seminars, education, easyto-understand information, advertising).

Make changes to the e-file program (e.g., make e-filing mandatory, have more 

forms available for e-filing, eliminate signature forms, explain errors/provide 

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; the 

results are presented in Table 10-3462.

 

456 Electronic Tax Administration 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 IRS (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 attributed their 

change to learning more 

about e-file benefits such as 

fast refunds, cost savings, 

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 Incentive-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-Coders

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 

practitioners 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 to 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% efile goal for Incentive Option 3 includes those eligible for Free File who meet the 

following two 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 already using a preparer are not likely to switch to a self-prepare 

option (for individuals using a preparer, other options may be more 

appropriate).

To reach this population, the IRS must have a better understanding of the motivations 

behind filing for free 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

To convert those eligible for 

Free File but not using it, the 

IRS must have a better 

understanding of their 

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 Incentive-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 is 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 behavior 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 File465. The 

IRS marketing budget from 1999 to 2004 grew from $9 million to $13 million for both efile 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 included paid placement of 

search and banner messages 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 advertisement in cinemas frequented by taxpayers with an 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 not 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 years469. 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 returns 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 Administration: 

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 Incentive-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 Study470. 

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 

following471: 

Participants had an “overall disposition toward Free File,” with 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 selfpreparers and 20% of paid preparers e-filed).

Many Migrators 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,” although 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 years, Free 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 made472: 

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 payments, debt forgiveness associated 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 

what 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 

most 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 Incentive-Based E-filing Options

10.4.4.1 Targeted Population/Potential E-file Contribution

Similar to when a subset of the 70% of taxpayers 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, the 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 because 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

incentives) 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 balances due, on or before April 15 following the 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-filers who use direct deposit for 

refunds or use EFT or credit/debit cards for paying their balances 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-filers, while maintaining April 15 as 

the deadline for filing (on paper or electronically) the return474. A payment extension for

e-filers would presumably put balance due e-filers 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 Year 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 Incentive-Based E-filing Options

In fact, since the drafting of RRA98, when a provision 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 benefit475. 

In December 2001, the IRS submitted a proposal to change the due 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 proposals 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 extension 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 extended the filing due date by 15 days for e-filed returns if 

taxpayers paid their balances 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 existing 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-filers (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 58.5 million paper filers (19.5 million) owed a balance479. 

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. Extending 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 

14% contribution to the 

80% e-file goal.
Advancing E-file Study Phase 1 Report 137 Incentive-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 balances due have the opportunity to accrue further 

interest on money owed to the IRS480.

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 check 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 Briefing482. 

Preparer Concerns —Many preparers close their offices on April 16 each year. 

An extension would require these preparers to modify business practices. 

CERCA echoed this concern in its comments to Congress in 2003483. 

Effect on States — 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 own485. Three States

(Arkansas, Louisiana, and Virginia) already have a due date later than April 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 returns486. 

 

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 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; 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 Electronically 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-file Study Phase 1 Report 138 Incentive-Based E-filing Options

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Advancing E-file Study Phase 1 Report 139 Mandate-Based E-filing Options

11. Mandate-Based E-filing Options

Mandates for e-filing would require specified groups of paid preparers to efile individual tax returns. This Chapter examines mandate-based options for 

advancing e-file and the bump in e-file volumes that would be incurred by 

imposing mandates. This Chapter also examines the change to Federal law 

that would be needed to implement a Federal mandate strategy for e-file, 

considers current State experiences with mandates, outlines Federal

implementation options, and discusses overall implications for e-file

participation. Themes identified in this Chapter include the following: 

A Federal mandate on preparers to e-file individual returns increases 

e-file volumes 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 at 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 relationships.

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 of 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 of 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 Thresholds — 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., starting at the intended target or lowering the 

Contents of Chapter 11:

11.1 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.

For more information on the 

characteristics of mandates, see 

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 mandate)487.

Hardship Exceptions — Allowance of a grace period for implementation488. 

Opt-Out Provisions — Opt-out procedures for individuals who choose not to 

allow their paid preparers to e-file on their behalf (this is why taxpayer 

behavior plays a role even in mandates on preparers).

Enforcement — Options/penalties for non-compliance with mandates.

Acceptable Alternatives — Provision for acceptable alternatives to e-filing

(e.g., a machine-friendly requirement for paper filing such as 2D barcodes).

Scope of Chapter

This report considers mandate options for paid preparers only — not on individual selfpreparers. 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 returns to the IRS). This type of mandate is out of scope for 

this Chapter but is discussed briefly in Chapter 15.

11.2 History and Background

Currently, Federal law prohibits the IRS from requiring electronic filing of income tax 

returns for individuals, estates, and trusts489. 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 for preparers of individual returns. In its 2007 annual 

report, ETAAC repeated its recommendation that the IRS mandate that paid preparers

e-file 1040 returns, describing mandates as “a quick and relatively painless way to 

increase e-filing”

490. ETAAC recommended 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 “reasonableness standards and exceptions” for 

preparers filing more than 50 individual returns in a year492. 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 Committee (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 selfpreparers, 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 criteria494. In the 2007 report, 

GAO echoed 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 states, “still, most V-Coders use a 

paid preparer (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 came short of 

recommending that Federal mandates be put into place at this time496. 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 selfpreparers, 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 exhausted498. Instead, in 2007, the IRS Oversight Board encouraged 

Congress 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 

implements any kind of Federal mandate. According to the 2007 report, these 

conditions are as follows500:

The IRS must first exhaust all reasonable steps to maximize voluntary 

participation in individual e-filing.

The IRS must carefully 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 Electronic 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: 2007 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 Trend 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 IRS 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 109th 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 community501. 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 electronic 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 different from 

the thresholds described for individual returns. The IRS mandates e-filing for the 

following503:

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 assets 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 translated into “piecemeal attempts” that 

have “yielded negligible results in many instances”504. 

To address such challenges, ETAAC has made recommendations for business 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 returns505. 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 returns506. 

 

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 Revenue 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 Administration Advisory Committee (2007) Annual Report to Congress p. 7 506 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 32

Full discussion of business and 

information returns is outside the 

scope of this report.
Advancing E-file Study Phase 1 Report 143 Mandate-Based E-filing Options

11.3 State Experiences

Unlike the IRS, States are not restricted in their authority to mandate that individual 

State tax returns be filed electronically507. 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 in place 

for certain populations of preparers. As shown in Table 7-2, as of May 2008, at least 18

States have imposed mandates on a select population of preparers who file individual 

State tax returns; two States have a mandate on software developers (rather than on 

preparers) to create electronic returns or paper returns with 2D barcodes.

The experiences in the States provide a series of snapshots of mandates as potential 

solutions for increasing e-filing and provide a set of issues for consideration. As explored 

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 partner 

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 Section

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 specific 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 States 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 States that are currently implementing 

mandate strategies509.

 

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 

State 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-file Study Phase 1 Report 144 Mandate-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 in Electronic Filing of State Returns

Electronic filing volumes for State individual returns have grown alongside Federal efiling 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, in 2005, 11 States received more than half their returns electronically and 

two, Iowa and Minnesota, received more than 60% electronically. Four out of five States 

with the highest proportion of electronically filed returns have an electronic filing 

mandate in place — Minnesota, Wisconsin, California, and Michigan.510

According to the FTA, in the 2004, 2005, and 2006 filing seasons, States that were first 

implementing a mandate experienced a higher rate of electronic filing growth than 

other States. FTA calculations (based on data submitted by the States) indicated that on 

 

510 Duncan, H. T. (2006) Preparing Your Taxes: How Costly Is It? p. 4

In 2005, four 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, see Chapter 7.
Advancing E-file Study Phase 1 Report 145 Mandate-Based E-filing Options

average, electronic filing in States 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 States accounted for 25% of the total increase in State electronically filed

returns. This is a difference from 2005 (pre-mandate), when together these two States 

accounted for 7% of all State electronically filed returns. Vermont was the only State

without a new mandate that saw growth at a 20% rate in 2006, and many States’ 

growth rates were in the single digits.512

11.3.2 Overview of State Approaches to Mandates 

Information 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 FTA513. Although not all States 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 efiling mandate.

The Sections below present shared experiences and observations as different States 

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 States 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 collaboration, many States 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 individuals514: 

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 preparation 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 Provisions — 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 

State 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-file Study Phase 1 Report 146 Mandate-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 returns, or 

other methods defined by the State.

In addition, many States 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 following515:

Scope Considerations — States had to define which preparers were included in 

the mandate and how to handle preparers who file in more than one State. 

Excluding Low-Volume Forms — Some States have worked with partners to 

identify which forms are more cost-effective to continue to file on paper 

because they are not filed as often.

Providing E-Services — Enhanced 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 — Allowed some States 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 proceeded516. 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 States 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 questions 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 

communication are 

important tools to ensure a 

smooth transition to 

mandated electronic filing.
Advancing E-file Study Phase 1 Report 147 Mandate-Based E-filing Options

Penalties

As of 2005, only two States 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 against 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 preparers to encourage 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 lifts 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 implement 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 States to continue to set their own mandates). In this 

scenario, with no nationwide mandate policy, States would continue to set their own 

threshold levels and choose features of mandates that are most in line with the needs of 

their States.

11.4.1 Mandate Option 1: Federal Mandate on Paid 

Preparers

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 

applicable 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 prepared or 

other measures) 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 preparers filing more than 50 individual 

returns a year520. 

 

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 States 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 States before deciding on a threshold (California).

Accompanying Policies/Exceptions — An opt-out provision or waiver that 

allows taxpayers to choose to not have their preparers 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 preparers and 

respond to their 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 decrease emphasis on 

voluntary options522.

11.4.1.1 Targeted Population/Potential E-file Contribution

The overall target for paid preparer mandates is tied directly to the number of 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-Coder population)523.

In TY2006, 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 preparers and were computer 

prepared. The effect of tapping into this targeted population of preparers (V-Coders) 

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 number of preparers who prepared a certain number of 

individual returns525. 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 explained: “Sizeable volumes 

of returns prepared by tax 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 professionally prepared 

returns represent 60 percent of all returns, a preparer mandate represents the single biggest opportunity 

for the IRS to increase 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 Individual 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 (PY2006)

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, if the Federal threshold were set at 200 or more preparers (which is higher 

than the thresholds in most States), 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 electronically — yielding an 18.1% 

contribution to the 80% e-file goal, which would bring the total e-file rate to 72.6%.

It is important to note that this estimate used PY2006 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 PY2006 (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% rate of PY2006. 

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 requirement. The 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 specific threshold aimed at reaching a certain percentage 

of the non–e-filing population526. The IRS Oversight Board suggested that “broadlydefined 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 strategy527. 

The IRS Oversight Board also pointed out that “as the threshold is lowered, the 

percentage increase in tax practitioners affected is higher than that of additional e-

 

526 IRS Oversight Board (2008) Electronic Filing 2007: Annual Report to Congress p. 6 527 IRS Oversight Board (2007) Electronic Filing 2006: Annual Report to Congress p. 5

Given the changes from TY2005 to 

today, further research is needed 

to obtain a better estimate of the 

expected increase in e-filing from a 

Federal preparer mandate.

The IRS Oversight Board 

urges careful consideration 

of mandate thresholds and 

their impact on preparers. 

However, State experiences 

suggest that the disruption 

is manageable and has not 

posed a major problem in 

the State-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 mandate may affect the third party

relationship with the IRS529. 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 preparer530. 

Experience in the States, however, has suggested that with sufficient communication 

and collaboration with the preparer community, the assumed burden could be 

minimized or mitigated. In conversations with States and preparer organizations, there 

is a general sense that although some have expressed 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 States 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. Because of this effort, 

California reported limited negative response to the mandate.531

Furthermore, when considering a Federal mandate for preparers, it would be worth 

considering the effect that States with mandates may have already had on paving the 

way for preparer readiness for a Federal preparer mandate — not just because States 

have built sustaining relationships with the preparer community, but also because 

preparers who have already converted their practices to support electronic filing to 

meet State mandates will be well-positioned to support a similar Federal e-file effort.

Effect of State Preparer Mandates on Federal E-file Volumes

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 States mandate preparers to electronically file, the result is not 

only an increase in the State electronic filing volumes, but also an increase in Federal efile volumes. 

This Section considers the possible effect of not implementing a Federal mandate but 

continuing to encourage State mandate programs, particularly in States that participate 

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 States to 

implement mandate programs, but such incentives could potentially be explored if 

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 States 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 State 

and Federal electronic filing 

rates and a reduction of VCoding at the Federal level.
Advancing E-file Study Phase 1 Report 151 Mandate-Based E-filing Options

result of States’ mandate policies. For example, the FTA calls attention to States such as 

Michigan, Oklahoma, and 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 States that are not 

part of the Fed/State program, such as Minnesota and California, the FTA noted, “the 

infrastructure for 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 States using the Fed/State model, preparers will need to sign up for and 

use IRS e-file to meet State mandates.

IRS analysis shows that the Federal electronic filing rates in States with mandates 

(grouped together as a whole) increased from 2000 to 2005, and in 2005, the rates for 

States with mandates exceeded electronic filing rates for the total population. Similarly, 

the percentages of paid preparers filing V-Coded returns have gone down in that time 

period and dropped below the rate of the overall filing population in 2004 and 2005.534

In the same IRS report, case studies for Wisconsin and Massachusetts showed increased 

e-filed and decreased V-Coded returns among paid preparers in those States. Both 

States had a threshold of 200 returns for the first year of implementation and reduced 

the threshold to 100 in the second year. Connecticut showed 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 States from TY2000 to TY2005, States 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 States as a whole. These numbers imply that 

continued strong growth in e-filing may require the adoption of additional 

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 States 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 States

536. 

In a 2006 report, the GAO compared the growth of electronic filing rates in Federal

returns for nine States that had mandates in effect before 2006 with national averages 

(not including States that implemented mandates in 2007)537. As shown in Table 11-3, 

the GAO found that “in eight of these nine States the growth rate of electronically filed 

Federal returns increased the year the mandate was implemented”

538. Other findings 

include the following539:

 

532 Federation of Tax Administrators (2005) Electronic Filing Mandates: Lessons Learned p. 2 533 Federation of Tax Administrators (2005) Electronic Filing 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 Additional 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 States had electronic filing increases of between 7% and 48%. 

The electronic filing growth rates in four other States more than doubled,

including California, whose growth rate nearly tripled.

In all but one of these cases, the growth in electronic filing rates for States in 

the year that the State mandates were implemented was higher than the 

nationwide electronic filing growth rate in that same year.

Table 11-3 E-filing Growth in States with Mandates Compared with US Averages (as of 2006)

State Tax Year

Mandate 

Implemented

E-filing Rate 

Before

Mandate

E-filing Rate 

After 

Mandate

Change in Efiling RateNational 

Change in Efiling 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 the 2006 report, the GAO reported that IRS officials attributed 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 filing”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 States, 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 States’

experience, which led some States to consider ERO certification impacts 

brought about by mandates, it may also be a topic for further research.

 

540 Government Accountability Office (2006) Tax Administration: Most Filing Season Services Continue to 

Improve, but Opportunities Exist for Additional Savings p. 14 541 Beach, C. (2008) Interview of Director, Filing Methods Bureau, California 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 selfprepared 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 stakeholders 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

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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 

administrations’ 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 implications 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 contributions 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 solutions, 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 parties.

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? While 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: IRSProvided 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 Individual 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 taxpayer self-prepares, 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 

electronic filing of 1040, 1040A, or 1040EZ returns and most associated forms and 

schedules through an e-file transmitter. The transmitter formats the returns in the IRS 

proprietary format and bundles them into submission files (batches of returns) for 

electronic transmission to the IRS. The role of the transmitter is unseen by most filers 

who simply press “send” to e-file their returns 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 paperless 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 the 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, see 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, telecommunications structure, security, and data 

management support for submission of individual returns to the IRS e-file program. 

Business returns are handled through a separate system. Submission files are received 

at the IRS by secured methods (i.e., dedicated telecommunications lines or secured 

transmission protocol over the Internet).548

Usually within 2 business days, the 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 resubmitted 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 parties may and often 

do charge taxpayers to e-file to cover their operating expenses and desired profit. There 

is currently no regulation of those charges. Depending 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 software. 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 MeF program has expanded to include tax-exempt organizations and 

partnerships.550

For these types of returns, businesses originate their electronic submissions to MeF by

doing one of the following551:

Electronically sending returns to a transmitter that, in turn, sends the returns

to the IRS.

Directly transmitting 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 File 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, see Section 

5.6.

For more information about error 

checking and acknowledgments, 

see Section 10.2.2.3.

For more information about e-file

cost structures and bundling, see 

Section 5.7.
Advancing E-file Study Phase 1 Report 158 Internet-Based E-filing Options

Transmitters may use 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 registered transmitters who send large complex returns.552

MeF improves on the electronic acknowledgment capability of EMS. Each return in a 

transmission is either accepted or rejected for specific reasons. Similar to e-file, returns 

that meet the processing criteria are considered “filed” as soon as they are accepted. 

Rejected returns that fail to meet processing criteria are considered not filed. MeF, 

however, provides acknowledgments in minutes versus hours or days.553

The IRS recently announced that it will expand 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 electronically. 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 provide 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 States’ 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, complexity, political climate, cost, overall usage) should be taken 

into account. In general, the States use two Internet-based alternatives described by the 

FTA 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 States, but some States also 

participate in the Fed/State program).

12.3.1 Direct Internet Filing (I-File)

State direct I-File programs offer 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 State 

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 all States 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 ability 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 States as a free electronic filing method. The States 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 IFile programs, Table 12-1 provides an overview of the system features for eight State

solutions sampled by the GAO554.

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 

publications 

Ability to save and return to form 

Auto populate some fields 

Status checks 

Must have filed 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 names 

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 

States offering free I-File as of 

2006.
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 States reviewed by GAO in 2006, usage was generally low, 

ranging from less than 1% to just over 5% of total filers, as shown in Table 12-2555. For 

information about States not reviewed by GAO, additional research 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 States profiled by GAO had at least some 

restrictions on eligibility, including income, residency, number of deductions, and 

previous filings. According to conversations with one State, allowing first time filers to IFile could increase usage volumes, though that could negatively affect fraud detection 

efforts556. 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 

Filers

I-File as % of 

Eligible Filers

I-File as % of 

Total Filers

California 111,436 6,400,000 14,600,000 1.7% 0.8%

D.C. 9,285 n/a 300,000 n/a 3.2%

Indiana 83,422 n/a 3,000,000 n/a 2.7%

Kansas 50,999 n/a 1,400,000 n/a 3.6%

Maryland 115,678 n/a 2,800,000 n/a 4.2%

Pennsylvania 300,552 1,500,000 5,600,000 20.0% 5.3%

South Carolina 29,241 1,500,000 2,000,000 2.0% 1.4%

Utah 25,267 n/a 1,000,000 n/a 2.5%

Notes: n/a indicates not applicable.

Other Considerations

I-File solutions require that States 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 States that have implemented I-File solutions are mixed. The GAO Report 

on Taxpayer Service highlighted the challenge of obtaining accurate cost information 

from the States and the IRS to determine the true cost of paper and electronically filed

returns:

Although incomplete, the available data combined with the decision by three 

States to discontinue their systems raise the possibility that in at least some 

States the benefits were less than costs. According to officials in two of the 

three States that discontinued 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 Revenue 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, 

Arkansas’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 processed557.

Although I-File is a State mechanism for offering free electronic filing, depending on the 

service offered, doing so may prevent the States 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 Service: State Experiences Indicate IRS Would Face 

Challenges Developing an Internet Filing System with Net Benefits pp. 25-26
Advancing E-file Study Phase 1 Report 162 Internet-Based E-filing Options

12.3.2 Online Filing Programs

State online filing programs are similar to IRS e-file for individuals 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 the returns.

Seven States (California, Illinois, Maine, Massachusetts, Minnesota, Ohio, and Utah) 

offered the independent filing alternative for returns prepared by preparers or 

taxpayers and originated to transmitters in 2007558. Three of these States (Illinois, Ohio, 

and Utah) also leveraged 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 States may be eligible for participation in the Statelevel 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; discusses 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 third parties to the Federal government, each option is 

reviewed in the context of the historical relationship between the IRS and third parties 

and its potential effect on changing the third party model described in Chapter 2. In 

most cases, the options do not 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., types 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 — Use of third party tax preparation software with the option to efile directly to the IRS at no cost (the preparation method remains commercial). 

3. IRS-Provided Preparation and Filing — Use of IRS-provided tax preparation 

software and e-filing 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 (government-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 Tax
Advancing E-file Study Phase 1 Report 163 Internet-Based E-filing Options

important to understand that each of these variations differ in the level of direct IRS 

involvement in the implementation and operation of the systems. 

Scope of Options Considered

A fourth option category 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 building 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, Increased 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 report559.

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 transition to MeF. Figure 12-2 illustrates how Internet Option 1 

operates and how it is identical from a Federal filing perspective to the current system 

shown in Figure 12-1.

Figure 12-2 Internet Option 1: Enhance IRS Systems

 

559 See e.g., Department of the Treasury (2003) Report 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 filing 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 

following560:

Faster Confirmation of Return Acceptance or Rejection — MeF returns are 

processed as they are received instead of being delayed in 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 rejected 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 community, specifically:

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 the combined size of these populations is not large; however, the actual 

number is unclear. Further research is required to better understand these preparer 

populations and whether these enhancements would “move the dial” to a significant 

extent.

12.4.1.2 Considerations

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 into

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 information 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 efiling 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 commercial packages are currently IRS-authorized) and file their returns, at no 

charge, over the Internet directly to the IRS.

Figure 12-3 illustrates how Internet Option 2 operates compared with the current 

system shown in Figure 12-1. 

Figure 12-3 Internet Option 2: Direct Filing

Similar to the current system, preparation software support remains the responsibility 

of the software vendors, and e-filers are responsible for access to the Internet. 

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 (VCoders), primarily because they object to the cost, are concerned about sharing 

 

561 Electronic Tax Administration Advisory Committee (2007) Annual Report to Congress p. 9
Advancing 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 Internet 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 

return 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 transmitter 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 preparation 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 efiling 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 IRS–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 transmitters 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 formatting, 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 IRS 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 benefit of near real-time response for 

acknowledgments because returns 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 variations 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 program, 

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 class of 

software to accommodate their business needs.

Figure 12-4 illustrates how Internet Options 3a 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 features 

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 Internet 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 referred 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 assistance 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, handwritten or typed returns comprised about 26% of paper returns (11% of 

all returns)562. Likely motivators for those filing this kind of return include comfort with 

paper, cost, objection 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-based 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 filland-print returns563. Likely motivators for the targeted population to adopt this option

are cost 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 Option 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 user support for the forms’ functions, calculations, and supporting material. 

This 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 Statistics 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) Taxpayer Service: State Experiences Indicate IRS Would Face 

Challenges Developing an Internet Filing System with Net Benefits p. 30
Advancing E-file Study Phase 1 Report 169 Internet-Based E-filing Options

Effect on IRS–Third Party Relationship

Evaluating 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, the 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 parties 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, 21 States offered I-File, allowing taxpayers to 

prepare and file their returns directly on the State tax agencies’ Internet web sites. 

Three States have since discontinued their I-File systems due to low usage and costs that 

exceeded the benefits provided. The GAO report also discussed 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 the 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 service. 

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 of 

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, the 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 prepare and transmit their returns. The application includes a guidedinterview–like software program — an interactive interface that simplifies the 

preparation process, similar to most current commercial products — accessed online or 

installed locally on the taxpayer’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 Internet directly with the IRS. 

 

566 Government Accountability Office (2007) Taxpayer Service: State Experiences Indicate IRS Would Face 

Challenges Developing an Internet Filing System with Net Benefits p. 51 567 Litan, R. E. et al. (2008) The Benefits and Costs of I-File p. 50
Advancing 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 concerned 

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 portion of the 38 million VCoded returns (30% of all returns filed) shown in Figure 4-1.

More research is required to determine whether this target population can be 

estimated 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-choice 

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 prefer free 

government-provided software over commercial alternatives?

The current e-file program offers free return preparation software services, using guided 

interviews, 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 similar challenges 

attracting users.

This option could force taxpayers to migrate to the IRS-provided solution against their 

wishes if commercial tax return preparation vendors leave 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 intermediaries 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 affect 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 offering.

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 its 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, the IRS would incur costs to provide these 

capabilities that would ultimately be borne by the taxpayer.

The IRS entering 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

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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, 

without access to a computer or the Internet, cannot take advantage of other

e-filing 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 Telefile efforts, and an introduction to a 

forward-looking phone-based e-filing option. Themes identified in this 

Chapter include the following:

The 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. The 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 keypad/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 needs of taxpayers with relatively simple returns. A phonebased 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 

channel besides the Internet.
Advancing E-file Study Phase 1 Report 174 Phone-Based E-filing Options

discontinued phone-based e-filing program — had Internet access, and 84% of those 

had access in their homes568.

13.2 History and Background

Between 1997 and 2005, the IRS ran the telephone-based e-filing program Telefile,

which allowed a set of pre-qualified 1040EZ filers to file by phone569. 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 percentage of 

Telefile users who reverted to paper filing570. 

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 system. Eligible taxpayers also received an instruction 

booklet as part of their tax packages. 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 taxpayers would use the service571. 

The Telefile program included a joint Federal/State capability such as the Fed/State 

program for Internet-based e-filing. Seven States participated in this portion of the 

program: Georgia, Indiana, Kentucky, Maryland, Missouri, Oklahoma, and West 

Virginia572. 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 same period, 45.9% of taxpayers eligible for Telefile used the 

program574. 

However, the number of taxpayers using Telefile declined over the life of the program 

from 6 million in 1998 to 3.3 million in 2005575. In March 2003, TIGTA issued a report on 

Telefile addressing the eligibility limitations of the program and suggesting possible 

expansions576. 

In terminating the program in April 2005, the IRS cited 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 Increased 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 maintain 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 program578. 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 inaccurate579. While TIGTA’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

point580. As shown in Figure 13-1, 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) Internal 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 Honorable 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 TeleFile 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 Taxpayers 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. 17
Advancing 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 returns582.

Regardless of the actual cost savings from discontinuing the Telefile program, 

the result, in effect, was to shift those costs from the IRS to taxpayers because 

former Telefile users paid almost $24 million to file their tax returns in 2006583.

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 processing 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 million585.

As shown in Figure 13-2, a 2007 TIGTA study found that 52% of former Telefile users efiled by other methods, including 32% who used Free File586.

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 Cost 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 TeleFile Increased the Cost and 

Burden of Filing a Tax Return for Many Taxpayers p. 7
Advancing E-file Study Phase 1 Report 177 Phone-Based E-filing Options

13.3 State Experiences

According to TIGTA, 31 States had Telefile programs in 2005. Nine States eliminated 

their programs prior to the Federal Telefile discontinuation, and 12 more discontinued 

their programs 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 States that participated in the joint Federal/State Telefile 

program discontinued support for Telefile when the IRS program was discontinued.587

As of May 2008, only eight States operated a Telefile program, 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 Telefile589. One reason for broader eligibility may be that State returns are 

generally simpler than Federal.

Other ways in which State programs differ from the discontinued Federal Telefile 

program and offer broader eligibility include the following590: 

Most of the State Telefile programs do not require pre-qualification. 

Connecticut, Nebraska, and Ohio are exceptions. 

In several States, 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 States’ experiences with Telefile. Understanding 

the elements that contribute to States’ success or failure with their Telefile programs

could offer insights to the IRS for developing any future phone filing option. 

13.4 Phone-Based E-filing Options

Technology and its users have changed since the days of Federal Telefile. In its March 

2008 report, the Pew Internet & American Life Project noted the pace of change since 

2002, which indicates “a sharp reversal in how people viewed these technologies”591.

Mobile phone usage has continued to grow, and people are increasingly connecting to 

the Internet wirelessly. Mobile phone usage in the United States has reached 255 

million users592. 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 Taxpayers p. 14 588 Duncan, H. T. (2008) State Electronic Filing: Recent Performance p. 7 589 Colorado (2008) Colorado Department of Revenue: Telefile 590 Massachusetts (2008) Massachusetts Department of Revenue: Telefile 591 Pew Internet & American Life Project (2008) 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, emailing, 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 the 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 $25,000, 59% did not have computers and 69.2% did 

not have Internet access595. 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 option. 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 limitations as TIGTA and others have pointed out596.

Interestingly, research shows that the population less likely to have a computer and 

Internet 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 populations598. As noted previously, groups that have 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) Data 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 and 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 balances

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 eligibility 

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 efiling 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 option599. 

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 wellsuited to simple self-prepared returns. 

Historically, a key challenge for the success of Telefile was the limited pool of eligible 

users. Figure 13-1 shows the decrease in eligible Telefile 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, allowing first-time filers and 

those whose addresses 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 declare their dependents600. 

In addition to increasing the e-filing 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 keypad 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 1040A (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 returns601.

Other organizations have had some success using phone-based technology as a channel 

for financial transactions. Western Union’s recent announcement 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 Hispanic Institute602. Similarly, 

a successful company in South Africa is aiming 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 encryption — to securely

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 phonebased 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-based 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 

Africa
Advancing 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 methods 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 meeting 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. This Chapter defines ways of automating paper return 

processing to realize efficiencies (e.g., 2D barcodes, Character 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 paperbased 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 achieving 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 dollars 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 [2D] barcodes and Character 

Recognition [CR]) do not qualify as electronic 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 regarding 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 each 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-filing604. 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 maintenance605. It is 88% less expensive per return to process 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 capabilities 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 Character 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 data 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 

looking up additional information. However, the development 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 looking up the full information. 

Figure 14-1 Example of 1D Barcode (UPC-12 Type)

 

604 IRS (2007) Calendar Year Return Projections 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 does not require end users to use specialized computer applications or software to 

prepare their documents. CR involves the application of specialized algorithms to 

recognize the shapes and correlate them with letters and words607. 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 edges, the lines 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 or 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 Character Recognition [ICR], 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 processing 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 handwriting; 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 example of a robust 

CR implementation.

Character Recognition does 

not require end users to 

employ additional 

specialized technology to 

prepare their documents.
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 into the following five centers608:

Austin 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 keyenter taxpayer returns and payment data into a tax return database609. 

Currently, the IRS processes the 1040 family of returns that are filed on paper using the 

Integrated 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 due 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 barcodes 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 following611:

Control work on Form 5546 (Examination Return Charge-Out Sheet).

Control Automated Underreporter (AUR) work.

Control the inventory of computer equipment.

Route envelopes faster.

Process Schedule K-1s (business forms) that are voluntarily barcoded.

The IRS attempted a voluntary 2D barcode program on K-1 forms (business returns), but 

without a mandate, only 3.2% of the more than 820,000 forms have acceptable 

barcodes. The number of accepted 2D barcoded K-1s fell this year because two software 

companies that could program the barcode lost their 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 provider612.) The Service Center Recognition/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 (Austin, 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 meeting its 80% e-file goal, residual 

paper returns exist. Even 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 replacing 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 accomplish 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 Volume — Although electronic filing has been steadily increasing, more 

than 52 million individual taxpayers filed paper returns in 2006614. The IRS 

projects that individual paper returns will exceed 38 million through 2014, and 

even 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 approximately $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-completed 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 retirement of the 

legacy Generalized Mainline Framework (GMF).

 

612 IRS (2007) Become 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, see 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 documents, 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 States have 

chosen to pursue 2D barcoding over “high-speed imaging with optical character 

recognition options618,” but data is not readily available on which States have used CR to 

process returns, and additional research is needed in this area.

According to the FTA, while States recognize that barcodes are not as efficient as 

electronic filing, they have reported the following high-level benefits from their barcode 

programs619:

Reduction in errors and rework that comes from manual data 

entry/transcription.

Decrease in time and effort 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 States”

620. Similarly, States reported that they 

have “worked with the software developer community to develop standards for 

barcode printing to minimize developer costs”

621.

Conversations with States 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 largevolume preparers, New York described its 2D pilot as a limited tactical effort, but it is 

not part of its long-term strategy. 2D barcoding was initially imposed as part of a 

mandate on preparers, and tax software companies provided systems that print 

barcodes on a separate page of the return. In the future, the State intends to use CR to 

capture and export paper return data as XML files to be consistent with electronically 

filed returns.622

 

617 IRS (2008) Modernized Submission Processing (Msp): Submission Processing 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, Enterprise Services Division, New York State 

Department of Taxation & Finance

Further research is needed to 

determine States’ use of CR and 

long-term plans for CR and 2D 

barcodes.

33 States have implemented 

2D barcodes for V-Coded 

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, all 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 compliance 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 States624. 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. Regardless, 

additional 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 Barcoded 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 Bureau, California Franchise Tax Board 624 IRS (2006) States’ Experience with Tax Return Bar Code Technology p. Appendix 3
Advancing E-file Study Phase 1 Report 188 Paper-Based Filing Options

State Total 

Returns

2D Barcoded 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%

Notes: FTA data suggests that percentages have gone up in many States (e.g., Alabama, Delaware, Indiana, 

Missouri, North Dakota, and Massachusetts), and discussions with the States have shown that some, like 

California, use Character Recognition instead of 2D barcodes.

As shown in Table 14-1, as of 2005, 33 States used 2D barcodes. Thus, the capability for 

generating barcodes exists in some form in current tax preparation software. A number 

of these States used barcodes as part of their opt-out provisions for their mandates on 

preparers to electronically file; preparers who elected not to electronically file had to 

barcode their returns. 

14.4 Paper-Based Options 

There are two major option categories for addressing 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. In fact, multiple options 

or a hybrid — such as Msp — may be required. 

The TY2006 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 Study
Advancing E-file Study Phase 1 Report 189 Paper-Based Filing Options

Table 14-2 Percentage 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-Coded) 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) 0.03% 0.01%

Of the preparation methods 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 not 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 technology 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 specifically designed for this purpose by the IRS and/or a 

third party. 

Not only does 2D barcoding reduce front-end processing costs, it also allows the IRS to 

establish a unified system architecture with full electronic access to complete tax return 

data across the IRS. However, taxpayers and preparers must use specialized computer 

applications that will generate a barcode on the printed return. There 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 filland-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 considered 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 VCoded returns and impose a 

stakeholder burden.

For more information on the 

difficulty 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 actually 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 effect on efiling 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 estimated 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 2006

filing season, January through April 2006, approximately 19.6 million individual tax 

return forms were downloaded from the IRS web site626. 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-printed 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 preparers (relatively few 

use fill-and-print forms), though the IRS would need to redesign the 1040 forms to 

accommodate the 2D barcode.

However, the increasing trend toward use of preparers indicates that the potential 

population that would adopt this option is significantly less than the population that 

would adopt the option below, which 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 considering the average read rate for 2D barcodes (assume 95% 

for this calculation), which yields 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 characters, 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 barcodes, 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 illustrate 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, writing, 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 and decoding it.

In a 2006 survey, respondents reported the first pass accuracy rates for 2D barcodes and 

CR, as shown in Table 14-4628.

 

627 California (2004) Proposed Process: Implement New 2D Barcode Format for Scannable Returns; 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-90s. 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 characters. 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 dramatically.

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. Barcodebased 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. 

Additionally, 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 

comply with specifications632. 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 through CR.

 

629 Breithaupt, M. (2001) The 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

Unlike 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 operations 

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 Option 2 

does not directly contribute to the 80% e-file goal. 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-nothing 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, stained, marked 

up) return, CR provides an extract, even at low confidence, whereas 2D barcodes 

2D barcoding requires 

specialized technology for 

processing.

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 more information about 

accuracy and the comparison 

between CR and 2D barcodes, see 

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 lessthan-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 zones 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 

forms 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 government is endorsing 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 regarding e-file. However, if filers can be 

encouraged to submit high-quality machine-printed 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 use 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-record, 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 executives 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 efile 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 1040EZ forms at a single processing center. Upon successful completion of 

the pilot, the full 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 project cost 

estimation was performed for Msp as part of the IRS Modernization Vision & Strategy 

[MV&S] technology portfolio management process and was not validated for the 

purposes of this study):

Character Recognition 

imposes a significantly lower 

stakeholder burden 

compared with 2D barcodes.

The IRS is in the planning 

stages of its Msp project, 

which will recognize 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-printed paper 

1040 family returns633.

The ability to also process 2D barcodes634.

Conversion of all paper returns into electronic “official record” images, allowing 

elimination of paper processing, filing, and archiving635.

The ability to work in tandem with MeF636.

Integration of paper return data into the MTRDB637.

Facilitation of the retirement of legacy Submission Processing and GMF 

systems638.

Improvement in customer service and compliance operations by providing 

increased access to return data639.

Retirement of legacy paper processing systems640.

An estimated $67 million per year saved in transcription, paper handling/filing, 

and system maintenance costs641.

Recovery of the entire capital investment for system development in 

approximately 1 year of full operation642.

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 Systems Modernization (BSM) funds for paper return 

processing has been difficult in recent years.

Implementing 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 (Msp) - 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 Committee

p. 5 642 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 5 643 IRS (2008) Modernized Submission Processing (Msp): Submission Processing Executive Steering Committee

p. 5
Advancing 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 

facilitate 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 

returns to exceed the costs.644

Other considerations in such an analysis 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/benefits of obtaining a 

complete data set. Such 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, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated p. 35

Further research is needed to 

define and analyze 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 advance e-file, this 

Chapter reviews possible options for consideration (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 

opportunities 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 experiences, 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 

analysis 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 options 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 briefly 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 is 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, additional examples of incentives were 

suggested by stakeholders during research for this report and are a subset of Incentive 

Option 5: Develop New Benefits. These options have not been prioritized or validated 

for applicability within the IRS environment. To be seriously considered, additional 

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 

Options

15.2.3 Research 

Opportunities for 

State and 

International 

Experiences

15.2.4 Research 

Opportunities for 

Option-Specific 

Considerations

There is room for innovation 

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 

Option 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 efiling. 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 efile. Different from Incentive Options 3 and 4, this free option 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 situations

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 file (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 among the many factors to be considered. 

15.1.1.3 Make E-signatures 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 their returns 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 electronically 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 given 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 suspended646. 

15.1.1.5 Contact Lapsed E-filers to Suggest Using It Again

A variation on Incentive Option 2 (Targeted Marketing of E-file), this option specifically 

refers to contacting lapsed e-filers 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 Program, see Section 10.4.4.

For more information about 

current acknowledgments (or 

acknowledgment as a motivating 

factor), see 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

holdouts who use the walk-in centers. 

15.1.1.8 Use New Technologies

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 these options are not 

necessarily under the control of the Federal government, they are mentioned below to 

acknowledge their potential to increase e-filing.

15.1.2.1 Encourage Commercial Businesses to Provide E-filing

Products for Free as an Incentive for Doing Business 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 firms, providing direct 

assistance to employees, and even establishing a temporary, dedicated area with 

computers for completing taxes. 

For more information about 

extending the return deadline, see 

Section 10.4.5.

Third party organizations 

can offer products or 

services that provide direct 

or indirect incentives to efile.
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 would 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 populations/estimated contributions

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 described 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 

Motivators

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 

adoption 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 Motivators

ID# Reference Research 

Opportunity

Description

1.1 Chapter 4 Updated data on 

taxpayer and 

preparer

perceptions

More current surveys and interviews 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

Directly observing taxpayer and preparer behavior (as 

opposed to relying on self-reported data) should 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 research 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 both the perception and 

reality of potentially increased audit risk from e-filing.

1.5 Chapters 

5 and 10

Acknowledgments 

as a benefit

More research is needed on the awareness about and

importance of acknowledgments as an e-file benefit.

1.6 Chapters 

5, 6, and 10

Holdouts’ 

perceptions of 

marketed e-file

benefits

IRS identifies and markets benefits associated with e-file

to taxpayers and preparers. More research is needed 

about the perception and effect of these benefits on efile holdouts and about other potential messages that 

may better resonate with holdouts.

1.7 Chapter 6 Business cost of efiling

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 research to refine the 

target population for any given option. For many of the options, this report provides 

narrative-based formulas for identifying their target populations; to the fullest extent 

possible in the next phase, these formulas will need to be used to calculate the options’

estimated numerical contributions toward the 80% e-file goal. These calculations 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 

marketing 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 eligible 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 affected 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

options

More 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 

prefer forms and/or use downloadable PDFs; and filers 

who prefer interview-based tax software.

2.5 Chapter 13 Effect of paperbased filing options 

on an advancing efile strategy

Discussions with stakeholders suggest the perception

that paper-based filing options 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 phonebased e-file options

The target population for this option depends 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

increase e-filing and for reaching target populations.
Advancing E-file Study Phase 1 Report 203 Other Options and Research Opportunities

15.2.3 Research Opportunities 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 considered 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 Experiences

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 

United States, 

United Kingdom, 

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), additional 

research is required.

3.4 Chapter 10 Incentives employed 

at the State level 

With the exception of a few examples (e.g., South 

Carolina has a deadline extension for electronic filers), 

no research on State experiences 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 Federal e-file mandate on preparers 

may affect State electronic filing programs or provide 

an opportunity for threshold consistency.

3.6 Chapter 12 State experiences 

with I-File

The GAO surveyed 8 States with I-File. For information 

on other States with I-File, research is needed.

3.7 Chapter 13 Character 

Recognition 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

There is limited information available 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 Offering e-services 

to draw new users 

to e-file

More research is needed to determine how other eservices influence filers’ behavior (i.e., through making 

them comfortable with online transactions).

4.2 Chapter 10 Historical direct 

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 EROs.

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:

Total customer contact volume during tax season 

or year by channel (e.g., phone, e-mail, chat, web)

Cost per contact by channel

Time/effort per contact by channel 

Disposition (was contact topic IRS-appropriate or 

IRS-inappropriate [i.e., redirectable to software 

vendor or paid preparer])

Other (e.g., how customer contact data is used for 

product development)

Foreign countries, States, 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 Filland-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 technologies 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 extends 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 Kurdziel, 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, Cassandra 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 McCullough, 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 Firestone, contributors; Susan Gogos, Deanna West, 

Josephine Cavallo, and Mary Przewlocki, researchers; Raye Anne Harris, Eric Etter, and 

Rene Young, fact checkers/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

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Advancing E-file Study Phase 1 Report 207 Acronyms

Acronyms

Acronym Expansion

1D One-Dimensional [as in 1D barcode]

2D Two-Dimensional [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 Systems 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 Canada 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 Originator
Advancing 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-File

MICR Magnetic Ink Character Recognition

MITS Modernization Information and Technology Services

MP3 Modernized Paper Pipeline Processing

Msp Modernized Submission Processing
Advancing 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 filing 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 As You Earn

PAYG Pay as you go

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 Taxpayer Assistance Center
Advancing 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 Language
Advancing E-file Study Phase 1 Report 211 Glossary

Glossary

Term Definition

1D Barcode A machine-readable unique identifier encoded in a one-dimensional 

black and white bar pattern of varying width.

2D Barcode 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-produced 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 Revenue 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 Public 

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 well 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 (reads) 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, enrolled 

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-employed 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 solutions 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 State electronic revenue 

communities.

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, soundness, 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 (eTax) (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. Acknowledgment 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 

clients’ returns at one time over the Internet. Acknowledgment 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 digitally (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 State tax administration by 

providing services to State 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 

preparer 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 return to the 

intended party electronically or by printing the form as completed by 

the user.

Filing by Phone

(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 

Registered Tax Agent

(Australia)

An 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 Millennial 

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 performance 

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

Preparers 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 Reports 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 (nonwage dividend income), and 1098 (mortgage interest).

Innovators 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 transmitter 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 with 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 electronically.

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 Association of 

Enrolled Agents (NAEA)

Association of independent, licensed tax professionals called enrolled 

agents dedicated to helping its members maintain the highest level of 

knowledge, skills and professionalism in all areas of taxation.

National Association 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) Electronic 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 

preparation 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 include 

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 whatever 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 signed 

paper return, or other methods defined by the State.

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 used 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, 

commercial 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 late filed returns for other 

tax years (also known as 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 Federal and/or State refunds.

Return Any 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 return 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 applications 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), 

and 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 returns), Form 1065 (partnership 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 information 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. 

TELEFILE (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

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Advancing E-file Study Phase 1 Report 219 References

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END OF REPORT.