United States Government Accountability Office

GAO Report to the Subcommittee on 

Financial Services and General 

Government, Committee on 

Appropriations, U.S. Senate 

E-FILING TAX 

RETURNS 

Penalty Authority and 

Digitizing More Paper 

Return Data Could 

Increase Benefits 

October 2011 

GAO-12-33 
 United States Government Accountability Office 

Highlights of GAO-12-33, a report to the 

Subcommittee on Financial Services and 

General Government, Committee on 

Appropriations, U.S. Senate 

October 2011 

E-FILING TAX RETURNS 

Penalty Authority and Digitizing More Paper Return 

Data Could Increase Benefits

Why GAO Did This Study 

The Internal Revenue Service’s (IRS) 

goal is to receive 80 percent of all 

major types of tax returns electronically 

by 2012. Legislation passed in 

November 2009 supports the 80 

percent goal for individual income tax 

returns by requiring tax return 

preparers who file more than 10 

individual returns per year to file them 

electronically, or e-file. 

GAO was asked to review IRS’s 

implementation of this e-file mandate. 

Specifically, GAO (1) described e-file 

rates and preparers’ experiences 

implementing the mandate, (2) 

assessed IRS’s plans to enforce the 

mandate, (3) assessed IRS’s analysis 

of options for digitizing more data from 

paper returns, and (4) determined 

whether there are any tax forms IRS 

cannot accept electronically and 

assessed IRS’s plans for adding them 

to the e-file system. To conduct these 

analyses, GAO reviewed IRS 

processing data and e-file planning 

documents, and interviewed IRS 

officials and 26 members of national 

preparer organizations. 

What GAO Recommends 

Congress should consider amending 

the Internal Revenue Code (IRC) to 

provide IRS with penalty authority for 

preparer noncompliance with the 

mandate. GAO also recommends, 

among other things, that IRS conduct 

analyses on the costs and benefits of 

implementing bar coding and additional 

transcription and create a time line and 

list of forms to be added to the e-file 

system. IRS agreed with the 

recommendations. 

What GAO Found 

In 2011, 79 percent of all individual tax returns were e-filed, a noticeable increase 

over prior years. Both preparer and self-prepared e-file rates increased, which 

IRS officials attributed to different factors. They said the e-file mandate was one 

key factor in the growth of preparer e-filing. Preparers GAO interviewed who 

were new to e-filing said they experienced increased costs and administrative 

burdens due to the mandate. Several preparers who had been e-filing prior to the 

mandate said they experienced some of these same problems when they first efiled, but they now find that e-filing helps their business—for example, by 

reducing the time needed to file returns. 

E-file Rates for Preparers and Self-Prepared, Calendar Years 2006 to 2011 

Preparer Self-prepared

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011

Percent

Source: IRS's Individual Return Transaction File data.

Calendar year

IRS e-file goal: 80%

89%

71%

IRS’s plans to identify preparers who are not complying with the mandate are not 

fully developed because IRS does not know the extent of noncompliance and it 

may be low. Nonetheless, officials stated some noncompliance likely exists and 

may increase in 2012 when the mandate applies to more preparers. Regardless 

of the extent, IRS does not have authority under the IRC to assess penalties on 

preparers who fail to comply. IRS may be able to impose sanctions under 

Department of Treasury regulations that govern practice before IRS. However, 

the process is costly and the penalties, which could include suspension of 

practice, may be harsher than needed. 

IRS is considering pursuing two options to digitize more data—bar coding and 

additional transcription. IRS does not transcribe all lines from paper returns. 

IRS’s policy is to post the same information from electronic and paper returns to 

its databases, so that similar paper and electronic returns have equal chances of 

being audited. IRS has not analyzed the costs and benefits of these options, 

which could support informed funding decisions. 

Some forms cannot be e-filed, including two relatively high-volume forms for 

amended returns and nonresident aliens. IRS has not developed a complete list 

of forms that cannot currently be e-filed nor does it have a time line for adding 

them to the e-file system. Without adding forms such as these to the system, IRS 

will limit e-filing’s growth potential. 

View GAO-12-33. For more information, 

contact James R. White, (202) 512-9110, 

WhiteJ@gao.gov. 
Page i GAO-12-33 

Contents 

Letter 1 

Background 3

Individual E-filing Rate Approaches 80 Percent Goal After First 

Year of Mandate, but Some Taxpayers Still Choose to File on 

Paper 7

IRS Is Developing Plans to Deal with Noncompliant Preparers and 

Study Lessons Learned from E-file Mandate Implementation 11

The Benefits and Costs of Different Options for Digitizing 

Remaining Paper Returns Have Not Been Fully Analyzed 15

IRS Does Not Have a Complete List of Forms That Cannot Be 

Accepted Electronically Nor Does It Have a Time Line for 

Adding Them to the E-file System 20

Conclusions 21

Matter for Congressional Consideration 21

Recommendations for Executive Action 21

Agency Comments and Our Evaluation 22

Appendix I Scope and Methodology 24 

Appendix II Possible Changes Affecting Preparers as a Result of the E-file 

Mandate 26 

Appendix III Trends in Preparer and Self-Prepared Filing Methods 28 

Appendix IV E-file Application Processing 29 

Appendix V Calculation of Costs of Transcribing Data Lines from Paper Returns 30 

Appendix VI Comments from the Internal Revenue Service 33 

 E-Filing Tax Returns 
Appendix VII GAO Contact and Staff Acknowledgments 36

Tables 

Table 1: E-filing Rates for Major Return Types Subject to the 80 

Percent Goal, Fiscal Year 2010 3

Table 2: Estimated Average Filing Season Transcription Cost Per 

Line on High Volume Forms and Schedules 19

Table 3: Estimated Number of New E-file Applications, 2011 and 

2012 29

Figures 

Figure 1: Key Parties in Providing Tax Information and Preparing 

Returns 5

Figure 2: E-file Rates for Returns Prepared by Preparers and SelfPrepared, Calendar Years 2006 to 2011 8

Figure 3: Preparer Reasons for Paper Filing Based on 1.5 Million 

Form 8948s, “Preparer Explanation for Not Filing 

Electronically” 9

Figure 4: Preparation and Filing Methods for Preparers 27

Figure 5: Trends in Preparer and Self-prepared Filing Methods, 

Calendar Years 2006 to 2011 (percentages, with volumes 

in millions) 28

Figure 6: E-file Rates for High Volume Forms and Schedules, 

Calendar Year 2009 31

Figure 7: Frequencies of Keystroke Lengths for Different Lines to 

Transcribe 32

Page ii GAO-12-33 E-Filing Tax Returns
Abbreviations 

2-D two-dimensional 

E-file electronically file 

EFIN Electronic Filing Identification Number 

EMS Electronic Management System 

FTE full-time equivalent 

IIRAPHQ Individual Income Received and Processed - Headquarters 

IRC Internal Revenue Code 

IRS Internal Revenue Service 

MeF Modernized e-File 

OCR optical character recognition 

OPR Office of Professional Responsibility 

PDF Portable Document Format 

PTIN Preparer Tax Identification Number 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately. 

Page iii GAO-12-33 E-Filing Tax Returns
 

Page 1 GAO-12-33 

United States Government Accountability Office

Washington, DC 20548 

October 5, 2011 

The Honorable Richard J. Durbin 

Chairman 

The Honorable Jerry Moran 

Ranking Member 

Subcommittee on Financial Services and General Government 

Committee on Appropriations 

United States Senate 

The Honorable Susan Collins 

United States Senate 

Electronically filed (e-filed) tax returns have many benefits for taxpayers 

such as improved convenience, higher accuracy rates, and faster 

refunds. According to the Internal Revenue Service (IRS), taxpayers who 

e-file can expect to get a refund within 3 weeks, while taxpayers who 

paper file should expect their refund within 6 to 8 weeks. E-filed returns 

also cost less to process—about $3.50 less per return, according to IRS 

officials. IRS officials said that increased e-filing could make it possible to 

transcribe more data from paper returns, which could result in increased 

enforcement revenue and improved service to taxpayers. Nevertheless, 

tens of millions of individual tax returns are still filed on paper. If these 

remaining paper returns were e-filed, IRS could have saved about 85 

percent of its processing costs during 2010, or about $131 million. 

To support increased e-filing, Congress passed the Worker, 

Homeownership, and Business Assistance Act of 2009, which requires 

tax return preparers who expect to file more than 10 federal income tax 

returns for individuals, estates, and trusts during a calendar year to e-file, 

starting on January 1, 2011 (i.e., for tax year 2010).1

Given the potential benefits for IRS, taxpayers, and preparers, you 

requested that we review IRS’s implementation of this e-file mandate and 

IRS’s plans and capacity to maximize its use of digital data. In March 

2011, we issued an interim report that assessed IRS’s initial 

implementation of the mandate and made recommendations to simplify 

 

1

Pub. L. No.111-92, § 17, 123 Stat. 2984 (Nov. 6, 2009). 

 E-Filing Tax Returns 
 

the e-filing process for preparers and better inform the taxpayers of the 

benefits of e-filing, to which IRS agreed.2 To complete your request, in 

this report we (1) describe e-file rates, IRS processing capacity, reasons 

why preparers did not e-file, and their experiences implementing the 

mandate; (2) assess IRS’s plans to enforce the mandate and determine 

lessons learned; (3) assess IRS’s analysis of options for digitizing more 

data from paper returns; and (4) determine whether there are any tax 

forms IRS cannot accept electronically and assess IRS’s plans for adding 

them to the e-filing system. 

To accomplish our objectives, we obtained and analyzed e-file data prior 

to and during IRS’s 2011 filing season, examined preparer e-file and 

waiver applications, and interviewed 9 tax preparation software 

companies and 26 representatives from tax preparation firms to obtain 

their views about the mandate’s implementation. Companies and 

preparers were identified through referrals from industry groups. We 

reviewed IRS compliance and enforcement plans and interviewed officials 

from IRS’s Office of Professional Responsibility (OPR). We analyzed prior 

proposals to add a bar coding system to process paper returns as well as 

IRS’s priority transcription list and calculated line-by-line transcription 

costs. Finally, we reviewed IRS’s list of forms that can currently be e-filed 

and analyzed when remaining forms would be added to the e-file 

systems. For all objectives, we interviewed relevant IRS officials to collect 

information on IRS’s mandate implementation efforts and future plans to 

increase e-filing. 

We reviewed documents and interviewed IRS officials and determined 

that the data presented in our report were sufficiently reliable for our 

purposes. We conducted this performance audit from March to October 

2011, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. (See app. I for more 

information on our scope and methodology.) 

 

2

GAO, Electronic Tax Return Filing: Improvements Can Be Made Before Mandate 

Becomes Fully Implemented, GAO-11-344 (Washington, D.C.: Mar. 7, 2011). 

Page 2 GAO-12-33 E-Filing Tax Returns
 

The IRS Restructuring and Reform Act of 1998 established a goal of 

having 80 percent of individual returns filed electronically by 2007.3 IRS 

worked to promote e-filing, and although rates increased steadily between 

1998 and 2007, IRS did not meet the 80 percent goal. The IRS Oversight 

Board recommended extending the goal’s time period to 2012 and 

expanding the scope of the goal to include all major individual, business, 

and exempt organization returns.4 Table 1 shows e-filing rates by type of 

return for fiscal year 2010. Except for individual returns, those rates were 

far from the 80 percent goal. 

Background 

Table 1: E-filing Rates for Major Return Types Subject to the 80 Percent Goal, Fiscal Year 2010 

Returns in millions 

Type of return (form 

number)a

 

Total number of 

returns filed

Total number of 

returns e-filed

Percentage of returns 

e-filedb

Number of additional efiled returns required to 

reach 80 percent goalc

Individual (1040) 141.2 98.3 69.6% 14.6

Employment (940/941) 29.8 6.9 23.3 16.9

Corporate (1120) 6.8 2.2 32.5 3.2

Partnership (1065) 3.5 1.3 36.1 1.5

Fiduciary (1041) 3.1 0.9 28.2 1.6

Tax exempt (990) 1.3 0.5 40.0 0.5

Totald 185.7 110.1 59.3% 38.4

Source: GAO analysis of IRS Document 6292, Fiscal Year Return Projections for the United States 2011 through 2018 (revised June

2011). 

a

IRS’s 2012 e-file goal also includes real estate mortgage investment conduits and excise tax returns. 

These returns are small in volume and not included in this chart. 

b

Percentages are based on non-rounded return counts. 

c

While the number of returns needed to the reach the 80 percent goal may appear small in several 

cases (e.g., corporate returns), the percent needed is large. Numbers are based on non-rounded 

return counts. 

d

Numbers may not sum to totals due to rounding. 

IRS is implementing the e-file mandate in two phases. In 2011, paid 

preparers who reasonably expect to file 100 or more individual, estate, or 

 

3

Pub. L. No. 105-206, title II, § 2001, 112 Stat. 685 (July 22, 1998). 

4

IRS Oversight Board, Electronic Filing 2006: Annual Report to Congress, Feb. 28, 2007. 

The IRS Oversight Board’s responsibility is to oversee the IRS in its administration, 

management, conduct, direction, and supervision of the execution and application of the 

internal revenue laws. 

Page 3 GAO-12-33 E-Filing Tax Returns
 

trust income tax returns are required to e-file. In 2012, the e-file 

requirement will apply to paid preparers who reasonably expect to file 

more than 10 individual, estate, or trust tax returns.5 IRS decided to 

implement the mandate in two phases to give preparers time to make any 

necessary changes to their business practices and to help IRS prepare 

for the anticipated volume in e-file applications. (See app. II for possible 

business changes affecting preparers as a result of the mandate as well 

as a comparison of the paper filing and e-filing processes.) 

In recent years, taxpayers have relied heavily on third party software 

companies and preparers to get tax information and prepare their tax 

returns. Figure 1 illustrates how taxpayers avoid direct interaction with 

IRS by working with third parties. In 2010, 91 percent of all tax returns 

were prepared using tax software—some by preparers and some by 

taxpayers.6 Approximately 70 percent of all 2010 returns were e-filed 

while the remainder were printed and mailed in on paper (see more 

details of preparation and filing methods in app. III). Also, as reported in 

IRS’s Return Preparer Review, many taxpayers often rely on third parties 

to assist them with their tax law questions.7

 

5

Specified Tax Return Preparers Required to File Individual Income Tax Returns Using 

Magnetic Media (Final Regulations), 76 Fed. Reg. 17,521 (Mar. 30, 2011). The regulations 

specify that the determination of whether a preparer reasonably expects to file more than 

10 returns is made by adding together all of the individual tax returns the preparer or the 

preparer’s firm reasonably expects to prepare and file in the calendar year, except for 

returns subject to administrative exemptions and returns for which the taxpayer signs an 

opt-out statement. 

6

Calendar year data from Individual Return Transaction File. 

7

Department of the Treasury, Internal Revenue Service, Return Preparer Review, 

Publication 4832 (Rev 12-2009) (Washington, D.C.: December 2009). 

Page 4 GAO-12-33 E-Filing Tax Returns
 

Figure 1: Key Parties in Providing Tax Information and Preparing Returns 

Source: GAO analysis of IRS information.

Paid preparers

Third Parties

Taxpayers

Tax Preparation 

Service

Tax 

preparation

software

IRS accepts e-filed tax returns through two systems, the legacy Electronic 

Management System (EMS) and the new Modernized e-File (MeF) 

system. During filing season 2011, only certain forms were accepted 

through the MeF system, so not all tax returns could be processed with 

the new system. IRS plans to add all of the forms currently accepted in 

EMS to MeF and discontinue use of EMS in October 2012. IRS officials 

said that MeF provides several benefits; for example, MeF accepts or 

rejects individual tax returns faster than the EMS and provides better 

explanations for rejections.8 MeF will also allow taxpayers to attach 

Portable Document Format (PDF) files to their tax returns, which will be 

 

8

We previously recommended that IRS provide paid preparers and software providers with 

clearer descriptions of why returns are rejected. See GAO, Tax Administration: 

Opportunities Exist for IRS to Enhance Taxpayer Service and Enforcement for the 2010 

Filing Season, GAO-09-1026 (Washington, D.C.: Sept. 23, 2009). 

Page 5 GAO-12-33 E-Filing Tax Returns
 

useful in instances where taxpayers are required to submit additional 

documentation, such as settlement statements when claiming the First 

Time Homebuyer Credit. Another benefit is that MeF accepts prior year 

returns starting with tax year 2009. As we previously reported, IRS tested 

MeF during the 2010 filing season, but use was low.9 Industry 

stakeholders, who are major users of the e-filing systems, said MeF was 

unstable (i.e., the system often had down time, time-outs, slow servers, 

and delayed acknowledgments). Use of MeF increased during the 2011 

filing season and industry stakeholders reported improvements and 

positive experiences with the system. IRS officials said that plans to 

exclusively use MeF for the 2013 filing season are viable. 

E-filed tax returns provide IRS with digital information. IRS transcribes 

select data from paper returns to convert it to a digital format. IRS’s policy 

is to post the same information from electronic and paper returns to its 

databases. Only information posted to its databases is readily available 

for use in IRS’s enforcement programs and audit selections, which means 

that similar paper and electronic returns have equal chances of being 

selected for audit.10 In addition to e-filing or transcribing, IRS can 

potentially obtain digital tax data from two-dimensional (2-D) bar coding. 

A 2-D bar code is a black and white grid that encodes tax return data. Tax 

software would print bar codes on paper tax returns and high-speed 

scanners would scan them and import the data into IRS’s systems. IRS 

released a study in December 2010 that found that using 2-D bar codes 

would provide significant flexibility and generate cost savings.11 Paper 

returns that were prepared with pens or typewriters rather than software 

would still have to be transcribed. 

 

9

GAO, Tax Filing Season: IRS’s Performance Improved in Some Key Areas, but Efficiency 

Gains Are Possible in Others, GAO-11-111 (Washington, D.C.: Dec. 16, 2010). 

10Information not posted to IRS databases can be obtained from the original source 

documents (i.e., paper or e-filed return) when needed. 

11The MITRE Corporation, Advancing E-file Study Phase 2 Report: An Examination of 

Options to Increase Electronic Filing of Individual Returns. A special report sponsored by 

the Internal Revenue Service. (Dec. 15, 2010.) 

Page 6 GAO-12-33 E-Filing Tax Returns
 

Individual E-filing 

Rate Approaches 80 

Percent Goal After 

First Year of Mandate, 

but Some Taxpayers 

Still Choose to File on 

Paper 

2011 E-filed Returns Have 

Surpassed Projections and 

Were Processed Smoothly 

As of August 12, 2011, IRS processed 108 million returns electronically 

and 29 million returns on paper, for an e-filing rate of about 79 percent, 

according to IRS’s weekly processing data.12 IRS officials had estimated 

that the mandate would increase the individual e-filing rate to 75 percent 

in 2011 and 77 percent in 2012. 

The e-file rate for preparers increased this year, to about 89 percent, 

which is an increase of about 11 percentage points over last year’s rate, 

according to data as of July 2, 2011, from the Individual Return 

Transaction File.13 Although the e-file mandate did not apply to individual 

taxpayers who self-prepared their returns using commercial tax software, 

their e-file rate also increased to about 71 percent or about 7 percentage 

points over last year’s rate. (See fig. 2.) Based on IRS processing data 

and interviews with select software companies, IRS did not have any 

problems processing the 7.9 million additional returns e-filed in 2011. 

 

12Individual Income Received and Processed Headquarters (IIRAPHQ) Cumulative 

Individual Income Tax Return report for week ending Aug. 12, 2011. 

13IRS officials stated that the Individual Return Transaction File, which provides data 

broken down by preparers vs. individual taxpayers, is updated after and less frequently 

than the IIRAPHQ report. 

Page 7 GAO-12-33 E-Filing Tax Returns
 

Figure 2: E-file Rates for Returns Prepared by Preparers and Self-Prepared, 

Calendar Years 2006 to 2011 

Preparer

Self-prepared 

0

10

20

30

40

50

60

70

80

90

100

2011a 2006 2007 2008 2009 2010

Percent

Source: IRS's Individual Return Transaction File data.

Calendar year

IRS e-file goal: 80%

89%

71%

a

Calendar year 2011 data are part-year data through July 2, 2011. 

While IRS has not conducted an analysis to determine what factors 

influenced e-file growth, officials in the Return Preparer Office said that 

the mandate was one of the main contributors. According to IRS 

Forecasting Office officials, the increased e-file rate for self-prepared 

returns may have been due, in part, to IRS no longer mailing the paper 

forms and instructions to taxpayers, and to taxpayers becoming more 

comfortable with technology. 

Page 8 GAO-12-33 E-Filing Tax Returns
 

Most Preparers Who Did 

Not E-file Cited Taxpayer’s 

Choice as the Explanation 

By far the most common reason preparers cited for not e-filing was that 

the taxpayer asked to file on paper, as shown in figure 3.14 Preparers 

subject to the mandate who did not e-file a tax return were required to 

complete Form 8948, “Preparer Explanation for Not Filing Electronically,” 

and submit it with the return.15 IRS has not analyzed why taxpayers 

chose to file on paper, but it plans to do so in the future. Other reports 

about e-filing suggest some taxpayers have security concerns with efiling.16

Figure 3: Preparer Reasons for Paper Filing Based on 1.5 Million Form 8948s, 

“Preparer Explanation for Not Filing Electronically” 

Reason for not filing electronically

Paper filing (Number of Form 8948s in thousands)

Source: GAO analysis of IRS Preparer Explanation Form count data.

0 200 400 600 800 1,000 1,200 1,400

Religious exemptionf

Form not supported

by softwaree

Waiverd

Rejected returnc

Otherb

Taxpayer choicea 81.6%

 12.3%

 3.0%

 1.7%

 1.2%

 0.2%

 

14Waivers were a less common reason but they are noteworthy as well, because they 

require a separate administrative process by IRS. Preparers could apply for hardship 

waivers, which IRS could grant for bankruptcy or economic hardship in cases where 

preparers are located in a declared disaster area, and for “other” reasons. As of June 21, 

2011, IRS received and processed 938 preparer hardship waiver applications, 72 percent 

of which were approved. 

15As of June 17, 2011, IRS received and processed 1.5 million Form 8948s. 

16The MITRE Corporation, Advancing E-file Study Phase 2 Report: An Examination of 

Options to Increase Electronic Filing of Individual Returns. A special report sponsored by 

the Internal Revenue Service. (Dec. 15, 2010.) 

Page 9 GAO-12-33 E-Filing Tax Returns
 

a

The taxpayer requested that the return be filed on paper. 

b

Other can include various things, such as a foreign preparer without a Social Security number. 

 as economic hardship. 

o is a member of a recognized religious group that 

 conscientiously opposed to filing electronically. 

rs 

parers, but they provide 

some examples of preparer experiences.17

ional fee 

ere new to 

urs to 

e 

t 

e of these same problems when they 

first e-filed, but do not any longer. 

y, 

 

c

The tax return was rejected by the e-file system and the error could not be resolved. 

d

The preparer obtained a hardship waiver from IRS for instances such

e

Some e-file software packages may not support lesser-used forms. 

f

A religious exemption is allowed for a preparer wh

is

The preparers we talked with who were new to e-filing said they 

experienced increased costs and administrative burdens as a result of the 

mandate. Other preparers, who previously e-filed returns, told us that the

mandate had little effect on their practice. We interviewed 26 prepare

who were members of national preparer groups. Their views are not 

representative of the entire population of pre

E-Filing Tax Returns

Five of the 26 preparers we interviewed had not previously e-filed, and 

they provided a variety of examples of how the mandate affected them. 

One preparer noted that her software provider charged an addit

to e-file returns. Another preparer stated he hired an additional 

administrative employee to help manage requirements that w

him when e-filing, such as Form 8879, “IRS e-file Signature 

Authorization.” Several preparers told us that it took them several ho

make changes to rejected returns—a step that may not occur until 

months later, if at all, when filing a paper return. Another preparer who 

had not previously e-filed reported that she experienced a learning curv

for e-filing, but after e-filing the first 10 or so returns, the process wen

more smoothly. Several preparers who had been e-filing prior to the 

mandate said they experienced som

Some preparers who previously e-filed said that e-filing helped their 

businesses and found that the mandate did not change their operations 

greatly from the previous years. These preparers liked the convenience of 

e-filing and told us that it reduced the time needed to file returns, ensured 

the receipt of returns at IRS, and did not cost them any additional mone

te 

or Efiling Experiences 

Preparers’ Views about 

Implementing the Manda

Varied Based on Pri

17We interviewed members from three national groups: American Institute of Certified 

Public Accountants, National Association of Tax Professionals, and National Association 

of Enrolled Agents. 

Page 10 GAO-12-33 
 

but in fact saved them money. One preparer noted that he had e-filed 

some returns in previous years, but this year was the first time tha

all of his clients e-filed due to his encouragement because of the 

mandate. He said he saved money by placing PDF versions of his clien

returns on a secure network space for them 

t almost 

ts’ 

to review before he e-filed 

the return with IRS, reducing printing costs. 

. 

id that they heard about the mandate through their software 

companies. 

reparers who 

may not comply with the e-file mandate: Preparers who 

 the mandate or do not fully understand the 

mandate, sign the tax return, but intentionally choose 

date, 

Some preparers we interviewed relied heavily on software companies

One preparer noted that he attends tax law training conducted by his 

software company to get annual updates. Three of the preparers we 

interviewed noted that their software automatically generated the new 

forms needed to comply with the mandate (e.g., Form 8948), and two 

preparers sa

IRS Is Developing 

Plans to Deal w

Noncompliant 

Preparers and Study 

Lessons Learne

E-file Mandate 

ith 

d from 

 the 

h

e 

Monetary Penalties 

Implementation 

IRS Does Not Know

Extent of Preparer 

Noncompliance with t

Mandate or Have th

Authority to Issue 

IRS officials believe there are potentially three types of p

 are unaware of e 

requirements; 

 know about the 

not to e-file; or 

 complete tax returns, but do not sign the returns or submit them 

electronically. IRS refers to these preparers as “ghost preparers.” 

IRS has preliminary plans to identify each of these types of noncompliant 

preparers, but the plans are not yet fully developed. To identify preparers

who may be unaware of or deliberately noncompliant with the man

Page 11 GAO-12-33 E-Filing Tax Returns
 

IRS plans to review paper tax returns and identify ones that were 

completed by a preparer and appear eligible for e-filing but have no Fo

8948, “Preparer Explanation for Not Filing Electronically.”

rm 

r 

 mostly 

er 

urns 

 yet appear to have had assistance 

completing their returns.19

heir 

-year 

ey 

ile requirement drops to more than 10 returns (down 

from 100 in 2011). 

 

18 To furthe

identify preparers who are willfully noncompliant with the mandate, 

officials plan to review preparers’ use of Form 8948, but have not yet 

determined how they will use this information to identify noncompliant 

preparers. Officials in IRS’s Return Preparer Office also stated they plan 

to modify the existing e-file monitoring program—currently focused

on e-file security—to include compliance with the e-file mandate. 

However, officials have not yet developed the selection criteria to 

determine which preparers they will send notices to and visit, nor have 

they determined how compliance with the e-file mandate will fit into the 

scope of their visits. IRS has some plans regarding ghost preparers that

were developed to enforce new regulations for preparers. Among oth

things, IRS plans to send letters to taxpayers who submitted ret

without preparer signatures

IRS officials said that one reason they have not completed t

compliance plans is that they do not yet know the extent of 

noncompliance with the mandate. IRS officials said an extensive 

compliance strategy may not be needed unless noncompliance rates are 

high. They said that because this is the first year of the mandate’s 2

implementation period, there is not sufficient data to know whether 

noncompliance with the e-file mandate is high or will be high in the future. 

In fact, they suspect that noncompliance may be low, because e-file rates

exceeded projections in the first year of the mandate. Nonetheless, th

acknowledged that some noncompliance likely exists, and that there 

could be more next year when the mandate is fully effective and the 

threshold for the e-f

Regardless of the extent of noncompliance, IRS does not have authority 

under the Internal Revenue Code (IRC) to impose penalties on preparers 

18A return that appears eligible for e-filing could include a paper return with a preparer tax 

identification number (PTIN) but not a Form 8948, “Preparer Explanation for Not Filing 

Electronically.” Starting in 2011, tax return preparers must obtain a PTIN, and use it to 

sign all returns they prepare, paper and electronic. 26 C.F.R. § 1.6109-2. 

19IRS uses different methods to determine if taxpayers appear to have had assistance in 

preparing their returns. IRS safeguards such details of its compliance strategy. 

Page 12 GAO-12-33 E-Filing Tax Returns
 

who fail to comply with the e-file mandate, but does have some authority

to discipline preparers under the Department of Treasury’s Circular No

230.

. 

o 

lso 

g 

e 

e Department of Justice, adding to the time 

and costs of enforcement. 

ority 

a $50 penalty per return if a preparer neglects to sign a tax return or 

 

20 Circular 230 governs the practice of practitioners, including tax 

return preparers, before IRS, and provides IRS with a limited ability t

sanction preparers for failing to e-file.21 IRS’s Office of Professional 

Responsibility (OPR) administers and enforces Circular 230 standards. 

OPR officials said that they do not plan to frequently impose sanctions 

against preparers for noncompliance with the e-file mandate because the

administrative process is resource-intensive and the sanctions may a

be harsher than necessary. Prior to imposing sanctions, OPR must 

provide practitioners with notice and an opportunity for a hearing. Buildin

a case against a preparer is time-consuming, often taking longer than a 

filing season. Sanctions can include censure, suspension from practic

before IRS, or disbarment. IRS can also impose monetary sanctions 

under Circular 230, but officials said they likely would not because the 

agency does not have the authority to collect any unpaid amounts—such

cases must be referred to th

Because imposing monetary sanctions under Circular 230 is timeconsuming and costly, IRS could benefit from separate penalty auth

under the IRC. IRS already has authority under the IRC to impose 

penalties in other, similar circumstances.22 For example, IRS may impose 

20IRS has the authority under the IRC to impose and collect penalties on paid preparers 

for certain misconduct in the preparation of tax returns. See, for example, 26 U.S.C. §§ 

6694, 6695, 6701 and 6713. IRS currently cannot impose or collect penalties for a paid 

preparer’s failure to e-file. Section 330 of title 31 of the United States Code allows the 

Secretary of the Treasury, delegated to OPR, to regulate the practice of representatives of 

persons before IRS. The regulations governing practice are in 31 C.F.R., part 10, which 

was published as Circular 230. Under Circular 230, OPR may initiate disciplinary 

proceedings against these practitioners for certain incompetent or disreputable conduct. 

21Practice before IRS encompasses all matters connected with a presentation to IRS 

relating to taxpayer’s rights, privileges, or liabilities under tax laws, including preparing 

documents or filing documents with IRS. Practitioners are attorneys, certified public 

accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and as 

of August 2, 2011, registered tax return preparers. 31 C.F.R. § 10.2(a). Circular 230

includes failure to e-file in the definition of disreputable conduct for which a preparer can 

be sanctioned. 31 C.F.R. § 10.51(a)(16). 

22IRS is authorized to assess penalties on paid preparers for a variety of reasons including 

failure to (a) furnish a copy of the return to taxpayer, (b) sign the return, (c) obtain and 

include a PTIN on the return, and (d) retain copy of the return. 26 U.S.C. § 6695. 

Page 13 GAO-12-33 E-Filing Tax Returns
 

include a Preparer Tax Identification Number (PTIN) on a return.23

According to IRS’s penalty handbook, penalties exist to encourage 

voluntary compliance by supporting the standards of behavior required by 

the IRC.24 Granting IRS the authority to penalize for failing to e-file would 

build upon IRS’s existing penalty regime and provide a more 

commensurate sanction than those which can be imposed under Circular 

230. Without such penalty authority, IRS may be limited in its ability to 

deter noncompliance and enforce the e-file mandate. 

Analyzing and 

Documenting Lessons 

Learned Could Improve 

the Implementation of Any 

Future E-file Mandates 

According to the Director of the Return Preparer Office, IRS intends to 

conduct a “lessons learned” review of steps taken to implement the e-file 

mandate, but does not have a plan or schedule for doing so. As 

discussed in our previous reports, lessons learned can be useful tools for 

an organization to identify areas of improvement or document things that 

worked well.25 Areas of focus could include a review of staffing levels, 

timeliness of management decision making, and communication with the 

public. One lesson learned during the first year of the e-file mandate may 

be that additional staff helped IRS process e-file applications in a timely 

manner.26 (See app. IV for more information on the e-file application 

process.) 

Performing a lessons learned analysis on the e-file mandate for preparers 

could have future benefits because the fiscal year 2012 budget request 

for IRS included five legislative proposals for additional e-file mandates.27

Without identifying and documenting lessons learned, the knowledge 

 

23Starting in 2011, tax return preparers must obtain a PTIN, and use it to sign all returns 

they prepare, paper and electronic. PTINs will allow IRS to identify preparers and help 

ensure they are in compliance with rules relating to tax return preparers. 26C.F.R. § 

1.6109-2. 

24Internal Revenue Manual 20.1. 

25GAO, Recovery Act: IRS Quickly Implemented Tax Provisions, but Reporting and 

Enforcement Improvements Are Needed, GAO-10-349 (Washington, D.C.: Feb. 10, 2010) 

and GAO, Information Reporting: IRS Could Improve Cost Basis and Transaction 

Settlement Reporting Implementation, GAO-11-557 (Washington, D.C.: May 19, 2011). 

26IRS added 41 full-time equivalents (FTE) to process the increased e-file applications in 

fiscal year 2011, which allowed IRS to process 89 percent of the applications within IRS’s 

target time period of 45 days. 

27As an example, IRS asked for regulatory authority to require that all information returns 

and Form 5500s, “Annual Return/Report of Employee Benefit Plan,” be e-filed. 

Page 14 GAO-12-33 E-Filing Tax Returns
 

could be lost for reasons such as staff turnover. The scope and depth of a 

lessons learned study should, of course, balance the costs of the study 

against the potential benefits. 

Paper returns limit the effectiveness of IRS’s enforcement and service 

programs. To control costs, IRS does not transcribe all the information on 

paper tax returns into its computer databases. In addition, as previously 

noted, IRS has a policy of posting the same information from electronic 

and paper returns to its databases, so that similar paper and electronic 

returns have equal chances of being selected for audit. In part, IRS’s 

intention with this policy is to avoid disincentives to e-filing. Consequently, 

if a line is not digitized from paper returns, it is not posted from electronic 

returns either, which limits the amount of information readily available for 

enforcement and service purposes. For example, taxpayers’ telephone 

numbers are not digitized. When IRS wants to obtain a phone number 

from a paper tax return, the number must be retrieved from the originally 

filed return, which takes extra time. 

The Benefits and 

Costs of Different 

Options for Digitizing 

Remaining Paper 

Returns Have Not 

Been Fully Analyzed 

Digitizing data can benefit taxpayers. In addition to faster refunds and 

improved convenience, IRS officials said that having more tax return 

information available electronically would improve audit selection, thus 

reducing burdensome audits for compliant taxpayers.28 Additionally, 

digital information can help some taxpayers get larger refunds, or reduce 

their taxes due. For example, using automated error checking, IRS 

corrected 7.7 million returns from taxpayers claiming the Making Work 

Pay credit, about 60 percent of which were in the taxpayer’s favor.29

These automated corrections, which reduced taxes, may not have been 

possible without digitizing relevant data from paper returns. 

According to IRS officials, digitizing and posting more comprehensive 

information from individual income tax returns could also facilitate 

enforcement efforts, expedite contacts for faster resolution, reduce 

handling costs, and increase compliance revenue. For example, in fiscal 

 

28See GAO, Tax Administration: 2007 Filing Season Continues Trend of Improvement, but 

Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated, 

GAO-08-38 (Washington, D.C.: Nov. 15, 2007). 

29The error corrections were made January 1 through September 30, 2010. See GAO, Tax 

Refunds: Enhanced Prerefund Compliance Checks Could Yield Significant Benefits, 

GAO-11-691T (Washington, D.C.: May 25, 2011). 

Page 15 GAO-12-33 E-Filing Tax Returns
 

year 2010, IRS increased the amount of data it transcribed from Form 

5405, “First-Time Home Buyer Credit.” It used this additional information 

to conduct prerefund compliance checks to ensure that taxpayers do not 

claim the credit in multiple years. We calculated IRS’s increased 

enforcement efforts prevented about $95 million in erroneous refunds in 

fiscal year 2010.30 

Options for digitizing more paper tax return data include optical character 

recognition (OCR), bar coding, and transcription.31 An OCR system would 

read text directly from paper returns using optical scanners and 

recognition software and convert the text to digital data. IRS is not 

currently considering implementing OCR to obtain more digital data 

because of the high expense of the additional equipment needed.32

Instead, IRS is pursuing what it considers to be a less costly bar coding 

system and transcribing more data from paper returns. 

Bar Coding Could Be 

Operational In Several 

Years 

Two-dimensional (2-D) bar coding technology would capture data on vcoded returns, which are those returns that are prepared using software 

but are printed and mailed to IRS. All of the information on a return can 

be coded in bar codes, and unlike transcription, bar codes transfer data 

with 100 percent accuracy (although poorly printed bar codes may be 

rejected by the scanners). On a limited basis, IRS already uses bar 

coding technology to digitize the Schedule K-1, “Partner’s Share of 

Income, Deductions, Credits, etc.” This system, implemented in the early 

1990s, was used to digitize about 15 million Schedule K-1s in fiscal year 

2010. IRS also recently started to use bar codes to mask Social Security 

numbers on communication letters to preparers. 

IRS’s Submission Processing officials told us that they have written a 

proposal for a bar coding system, and IRS may request funding for it in 

the near future. Officials believe bar coding will improve tax return 

processing and reduce costs. As we previously reported, bar coding could 

contribute to IRS’s agency modernization goals and produce some of the 

 

30See GAO-10-349 and GAO-11-691T. 

31Other options may be available or could be developed in the future. 

32IRS officials did not provide us documentation showing that OCR is a more expensive 

option than bar coding or additional transcription. Our analysis only considered the options 

IRS officials say they are pursuing. 

Page 16 GAO-12-33 E-Filing Tax Returns
 

same efficiencies as e-filing by replacing the labor-intensive transcription 

process and eliminating transcription errors.33 However, returns that were 

prepared without software—for example, with a typewriter or pen—would 

still require manual transcription, and bar coded returns would require 

some paper processing such as receiving and opening mail. A costbenefit analysis for bar coding could include costs for processing and 

transcribing remaining paper returns. 

In our prior report, we recommended that IRS determine actions needed 

to require bar coding and related costs.34 IRS’s 2012 Revenue Proposals 

included a legislative proposal that would require all taxpayers who 

prepare their returns electronically but print and file them on paper to print 

the returns with a 2-D bar code.35 As of September 1, 2011, there had 

been no action on this legislative proposal. 

Officials also told us that even if a potential request is funded, it will be 

another 18 to 24 months before IRS could begin scanning individual 

paper returns using the technology. IRS has not yet produced a costbenefit analysis or a return on investment study related to the bar coding 

initiative. Without a cost-benefit study, IRS management and Congress 

will lack key information useful for deciding whether to fund bar coding. 

IRS officials told us that if IRS is able to implement bar coding, they plan 

to model the bar code system on systems that states have developed and 

standardized, working in collaboration with software companies. As of 

2007, 24 states and the District of Columbia were using bar code 

scanning to process some or all of their tax returns.36 State tax agencies 

reported that bar coding is quicker, more accurate, and less expensive 

than manual transcription of paper tax return data. A 2007 survey by the 

Federation of Tax Administrators asked the states that bar coded various 

state tax returns that year about savings they realized by bar coding 

instead of transcribing data manually. Eleven states provided answers 

 

33GAO-08-38. 

34Ibid. 

35Due to the limitations under Section 6011(e)(1), a statutory change is necessary to 

require individuals, estates, and trusts to print their returns with a 2-D bar code. 

36These data have not been updated since 2007. 

Page 17 GAO-12-33 E-Filing Tax Returns
 

with quantitative cost information; each of them reported that bar coding 

cost less than manual transcription. 

Transcribing More Lines of 

Data from Paper Returns 

May Have Net Benefits 

Manual transcription of data is the primary method currently available to 

IRS to digitize data from paper returns. IRS has analyzed the cost of 

transcribing all remaining lines on individual paper tax forms, and 

estimates that it would require 1,714 full-time equivalent (FTE) staff, 

costing about $71 million, for fiscal year 2012. However, IRS officials told 

us that IRS does not have funding at this time to transcribe all the 

remaining data lines from paper returns. According to IRS officials, IRS 

may increase the digital data available to its programs by transcribing 

selected lines, although the amount of transcription needed would be 

reduced if bar coding were implemented. 

If the additional transcription is phased in, a cost-benefit analysis that 

prioritizes data on a line-by-line basis could be used to determine which 

lines would have the lowest costs and greatest benefits. IRS has not 

completed such an analysis. IRS has taken some steps, such as 

developing priority lists of additional lines to transcribe, but has not 

quantified the costs or benefits of transcribing each line. Also, these 

listings were developed in different business operating divisions and are 

not integrated across divisions, so there is no ranking of the agency’s 

transcription priorities as a whole. 

Ranking transcription priorities could have benefits because the cost of 

transcription varies by line. We used IRS data to develop calculations to 

illustrate the potential variability of transcription costs across different tax 

return lines that IRS included in its priority listing.37 We estimated the 

costs of transcribing different lines from all paper tax returns submitted 

during a filing season, and found that costs varied from less than $1,000 

to more than $500,000. 

We illustrate the variability of transcription costs by presenting averages 

for all lines on selected forms. For example, if IRS were to transcribe an 

average line on Form 1040 Schedule C from all paper tax returns for a 

 

37These calculations are based on the cost per keystroke transcribed, the average number 

of keystrokes for the line, the e-file rate of the form or schedule that the line appears on, 

the number of taxpayers who submit the form or schedule that the line appears on, and 

the rate at which the line is filled in rather than left blank. 

Page 18 GAO-12-33 E-Filing Tax Returns
 

filing season, it would cost $123,400. Costs for different lines on Schedule 

C would vary substantially around this average. Table 2 illustrates some 

of the average costs for lines on high-volume forms and schedules. (More 

details on our calculations are in app. V.) 

Table 2: Estimated Average Filing Season Transcription Cost Per Line on High 

Volume Forms and Schedulesa

Form/Schedule 

Estimated average filing season 

transcription cost for line on 

form/schedule

Form 8863, “Education Credits” $217,800

Form 1040, “U.S. Individual Income Tax Return” 159,700 

1040 Schedule C, “Profit or Loss From Business” 123,400 

1040 Schedule E, “Supplemental Income and Loss” 50,400 

Form 4562, “Depreciation and Amortization” 11,600

1040 Schedule D, “Capital Gains and Losses” 8,100 

Source: IRS data. 

a

Based on lines listed by IRS as priorities for transcription. Averages do not include lines that are 

already transcribed. Averages are rounded. Costs for individual lines vary substantially around the 

averages. Cost information is based on IRS labor cost projections for 2012. 

Because an increasing percentage of returns are e-filed, IRS could be at 

the tipping point where the service and compliance benefits of digitizing 

additional data from paper returns are greater than costs. Given today’s 

tight budget environment, additional resources for transcription would 

likely have to be moved from other areas within IRS. In deciding on 

whether to transcribe more lines, IRS would have to balance the benefits 

of additional transcription against the value of the work foregone. 

Page 19 GAO-12-33 E-Filing Tax Returns
 

Preparers and taxpayers wanting to e-file may not be able to because 

some forms have not been added to IRS’s e-file systems. We identified 

two high-volume individual forms that currently cannot be e-filed and do 

not have a time line to be added to MeF.38

 Form 1040-X, “Amended U.S. Individual Income Tax Return.” About 

6.9 million taxpayers submitted a Form 1040-X in fiscal year 2010. 

Several tax preparers we spoke with said it was a burden not to be 

able to e-file this form. Electronic Tax Administration officials said 

eventually they would like to enable e-filing of the 1040-X, but they 

have not done so because the technology would need to be 

developed to check the amended data against what was originally 

filed. 

IRS Does Not Have a 

Complete List of 

Forms That Cannot 

Be Accepted 

Electronically Nor 

Does It Have a Time 

Line for Adding Them 

to the E-file System 

 Form 1040-NR, “U.S. Nonresident Alien Income Tax Return.” About 

621,000 taxpayers submitted a Form 1040-NR in 2010. IRS officials 

said that Form 1040-NR was not included in the decision process 

when IRS decided on the sequence of adding forms to e-file, but it 

might be in the future. 

Having a time line to add these high-volume or other forms to the e-file 

system could help IRS further achieve its e-filing goals, consistent with 

IRS’s e-Strategy for Growth.39 Without a time line, these high-volume or 

other forms may not be added to the e-file system. 

One reason IRS does not have a complete time line is that it has not 

developed a complete list of forms that cannot currently be e-filed. IRS’s 

Strategic Plan calls for using data and research across the organization to 

make informed decisions and allocate resources.40 Adding forms to the efile system requires one-time expenditures, but ultimately may have 

compliance benefits, save IRS money, and reduce the burden on 

preparers and taxpayers. Without a list of forms that are not currently efiled, IRS would not be able analyze the costs and benefits of adding 

 

38Other forms exist that cannot be e-filed—for example, Form 1041-QFT, “U.S. Income 

Tax Return for Qualified Funeral Trusts” and Form 1042, “Annual Withholding Tax Return 

for U.S. Source Income of Foreign Persons.” These forms may be lower in volume, but 

having them available electronically may help with IRS’s compliance efforts. 

39IRS, e-Strategy for Growth: Expanding e-Government for Taxpayers and Their 

Representatives, Pub 3187 (Washington, D.C.: Rev. January 2005). 

40IRS, “Strategic Plan 2009-2013,” Pub. 3744 (Washington, D.C.: Rev. April. 2009). 

www.irs.gov/pub/irs-pdf/p3744.pdf. 

Page 20 GAO-12-33 E-Filing Tax Returns
 

different forms in order to prioritize which forms to add. Further, as with 

additional transcription, IRS would need to weigh the benefits of shifting 

resources to enable forms to be e-filed against the value of the work 

forgone. 

E-filing provides important benefits to taxpayers, including faster refunds 

and more accurate returns. It provides a low-cost option for IRS to 

improve enforcement operations and services to taxpayers. This is 

especially important in an era of tight budgets when federal agencies will 

be expected to do more with less. The increased e-filing rates from the 

first year of the mandate are helping IRS do this. 

IRS would benefit from having increased penalty authority to enforce the 

mandate and deter noncompliance. There are also several steps IRS 

could take to reduce costs, obtain more digital data, and facilitate further 

growth in e-filing. Documenting lessons learned from the current mandate 

might help with the implementation of future e-file mandates. Analysis of 

the costs and benefits of bar coding technology and additional 

transcription could better inform decisions about whether to digitize more 

data from paper returns. Similarly, developing a list and scheduling the 

addition of more forms to the e-file system could inform resource 

allocation decisions. 

Congress should consider amending the Internal Revenue Code to 

authorize IRS to assess penalties on preparers for failure to comply with 

section 6011(e)(3). 

To help increase electronic filing and to better target IRS’s efforts, we 

recommend that the Commissioner of Internal Revenue direct the 

appropriate officials to take the following five actions: 

Conclusions 

Matter for 

Congressional 

Consideration 

Recommendations for 

Executive Action 

 develop a plan for and schedule to conduct a study that identifies and 

documents lessons learned from the implementation of the e-file 

mandate; 

 determine whether and to what extent the benefits of bar-coding 

would outweigh the costs; 

 determine the relative costs and benefits of transcribing different 

individual lines of tax return data; 

Page 21 GAO-12-33 E-Filing Tax Returns
 

 develop and prioritize a list of forms that still need to be added to the 

Modernized e-File system; and 

 create a timetable to add additional forms to the Modernized e-File 

system, particularly for high-volume forms, such as the 1040-X and 

1040-NR. 

We provided a draft of this report to the Commissioner of Internal 

Revenue for his review and comment. The Deputy Commissioner for 

Services and Enforcement provided written comments, which are 

reprinted in appendix VI. IRS also provided us with technical comments, 

which we incorporated into the report as appropriate. 

Agency Comments 

and Our Evaluation 

In response to our draft report, the Deputy Commissioner expressed 

appreciation to GAO for recognizing the noticeable increase in e-file 

participation this year and agreed with all five of our recommendations. 

However, the steps IRS outlined in its comments may not fully address 

two of our recommendations. Regarding our recommendation on the 

relative costs and benefits of transcribing different individual lines of tax 

return data, IRS stated that it has determined the relative costs of 

transcribing individual lines. To fully address this recommendation, 

however, IRS should also quantify the benefits of transcribing individual 

lines and compare them to the individual costs. This analysis could inform 

budget decisions by allowing IRS to compare the option of additional 

transcription against any work foregone. Regarding our recommendation 

to develop and prioritize a list of forms that still need to be added to MeF, 

IRS outlined the next three releases scheduled for MeF (through filing 

season 2014). While IRS has a list of forms it plans to transfer from EMS 

to MeF, there are still some forms that cannot be e-filed on either system. 

To fully address this recommendation, IRS should also develop a list of 

forms and schedules that cannot currently be e-filed. A complete list 

would enable IRS to analyze the costs and benefits of adding different 

forms to MeF as well as prioritizing which forms to add first. 

We plan to send copies of this report to the Chairmen and Ranking 

Members of other Senate and House committees and subcommittees that 

have appropriation, authorization, and oversight responsibilities for IRS. 

We are also sending copies to the Commissioner of Internal Revenue, the 

Secretary of the Treasury, the Chairman of the IRS Oversight Board, and 

the Director of the Office of Management and Budget. This report is also 

available at no charge on the GAO Web site at http://www.gao.gov. 

Page 22 GAO-12-33 E-Filing Tax Returns
 

If you or your staffs have any questions or wish to discuss the material in 

this report further, please contact me at (202) 512-9110 or 

WhiteJ@gao.gov. Contact points for our offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

Individuals making key contributions to this report can be found in 

appendix VII. 

James R. White 

Director, Tax Issues 

Strategic Issues 

Page 23 GAO-12-33 E-Filing Tax Returns
Appendix I: Scope and Methodology 

Page 24 GAO-12-33 

Appendix I: Scope and Methodology 

To describe electronic filing (e-file) rates, the Internal Revenue Service’s 

(IRS) processing capacity, reasons why preparers did not e-file, and their 

experiences implementing the mandate, we obtained and analyzed data 

from IRS’s weekly processing reports and the Individual Return 

Transaction File from Submission Processing and the Return Preparer 

Office, respectively.1 Data included numbers of returns that were 

completed by taxpayers and preparers as well as the filing method—efiled, “v-coded,” and paper filed. In addition, we obtained and analyzed 

data about Form 8948, “Preparer Explanation for Not Filing 

Electronically,” and Form 8944, “Preparer e-file Hardship Waiver 

Request.” To determine the reliability of IRS’s data, we interviewed IRS 

officials who created the reports, reviewed related documentation, and 

reviewed the data for obvious errors. We found the data to be sufficiently 

reliable for our purposes. We interviewed Submission Processing officials 

and representatives from the National Association of Computerized Tax 

Processors about how well IRS processed additional e-filed returns this 

year. We also interviewed 9 tax software companies and 26 

representatives from tax preparation firms to obtain their views about the 

mandate’s implementation. We chose a nonrepresentative sample of 

preparers affiliated with national preparer groups: American Institute of 

Certified Public Accountants, National Association of Tax Professionals, 

and National Association of Enrolled Agents. Each group gathered 6 to 9 

preparers for group interviews, and two of the groups identified 4 

preparers whom we spoke with individually. Additionally, we spoke with 

one preparer who contacted us in response to our previous report on efiling. 

To assess IRS’s plans to enforce the mandate and determine lessons 

learned, we reviewed the 2011 planning documents for the integrated 

preparer compliance strategy and E-file Monitoring Program. We also 

interviewed officials from the Return Preparer Office about their 

compliance and enforcement plans for ensuring preparers were following 

the mandate. We interviewed officials from the Chief Counsel’s Office and 

the Office of Professional Responsibility to determine current options 

available to sanction preparers noncompliant with the e-file mandate. We 

also interviewed IRS officials from the Return Preparer Office about IRS 

 

1

Weekly processing reports are from the Individual Income Received and Processed 

Headquarters (IIRAPHQ) Cumulative Individual Income Tax Return report. 

 E-Filing Tax Returns 
Appendix I: Scope and Methodology 

plans for conducting a lessons learned study on the mandate’s 

implementation. 

To assess IRS’s analysis of options for digitizing more data from paper 

returns, we reviewed IRS’s 2008 proposal, Modernized Submission 

Processing: Solution Concept Briefing, to add a bar coding system to 

process paper returns and analyzed IRS’s priority transcription list 

developed by IRS’s Deputy Commissioner’s Office for Service and 

Enforcement (Service and Enforcement). Using IRS data, such as staff 

cost per keystroke and volume of paper forms, we estimated costs to 

transcribe additional lines of data (see app. V). To determine the reliability 

of IRS’s data, we interviewed IRS officials who developed the 

transcription priority listing, reviewed related documentation, and 

reviewed the data for obvious errors. We found these data to be 

sufficiently reliable for our purposes. We shared our calculations with IRS 

officials in Service and Enforcement who agreed with our approach. Also, 

we interviewed IRS officials from Submission Processing and Service and 

Enforcement about their plans to implement bar coding technology and 

transcribe additional lines of data and any analysis of the costs and 

benefits of implementing such methods. 

To determine whether there are any tax forms IRS cannot accept 

electronically and assess IRS’s plans for adding them to the e-filing 

system, we compared a list and time line of all tax forms that Submission 

Processing planned to add to the e-file system to a list of all existing IRS 

forms obtained from the Forms and Publications division. We also 

interviewed officials from the Wage and Investment division and the 

offices of Electronic Tax Administration and Submission Processing about 

their plans to add more forms to the e-file system. 

For each objective, we also interviewed officials at IRS’s office of 

Electronic Tax Administration and Return Preparer Office. Our work was 

done primarily at IRS Headquarters in Washington, D.C. and its division 

offices in New Carrolton, Maryland, and Atlanta, Georgia where the IRS 

officials who manage the e-file mandate implementation are located. 

We conducted this performance audit from March 2011 to October 2011, 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

Page 25 GAO-12-33 E-Filing Tax Returns
Appendix II: Possible Changes Affecting Appendix II: Possible Changes Affecting Preparers as a Result of the E-file Mandate 

Preparers as a Result of the E-file Mandate 

Tax return preparers who have never electronically filed (e-filed) a tax 

return may need to make some changes in their business practices as a 

result of the e-file mandate. Some preparers may need to purchase a tax 

software package to enable them to e-file. Most preparers will also need 

to apply to become an Authorized E-file Provider with the Internal 

Revenue Service (IRS), which allows them to submit electronic tax 

returns to IRS. 

New steps in preparing returns for those who have never e-filed could 

include obtaining a taxpayer’s signature on Form 8879, “IRS e-file 

Signature Authorization,” to document that the taxpayer has reviewed the 

return and that it is ready for transmission to IRS. Also, preparers who efile receive an acknowledgement from IRS stating that the return was 

accepted or rejected into IRS’s e-file system.1 When a return is rejected, 

the preparer must correct the error, sometimes with more information 

from the taxpayer, in order to resubmit it to IRS. In instances when a 

preparer needs to file a return on paper, the preparer must submit Form 

8948, “Preparer Explanation for Not Filing Electronically.” 

Figure 4 compares the processes preparers go through to submit a return 

electronically versus on paper. 

 

1

IRS does not send an acknowledgment when a paper return is filed. IRS may send 

correspondence to the taxpayer when an error is identified. 

Page 26 GAO-12-33 E-Filing Tax Returns 
Appendix II: Possible Changes Affecting 

Preparers as a Result of the E-file Mandate 

Figure 4: Preparation and Filing Methods for Preparers 

Paper process

Preparer obtains information from 

taxpayer to fill out paper forms

Preparer obtains information from 

taxpayer to fill out paper forms

Preparer obtains information from 

taxpayer to fill out paper forms

Preparer fills out Form 8948, “Preparer 

Explanation for Not Filing Electronically”

Preparer obtains information from 

taxpayer to fill out paper forms

Preparer gives return back to taxpayer 

to mail to IRS

Electronic process

Preparer obtains information from 

taxpayer to fill out return using software 

Preparer reviews return with taxpayer. 

Taxpayer signs Form 8879, "IRS 

E-file Signature Authorization”

Preparer transmits return to IRS

Return is 

rejected 

Return is filed on 

paper, known as 

a v-coded return 

Return information 

posted to IRS’s 

databases

Preparer corrects 

return, sometimes

with more information 

from taxpayer 

Preparer obtains information from 

taxpayer to fill out paper forms

At IRS, staff

● Open and sort mail

● Code and edit return

● Transcribe selected data 

Return is 

accepted 

Source: GAO analysis of IRS information.

Page 27 GAO-12-33 E-Filing Tax Returns
A

Prepared Filin

ppendix III: Trends in Preparer and Selfg Methods 

Page 28 GAO-12-33 

Appendix III: Trends in Preparer and SelfPrepared Filing Methods 

As of July 2, 2011, almost 60 percent (about 76 million) of all individual 

income tax returns were completed by a preparer and the remainder (54 

million) were self-prepared by taxpayers (see fig. 5). Filing methods 

include electronic filing (e-filing) and paper filing. Returns that are 

prepared using software, but are printed and mailed to the Internal 

Revenue Service (IRS), are called “v-coded” returns. 

Figure 5: Trends in Preparer and Self-prepared Filing Methods, Calendar Years 2006 

to 2011 (percentages, with volumes in millions) 

0

10

20

30

40

50

60

70

80

90

100

2011a 2006 2007 2008 2009 2010

Percent

Calendar year

Self-prepared/filed on paper

Self-prepared/v-coded

Self-prepared/e-filed

Preparer/filed on paper

Preparer/v-coded

Preparer/e-filed

Source: IRS's Individual Return Transaction File data.

131 134 149 139 137 130

a

Data as of July 2, 2011. 

 E-Filing Tax Returns 
Appendix IV: E-file Application Processing 

Page 29 GAO-12-33 

Appendix IV: E-file Application Processing 

In order to e-file, a preparer must be an Authorized E-file Provider. The 

requirements to become an Authorized E-file Provider include submitting 

an application and passing background and suitability requirements. The 

Internal Revenue Service (IRS) issues an Electronic Filing Identification 

Number (EFIN) to firms or sole practitioners who meet these 

requirements. 

As of June 30, 2011, IRS processed 36,714 applications for preparers to 

become Authorized E-file Providers, 19 percent more than during the 

same time period in 2010—an increase that IRS officials said was due 

predominantly to the mandate. Applications that were submitted 

electronically had an average processing time of 18 days, while those 

submitted on paper had an average processing time of 26 days—both 

within IRS’s normal 45-day processing time. Overall, 89 percent of e-file 

applications were processed in fewer than 45 days. For 2012, when the 

mandate threshold is lowered to more than 10 returns, IRS officials 

project that e-file applications will increase by 38 percent over the 

average annual applications based on prior years. Electronic Products 

and Support Services officials anticipate the preparers who apply to 

become Authorized E-file Providers in 2012 will require additional 

assistance resulting in longer calls or multiple calls. As shown in table 3, 

IRS officials told us they will need 11 additional full-time equivalents 

(FTE) to manage this workload. 

Table 3: Estimated Number of New E-file Applications, 2011 and 2012 

Fiscal year 2011 2012 

E-file applications Average annual 

applications based on 

prior years 

30,000 30,000 

Increase projected due 

to e-file mandate 

22,401 11,643

Total 52,401 41,643

Percent increase over average annual applications 

based on prior years 

75% 38%

Additional full-time equivalents (FTE) needed to 

process applications 

41 11 (in addition to the 

41 added in 2011) 

Source: IRS data. 

E-Filing Tax Returns
Appendix V: Calculation of Costs of Appendix V: Calculation of Costs of Transcribing Data Lines from Paper Returns 

Transcribing Data Lines from Paper Returns 

We used the Internal Revenue Service (IRS) data to develop calculations 

to illustrate the potential variability of transcription costs across different 

tax return lines that IRS included in its priority listing. The formula we 

used to calculate the cost of transcribing a line of data is the following: 

form of volume paper occurrence line of rate 

 line

keystrokes average

 keystroke

 cost transcribi of Cost line ng    

All of these elements can vary: 

 Cost/keystroke is based on the hourly rate for transcription staff 

multiplied by number of keystrokes per hour. Number of keystrokes 

per hour varies slightly for different forms. 

 Average keystrokes per line varies for different data lines, from 1 to 

several hundred, with most under 10, as shown in figure 7. 

 Paper volume of the form is the number of forms that are submitted to 

IRS on paper. For example, if 10,000 taxpayers submit paper returns 

that include a given form, the paper volume of that form is 10,000. 

Paper volume is related to the total volume of the form and the e-file 

rate of the form: 

Paper volume = # taxpayers who submit the form × (1 – e-file rate of form) 

 E-file rates vary significantly for different forms, as shown in figure 6; 

for example, 78 percent of Form 8863s were e-filed for tax year 2009, 

compared to 55 percent of Schedule C’s. 

 Number of taxpayers who submit the form varies significantly for 

different forms, from under 10,000 to over 50 million. 

 Occurrence rate of the line is the rate at which the line is filled in. 

Some lines are left blank most of the time, while others are filled in 

more often or always. Occurrence rates vary from 1 percent to 100 

percent. 

IRS has all of these data for over 500 lines identified by its Business 

Operating Divisions as high priorities for transcription. As an example of 

variations in these factors, different e-file rates for some high-volume 

forms are shown in figure 6. All other variables being equal, a line on a 

form such as Schedule C with a 55 percent e-file rate (45 percent paper 

file rate) would be about twice as expensive to transcribe as a line on a 

form such as Form 8863 with a 78 percent e-file rate (22 percent paper 

file rate). This is because there would be about twice as many returns 

from which to transcribe that line (45 ÷ 22). 

Page 30 GAO-12-33 E-Filing Tax Returns
Appendix V: Calculation of Costs of 

Transcribing Data Lines from Paper Returns 

Figure 6: E-file Rates for High Volume Forms and Schedules, Calendar Year 2009 

Forms and schedules

Percent

Source: GAO analysis of IRS data.

0 10 20 30 40 50 60 70 80 90 100

1040 Schedule C,

Profit or Loss from Business

1040 Schedule E,

Supplemental Income and Loss

1040 Schedule D,

Capital Gains and Losses

Form 1040,

U.S. Individual Income Tax Return

Form 4562,

Depreciation and Amortization

Form 8863,

Education Credits 78%

 63%

 62%

 59%

 59%

 55%

As another example, figure 7 is a frequency chart showing that most lines 

would require 1 to 15 keystrokes to transcribe, while some would require 

46 or more. All other variables being equal, a line that required 46 

keystrokes would be 46 times more expensive to transcribe than one 

requiring 1 keystroke. 

Page 31 GAO-12-33 E-Filing Tax Returns
Appendix V: Calculation of Costs of 

Transcribing Data Lines from Paper Returns 

Figure 7: Frequencies of Keystroke Lengths for Different Lines to Transcribe 

0 50 100 150 200 250 300 350 400 450

1 to 5

6 to 10

11 to 15

16 to 20

21 to 25

26 to 30

31 to 35

36 to 40

41 to 45

46 or more

Keystrokes

Number of lines

Source: GAO analysis of IRS data.

 22

 2

 6

 7

 5

0

 3

 56

 418

 91

Page 32 GAO-12-33 E-Filing Tax Returns
Appendix VI: Comments from the Internal Appendix VI: Comments from the Internal Revenue Service 

Revenue Service 

Page 33 GAO-12-33 E-Filing Tax Returns 
Appendix VI: Comments from the Internal 

Revenue Service 

Page 34 GAO-12-33 E-Filing Tax Returns
Appendix VI: Comments from the Internal 

Revenue Service 

Page 35 GAO-12-33 E-Filing Tax Returns
A

A

ppendix VII: GAO Contact and Staff 

cknowledgments

Page 36 GAO-12-33 

Appendix VII: GAO Contact and Staff 

Acknowledgments 

James R. White, (202) 512-9110, or WhiteJ@gao.gov 

In addition to the contact named above, Libby Mixon, Assistant Director; 

Amy Bowser; Michele Fejfar; Cynthia Saunders; Robyn Trotter; and 

Meredith Trauner made key contributions to this report. 

 E-Filing Tax Returns 

GAO Contact 

Staff 

Acknowledgments 

(450852)
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