Individual federal taxpayers have several options for preparing and filing their returns as shown in figure 1. Using the traditional method, taxpayers or their preparers prepare paper returns and then file the returns by mailing them to one of IRS’s submission processing centers. At the submission processing centers, paper returns are opened and sorted, checked for completeness, numbered with an identifying code, manually transcribed into IRS’s computerized databases, and checked for accuracy. Transcribing paper returns inevitably introduces errors that then must be resolved by IRS and taxpayers. IRS devoted 2,798 staff years to paper processing in 2006. About 58 million taxpayers submitted their returns on paper in 2006. For a number of years, some taxpayers or preparers have used tax preparation software to prepare returns electronically. However, after returns have been electronically prepared taxpayers cannot transmit them directly to IRS in order to electronically file them. Instead, only paid tax preparers and tax preparation software companies that IRS has designated as electronic return originators (ERO) can transmit tax returns electronically to IRS. These companies may charge taxpayers for the services they provide, including electronic filing. Taxpayers who prepare their returns on their home computer and then use the electronic filing option are actually sending their returns electronically to an ERO. The EROs typically bundle returns from many taxpayers and then electronically forwards them to IRS. IRS conducts suitability checks of applicants who are applying to become EROs. These checks may include checking the applicants’ criminal background, credit history, and tax compliance. In 2006, approximately 72 million returns were submitted electronically. As shown in figure 1, electronic filing eliminates a number of steps necessary for processing paper returns. In 2002, IRS entered into an agreement with the Free File Alliance, a consortium of tax preparation companies, to provide on-line electronic preparation and filing to eligible taxpayers at no charge. Taxpayers can access Free File on IRS’s Web site, which provides links to the Web sites of the Free File Alliance companies. Taxpayers prepare their returns using free software on the companies’ Web sites and then electronically file their returns from the Web sites. In 2005, eligibility was restricted to taxpayers with incomes of $50,000 or less. The number of tax returns filed through Free File for filing season 2006 was about 4 million. As part of the Free File agreement, IRS agreed not to compete with the Alliance members by providing free, on-line tax return preparation and filing services to taxpayers on its Web site. Some taxpayers electronically prepare their returns but they choose to print and mail the tax return to IRS. These taxpayers are known as “v- coders” because IRS codes these returns with a “v” for processing purposes and to track separately from other paper filers. As shown in table 1, out of the 58.3 million paper returns submitted last year, approximately 42 million were v-coded returns. V-coders are an attractive target for conversion to e-filing because these taxpayers already have access to computers and electronically prepare their returns, both prerequisites for electronic filing. Until 2005, federal taxpayers had the option to Telefile. Telefile allowed taxpayers with simple returns to file electronically via telephone. This service was discontinued in 2005 because of declining usage and relatively high costs. Very generally, I-file is a Web site application that allows users to prepare and submit information to an agency electronically. Since the late 1990s, almost half of the states have offered an I-file service to taxpayers. Currently, 20 states and the District of Columbia currently offer this service to taxpayers. Three states have discontinued an I-file service for taxpayers. In addition, several foreign tax agencies offer I-file services. Also, some federal agencies offer nontax I-file services that, for example, allow users to apply for benefits on-line. Individuals applying for federal student aid, agricultural grants and loans, and veterans’ benefits may choose to use the agencies’ Web sites to prepare and submit applications rather than using paper to prepare forms and the mail to submit forms. For example, since 1997, the Department of Education has offered individuals an I-file service for preparing and submitting the Free Application for Federal Student Aid. Figure 2 shows the growth of federal electronic filing since 1997. According to IRS officials, it is getting harder to convert taxpayers to electronic tax return filing since those who might convert most readily have already done so. Electronic filing has also grown at the state level, as shown in figure 3. Several states imposed electronic filing mandates on tax preparers who meet certain criteria, such as filing 100 state tax returns or more, which contributed to increased electronic filing. Moreover, state taxing authorities are using technologies such as I-file and 2-D barcode to enable more efficient processing of returns. Within IRS, the Wage and Investment Division (W&I) and Modernization and Information Technology Services (MITS) have a role in electronic filing. W&I’s Electronic Tax Administration (ETA) administers IRS’s electronic filing programs and is responsible for receiving and processing tax returns electronically filed through EROs by taxpayers and preparers. MITS has the information technology (IT) and programming staff that develops and maintains IRS’s electronic filing systems, including hardware and software. IRS currently has a project underway, Modernized e-File (MeF), to replace its current electronic filing technology with a modernized, Internet-based electronic filing application. Successful implementation of the MeF system will give IRS increased capability to accept electronically filed returns (including individual returns) from EROs. Neither the current e-filing technology nor MeF does allow direct electronic filing by individuals. I-file systems have a range of design options. Two main technologies used to collect data from taxpayers exist: PDF fillable form technology often looks like the paper version of a form and Web page technology is interactive and prompts the user to respond to preformatted questions. Figure 4 illustrates the variety of features available with either technology. Tax agencies that have I-file systems also established a variety of eligibility requirements for taxpayers. PDF fillable form technology can closely resemble or reproduce the paper version of the form. This is one technology often used when agencies want to show users the paper version of a form. The PDF fillable forms are accessed through the agencies’ Web site, but users need additional software (PDF readers are available for free on the Internet) to view and fill in the fields. The U.S. Department of Agriculture (USDA) has offered PDF fillable forms with direct submission to support USDA’s Rural Development eForms System since 2002. USDA initially offered 200–300 on-line forms but later expanded the system to about 1,500 eForms for the public and USDA employees to prepare and submit forms directly on USDA’s Web site. Individuals may use the agency’s Web site to apply for a number of programs such as agriculture conservation, crop disaster, rural water, and farm loans. Users of USDA’s eForms can access the system with and without a user account. If a user creates an account with USDA, the user may save forms on USDA’s Web space and electronically submit the forms to the agency via the agency Web site. With an account, users may also bundle several forms together for submission. Once the forms are submitted electronically, the user receives an instant confirmation code, which users may reference if any questions arise. Additionally, users may use the account to view the status of the forms, and resubmit any form that may need corrections. Figure 5 shows a USDA fillable form with save and submission features. Without an account, users can search and download forms from the Web site, fill the forms in, and print the forms. However, users cannot submit forms electronically. USDA’s eForms provide basic instructions, like the paper version, and more detailed instructions are provided in separate PDF documents. After the user completes the form, it may be saved on a personal computer or printed and mailed to the agency. IRS currently provides PDF fillable form versions of some tax return forms and schedules. These forms can be downloaded to a home computer, filled in, printed, and mailed back to IRS. They cannot be filed electronically with IRS and, therefore, are not an I-file option. Another technology uses Web pages (HMTL),an interactive, ease-of-use Web site feature, containing checkboxes, option lists, text boxes, and buttons that allow users to respond to preformatted questions. Web pages do not always resemble the paper version of the form but collect similar information. Because these Web pages can be viewed using a regular Web browser, users usually do not need additional software. Similar to the PDF fillable forms, Web pages allow the agency to choose the features offered to the user. Some agencies offer fewer features to users. For example, both Utah’s TaxExpress and California’s CalFile systems allow users to log-in/create an account, perform calculations, link to other forms and publications, and submit directly to the agency. Other agencies have more sophisticated systems which offer more features. For example, United Kingdom’s Self Assessment system allows users to save their partially completed forms and return to the system at a later time, edit the forms, and view any changes made. Another example of a more sophisticated system with multiple features is Maryland’s I-file. Maryland offers features such as account access, calculations, and hyperlinks to other forms and publications. It also allows users to save work and return later and view prior years’ returns. The Maryland system also prepopulates some of the taxpayer’s biographic information and allows users to check the status of their current return. Figure 6 shows a computer screen picture/image of Web page technology with calculations and hyperlinks to help features from Maryland’s I-file system. Table 2 describes the I-file systems we profiled in eight states. As mentioned, state tax agencies offered a range of features such as calculations and save and return. Some states restricted eligibility by income, residency requirements, or number of itemized deductions.