The IRS Restructuring and Reform Act of 1998 established a goal of having 80 percent of individual returns filed electronically by 2007. 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. 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. 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 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. 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. 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. 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. MeF will also allow taxpayers to attach Portable Document Format (PDF) files to their tax returns, which will be 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. 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. 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. Paper returns that were prepared with pens or typewriters rather than software would still have to be transcribed. 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. 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. 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. 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. 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. 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. 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 e- filing. 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 parers, but they provide representative of the entire population of pre some examples of preparer experiences. 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 were new to 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 went more smoothly. Several preparers who had been e-filing prior to the mandate said they experienced some of these same problems when they first e-filed, but do not any longer. 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 y, the receipt of returns at IRS, and did not cost them any additional mone 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 to review before he e-filed the return with IRS, reducing printing costs. 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 said that they heard about the mandate through their software companies. . IRS officials believe there are potentially three types of p may not comply with the e-file mandate: Preparers who the mandate or do not fully understand the requirements; know about the mandate, sign the tax return, but intentionally choose 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.