E-Filing Gains in Popularity

With dozens of significant changes along with continued tweaking of the Internal Revenue Code throughout 2003, it's likely that the trend toward more Americans surrendering their pen and pencil to the computer and Internet will continue, according to CCH INCORPORATED (CCH), a leading provider of tax law information and software.

Adding to the sheer complexity this year is that many individuals did not have their withholdings adjusted during 2003 to reflect the lower tax brackets. As a result, more taxpayers also may be the recipients of larger refunds come this spring. This also could drive more to e-filing as refunds from e-filed returns are received in about half the time required for mailed returns, even faster for taxpayers authorizing the IRS to electronically deposit returns into their bank account.

In fact, of the nearly 131 million individual income tax returns filed during calendar year 2002, 36 percent used some form of electronic filing, up from 32 percent the year before, based on IRS data. The most significant increase was among do-it-yourself online e-filers. However, most taxpayers still rely on professional tax preparers for e-filing.

"As people become more familiar with electronic transactions, ranging from ATM cards to online banking, they're realizing the ease-of-use and time-savings benefits such transactions provide. When it comes to taxes, whether they file online themselves or complete electronic workbooks provided by their tax preparer, they're seeing it's faster and easier to get help than to go it alone," said Kevin Robert, president of the CCH tax and accounting unit that developed ProSystem fx Tax, the market-leading software for tax professionals.

Here's an overview of some of the options for taxpayers.

Professional Tax Preparers

Seven out of 10 taxpayers who e-file, or about 33 million, do so through professional tax preparers.

Individuals can have a tax preparer both prepare and e-file their returns. Having the professional also prepare the returns means they'll likely be there should an issue arise with the return-- for example, identifying and fixing a problem if the return is rejected or being available to respond to IRS inquiries. Those choosing just to have their professionals e-file should not take for granted that they'll receive this additional support--a reason so many people choose to turn over these chores to professional advisors. The IRS provides a ZIP-code enabled program to locate Authorized IRS e-file Providers on its site.

Online Filing

The most significant increase in e-filing was among do-it-yourself online electronic filers, which saw an increase of about 2.5 million taxpayers going online from calendar year 2001 to 2002. This group now accounts for two out of every 10 electronic returns filed. These do-it-yourself taxpayers use either online programs that can be accessed via the Internet to prepare and file their returns for a fee or software programs they must load onto their computers.

Continued growth in e-filing is expected in part thanks to a recent agreement between the IRS and the Free Filing Alliance, a group of software companies, which is making available free online tax preparation and electronic filing to at least 60 percent of all individual taxpayers — about 78 million people. Each alliance member determines which taxpayers to serve, with most setting specific criteria, such as offering services to those below a certain income level.

"Just as individuals will evaluate their tax preparer to make sure they're comfortable with the services they offer and their credentials, they need to closely evaluate any tax program to make sure it meets their needs," said Robert. "You want to make certain it has the features you require, but without unnecessary bells and whistles that add complexity and cost."

TeleFiling

This was the only e-filing method to experience a decline in usage with about 5 percent fewer individuals electing to TeleFile in the 2002 calendar year. The IRS TeleFile program allows taxpayers to electronically file their return over a touch-tone phone via a toll-free number. However, to be eligible the taxpayer must have filed a return in the previous year that met the filing requirements for Form 1040EZ.

Adding E-Payment and E-Deposit to E-Filing

In addition to filing electronically, taxpayers also can arrange for direct deposit of a refund or direct withdrawal if they owe additional taxes. Direct deposit further speeds tax refunds. For example, it generally takes about three weeks for a taxpayer to receive a paper check after e-filing a return. With direct deposit, a taxpayer should expect a refund deposited in his or her savings or checking account within two weeks. Those who owe money and also e-file early can designate an exact date in the future--as late as April 15--on which the IRS can take a direct withdrawal from their savings.

Talk with your tax advisor today about the options available to you.

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Posted February 4, 2003.