E-file: Off the mark

• By Judi Hasson
• Mar 19, 2000

The Digital Age is a pleasure and a problem for the Internal Revenue Service.

This year, the IRS' "e-file" program for Internet tax filing promises something

close to a paperless trail for taxpayers. But it is not one-stop shopping,

and it comes at a price. Indeed, it is still not as fast as older, less

sophisticated technologies.

By the time a taxpayer buys the $20-or-more software required to file

a tax return via the Internet, downloads the electronic tax return form

off the IRS World Wide Web site and sends in a handwritten signature as

confirmation, the convenience is questionable. Refunds don't come instantly,

either, according to electronic filers.

Those are the findings of a Federal Computer Week test to find out how

fast and reliable electronic tax filing really is. FCW asked three staff

members — all single, filing a short form and expecting a refund — to test

the system. Each filed their tax return a different way — by U.S. mail,

TeleFile and e-file. The results showed that although Internet tax filing

is a significant improvement over the traditional filing method of sending

in a hard-copy tax return via the U.S. mail, it is still not paperless or

as easy as it could be.

The IRS' experience with providing electronic services to the public

is symptomatic of the struggles many agencies are facing as they try to

transform paper-based services into e-services.

John Dyer, chief of information technology at the Social Security Administration

and a member of a new CIO Council committee that will focus on electronic

government, said new electronic programs in government always have growing

pains before they operate smoothly. The IRS is no exception.

"I look at it as the IRS being clever trying to figure out how to get

to taxpayers electronically," he said. "They are still trying to nail it

down. They are giving a service in interim steps. They set it up in a way

that provides security and is making it as easy as possible when we still

don't have things like electronic signatures."

The Case for E-gov

The IRS is a good case study for electronic government. For several

years, the IRS has encouraged taxpayers to file electronically — either

by TeleFile, in which taxpayers input their tax return via a touch-tone

phone, or by using a PC and filing via the Internet.

Taxpayers seem to like the options. Last year, 25 percent of all taxpayers

filed electronically — about 30 million people — and this year, the IRS

hopes that number will grow to more than 30 percent.

"If someone does it on a computer, there is practically zero chance

there will be math errors," said Paul Cosgrave, chief information officer

for the IRS. He filed electronically for the first time last year.

Electronic returns have a faster turnaround rate, Cosgrave said. Taxpayers

get immediate verification that the return has been sent, no paper forms

are necessary and ultimately, the refund arrives faster.

While electronic filing is sold as a convenience to tax payers, it also

is a cost-saver for the IRS. With electronic returns, IRS clerks don't have

to type information into the agency's computer system, as they do with paper

returns, and that reduces the cost of processing.

FCW's test showed that electronic filing, via the phone or the Internet,

is indeed faster — but not by much. TeleFile, which the IRS introduced in

1992, had the fastest turnaround time, with a refund deposit made 14 days

after filing. A tax return filed via e-file using Intuit Inc.'s TurboTax

software (estimated retail cost: $29.99, but many retailers offer rebates),

which became an option in 1995, had a turnaround time of 24 days. A refund

check was received from a mailed-in tax form 38 days after the forms were

dropped off in a mail box — two weeks longer than the e-file method.

But that doesn't tell the whole story. While all three tax-filing methods

have distinct advantages, e-file remains a clunky system that is not yet

the simple, smooth process envisioned by the IRS.

The growing pains may keep taxpayers from moving into the Electronic

Age before the kinks are worked out.

"Do I trust the IRS to properly get my electronic return? Let's put

it this way — I'm filing by paper this year," said Larry Allen, executive

director of the Coalition for Government Procurement, an industry group

that represents 300 vendors on the General Services Administration schedule.

Nevertheless, the IRS hopes to have 80 percent of all taxpayers filing

online by 2007. To reach that goal, President Clinton is promoting online

filing, proposing a $10 rebate in the fiscal 2001 budget for anyone who

does so.

E Doesn't Stand for Easy

But while the number of electronic tax returns is increasing, the method

is not for computer novices. The FCW employee who tested e-file spent an

hour filling out the 1040EZ form and zapping it to the IRS. The employee

still had to print out the forms, sign them and mail them to the IRS.

Once the employee got started, he was asked about a dozen questions

by the Intuit software package to make sure he was paying the right tax

amount. The questions — about medical savings accounts, real estate and

the federal fuel tax — were designed to jog the taxpayer's memory to make

sure all deductions were included. The employee provided his e-mail address

and other tidbits of information that added filing time.

The software prompted the employee to check on the status of his return

two days later to make sure the IRS had received the electronic form. He

then was asked to send in a paper form with his signature because the IRS

does not yet offer the option of using digital signatures, which would verify

the identity of the person sending in the electronic form.

Congress is considering legislation to legalize digital signatures.

The IRS is testing them with 18,000 taxpayers, but it will be several years

before the capability will be available systemwide, Cosgrave said.

Digital signatures are the linchpin of the whole system, said Philip

Kiviat, a consultant for companies that do business with the government.

"It's one of those problems that have to be worked out. Digital signatures

are a necessary thing to full e-business," he said.

Unknown to the FCW employee — and most other taxpayers — the IRS does

not receive electronic returns directly because of security concerns. Instead,

the return is filed to an authorized transmitter, who passes it on to the

IRS. This process could cause an additional delay if the system crashes.

The process for e-file is more complicated for companies that want to

electronically transmit tax returns. To secure the system for electronic

corporate tax returns, every company wishing to file electronically must

undergo a background check, according to Robert Barr, assistant commissioner

for the IRS' Electronic Tax Administration.

"They are fingerprinted. We do FBI checks, tax compliance checks," Barr

said.

Large companies and certified public accountants are exempt from the

background check, but large public companies must nominate three officers

who are subject to tax-compliance checks. This process costs the government

time and money.

The requirements and cost of filing using e-file has IRS critics wondering

why the agency has even bothered to offer the service.

"It seems strange the government would make it financially difficult

for taxpayers to want to use the service," said Pete Sepp, a representative

of the National Taxpayers Union, a consumer watchdog group. "Governments

are notoriously unable to walk on the cutting edge. They end up bleeding."

Despite the extra time involved in filing via e-file, professional tax

preparers are sold on the system.

"It's fast and accurate," said Todd Ransom, a spokesman for financial

services company H&R Block Inc., which has offered customers an e-file

option since 1986. "The error rate is less than 1 percent. With paper returns,

it's 20 percen

However, H&R Block had its own e-filing problem last

month when it was forced to shut down its Internet site for a week after

a bug corrupted the system. The problem was discovered when taxpayers tried

to file their returns online using the company's $9.99 service. When 10

taxpayers called up a tax form on the company's Web site, they got a form

filed by another taxpayer. The problem was an internal one and did not affect

the IRS, Ransom sa

Dialing for Dollars

In contrast to e-file, the simpler TeleFile technology is a less burdensome

method that provides returns much faster. The FCW employee using TeleFile

filed his tax return easily, experiencing none of the hassles that the e-file

tester found.

He received a TeleFile package in the mail this year because he had

filed the 1040EZ file by mail last year. The package came with a five-digit

customer service number that the filer uses instead of a handwritten signature.

The TeleFile tester called a toll-free number, punched in his W-2 information

and the amount of interest he earned in 1999, and the system computed his

adjustable gross income, standard deduction, taxable income and refund.

In place of signing the form, he entered his customer service number,

and TeleFile issued him a 10-digit confirmation number to keep on file.

The entire process took about 15 minutes. The FCW TeleFiler's refund was

deposited into his bank account two weeks after he filed.

There are shortcomings, however. TeleFile is limited only to those who

can file 1040EZ forms. TeleFilers must either be single or married and filing

jointly, claim no dependents, have a taxable income of less than $50,000

and taxable interest of less than $400. And only those who receive the TeleFile

package in the mail can file via the phone. The restrictions exclude many

taxpayers.

The IRS Pushes Onward

Although the system isn't perfect, there are some distinct advantages

to using a computer to file a return.

A computer checks the filer's math for mistakes. The tax return is easily

stored on a hard drive and tax return programs ask questions to remind the

taxpayer about what to include. And if a taxpayer owes money, e-filers

can have the payment taken directly from a checking or savings account by

authorizing a direct debit on a selected date. In other words, they can

file early but still make the payment closer to the April deadline.

Electronic filing clearly is the wave of the future.

"Our goal is to get all forms online and in place," Cosgrave said. "We're

very close to that. We're moving to make it seamless." Cosgrave said he

thinks that most forms will be available online for tax season next year.

Nevertheless, major cultural changes will have to happen before e-government

is the norm rather than the exception, said Ann Reed, former CIO at the

Agriculture Department and now vice president for the government global

industry group at Electronic Data Systems Corp.

"There's more pressure on the commercial side to be responsive to customers,"

Reed said. "Government...hasn't quite yet figured it out. What ought to

be very easy is very hard."