Electronic tax filing still buried by paper returns

Associated Press

WASHINGTON — Despite heavy electronic filing promotion by the IRS and makers of tax software, most of this year’s income tax returns will still be stamped and mailed the old-fashioned way.

About 87 million of projected 132 million returns are expected to be filed on paper, underscoring the challenge faced by the Internal Revenue Service to become more computer-compatible and less buried in paper.

Without some kind of financial incentive — one idea is a $25 tax credit for e-filers — experts say millions of taxpayers will stick to tried-and-true paper returns for years to come.

"Can the government meet its targets? Absolutely, if they give the right incentives," said James Hines, a University of Michigan economics professor. "It would be a small carrot."

The IRS and major tax preparers say they are showing significant growth in electronic filing, which is usually provided for a fee through a tax professional, with personal computer software or directly online via an Internet site. Some preparers don’t charge e-filing fees, particularly for lower-income people, while others offer rebates.

Through last week, the IRS had received 33.6 million returns prepared on computer, almost 17 percent above the same period last year. That includes 6.7 million prepared by taxpayers at home, up 39 percent from last year.

These growth numbers can be misleading, however. About a third of these e-filed returns came from H&R Block, the nation’s largest tax preparation firm, and the e-filed total is less than half of the overall number of returns received so far.

The IRS expects to get about 8.5 million e-filed returns from individual taxpayers at home using an Internet site or such software as TurboTax or TaxCut — still only about 6 percent of the total projected returns.

Terry Lutes, director of IRS electronic tax administration, said electronic filing remains in its infancy after going nationwide in 1997. The agency’s market research shows that 70 percent of taxpayers are now aware of e-filing.

The IRS e-filing marketing budget this year is about $18 million, including TV ads. Congress set a goal for the IRS to get 80 percent electronic returns by 2007.

"We’ve got our awareness up. Now, what we’re targeting is getting them to actually use it," Lutes said.

The marketing campaign so far has focused on such e-filing advantages as accuracy, IRS confirmation that a return was received and, above all, faster refunds. But many taxpayers remain wary of electronic filing because of data security concerns, audit fears, the fees involved or because "they just don’t see the advantage," Lutes said.

In fact, last year the IRS received 40 million returns that were prepared on computers but nevertheless mailed on paper.

Congress ignored former President Clinton’s request for an e-filing tax credit, which faces even longer odds now that projected budget surpluses have turned into deficits. The Bush administration instead asked lawmakers to extend the deadline by 15 days for electronic filers, which would make it April 30 beginning next year.

This incentive, administration officials say, would broaden e-filing’s appeal beyond those who simply want a faster refund. Last year, the IRS got 4 million e-filed returns in the final week before the deadline.

Tax preparers and software makers are trying to find ways to make e-filing easier and more convenient.

Intuit Inc., for example, has linked up with 1,100 financial institutions that can enable taxpayers to download the information they need to prepare returns. Another link is with Keen, which offers customers live, professional tax advice for fees ranging from 50 cents to $3 per minute.