and Trends in E-filing: A Survey of CPA Practitioners
Tracey Anderson, Mark Fox, and Bill N. Schwartz
2005 - The transfer of personal and business information
electronically has expanded rapidly during the past decade.
Individuals today can access business and contact information
via landline, cell phones, pagers, Blackberrys, computers,
and other devices almost anywhere. While business transactions
used to require the physical delivery of paper documents,
many can now be processed much faster electronically. Tax
return preparation is no exception; electronic filing (e-filing)
has become commonplace.
Development of E-filing
IRS started the e-file program as a pilot project for the
1986 filing season in conjunction with tax-preparation software
providers and the professional tax community. During the
test year, five third-party transmitters were approved by
the IRS to file tax returns electronically; they submitted
25,000 returns at three locations. Initially, tax preparers
could file returns electronically only if no tax payment
was due. The taxpayers that could participate in the program
and the types of returns they could file were limited.
IRS’s primary motive for initiating the pilot program
was to increase its efficiency in processing tax returns.
Prior to the pilot program, IRS staff had to manually enter
the information from every tax return, meaning lots of labor
time and human error. The new e-file system required only
one human input, by the taxpayer or preparer rather than
the success of the pilot program, the e-file program became
fully operational for the 1987 tax year. The IRS upgraded
its computer capacity and developed an archival and retrieval
system that allowed for quick access to tax return information.
The e-file system expanded to 16 districts in 1988 and 48
districts in 1989. At first, tax professionals could file
no-tax-due returns only; the e-filing of balance-due returns
was allowed in 1990.
1991, the IRS initiated the federal and state electronic
filing program. By 2003, 37 states and the District of Columbia
offered federal and state e-filing. In 1992, for the first
time individuals could file certain qualifying tax returns
from home; the Form 1040 TeleFile pilot program in Ohio
processed 125,983 returns. By 1994, the program had expanded
nationally to 39,000 transmitters, with over 14 million
electronically filed returns. In 1996, the IRS implemented
the Electronic Federal Tax Payment System (EFTPS), which
permitted individuals to pay their federal taxes electronically.
In 1999, the IRS expanded EFTPS to allow taxpayers to e-file
and tele-file balance-due returns and pay the tax at the
same time by direct debit from a bank account or by credit
2001, the IRS expanded the TeleFile program by allowing
the filing of the four-month automatic extension for individual
returns via telephone. In 2002, taxpayers filed 636,215
extensions electronically via this system. Also during that
year, 296,692 taxpayers took advantage of the federal and
state TeleFile program.
1 gives a breakdown of e-filing by year. The number
of taxpayers who e-file has grown consistently every year,
except in 1995. In 2003, taxpayers e-filed almost 53 million
individual income tax returns, the first year that over
40% of all individual income tax returns were e-filed. Of
these returns, tax professionals filed over 37 million.
Congress has set a goal of 80% of all individual income
tax returns to be e-filed by 2007.
the first e-filing season in 1986, only some individual
taxpayers and individual income tax forms qualified for
e-filing. By contrast, in the 2003 tax year, almost all
individual taxpayers and approximately 99% of all individual
forms qualified for e-filing. A list of the current qualifying
taxpayers and qualifying forms can be found in IRS Publication
1345, Handbook for Electronic Filers of Individual Income
learn about current practices concerning e-filing, 1,000
sole practitioners and managing partners from local and
regional firms across the country were surveyed; 277 usable
responses were received. Exhibit
2 summarizes the characteristics of survey respondents
by firm type, size, and location.
adoption of tax preparation software by the survey respondents
increased rapidly during the 1990s. The data also shows
that respondents that e-file typically started using tax
preparation software in 1997, compared to 1993 for companies
that did not e-file. Anecdotal evidence suggests that those
who use software but do not e-file, do not believe that
their clients want to. The added cost of e-filing, the desire
to have a physical copy, and proof of mailing may also be
most popular tax preparation software packages used by the
survey respondents are Prosystems FX, Lacerte, and UltraTax,
which account for 80% of the market (Exhibit
3). In January of each year, the IRS updates the federal
and state e-files Software Developer List at www.irs.gov/taxpros/providers/article/0,,id=97636,00.html.
the 277 respondents, 218 (79%) were e-filers. Exhibit
4 shows the year respondents started e-filing. On average,
15.3% of respondents e-filed all their returns during their
first year and 38.7% e-filed all their returns in the most
recent tax year. Form 1040 returns were the most commonly
e-filed (99% of respondents), followed by Form 1065 partnership
returns, (32%) Form 1120 corporate returns (16%), and Form
1120 S corporate returns (16%).
most frequently mentioned benefits of e-filing for preparers
appear in Exhibit
5. The most common benefit was that respondents found
it to be more efficient, indicating that e-filing saved
them both time and money. The second-most- mentioned benefit
was the reduced number of errors, attributable to the one-time
entry of figures and the checks performed by preparation
benefit of e-filing was that it enabled e-filers to be more
productive, presumably because it saves on paperwork costs,
makes it easier to correct errors, and is quicker than filing
on paper. These respondents commented that adopting e-filing
made them look more progressive and technologically sophisticated
to their clients. Respondents also noted that the IRS acknowledges
receipts of e-filed returns, and delivers quicker refunds.
one-third of respondents also found e-filing to be less
costly. In addition to reduced labor costs, e-filed returns
greatly reduce the volume of paperwork. New technology allows
a paperless filing system and provides taxpayers with an
electronic version for their files as well. A paperless
process saves paper, toner, and file storage costs.
6 shows that respondents with larger practices were
more likely to e-file than those with smaller practices.
One might speculate that smaller firms and sole practitioners
are more likely to have clients uncomfortable with newer
technologies. Larger firms may also be more likely to e-file
because they can afford the investment of time to start
an e-filing initiative. The IRS could consider employing
e-filing coordinators and trainers that would work with
smaller firms to further encourage e-filing. Respondents
with practices in the Midwest, West, and Southwest were
more likely to e-file than those in the Northeast or Southeast
7). The data indicate that, compared to the rest of
the country, smaller firms were more likely to be among
non-e-filers in the Northeast and Southwest. For firms in
the Northeast and Southwest, 71% had five or fewer employees,
as opposed to only 57% of firms in other areas.
has clearly become prevalent among tax preparers, with 79%
of the respondents indicating that they e-file. These practitioners
see major benefits from e-filing: it is more efficient,
leads to fewer errors, makes their firms more productive,
and is less expensive than paper-filing. For the IRS to
reach its goals for even greater use of e-filing, it should
focus on sole practitioners and small firms.
Anderson, JD, LLM, CPA, is a professor of accounting,
Mark Fox, PhD, is a professor of management and entrepreneurship,
and Bill N. Schwartz, PhD, CPA, is a professor
of accounting, all at the school of business and economics
at Indiana University–South Bend.