IRS modernization and E-filing strategies.

The IRS's new mission statement sets forth that the Service is to provide America's taxpayers with top quality service, by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Modernization efforts already underway to assist the IRS in this mission include reorganizing the Service into operating units based on taxpayer (rather than IRS) function.

The proposed operating units are:

* Wage and investment;

* Small businesses and supplemental income;

* Middle market and large corporations;

* Tax-exempt organizations;

* Core functions (national office) and shared services; and

* Distinct units (advocate, counsel, criminal investigation, etc.).

In addition, the Service is upgrading and redesigning its major information technology systems, for completion in 2003; goals for 1999 include completion of year 2000 (Y2K) changes, as well as new electronic (e-filing) initiatives. Top IRS officials are leading these efforts, starting with Commissioner Rossotti; Bob Barr, Assistant Commissioner for Electronic Tax Administration (formerly Vice President of Intuit Corp.); John LaFavre, Deputy Commissioner for Modernization (formerly Tax Commissioner in Kansas, Maine and Montana); and Val Oveson, National Taxpayer Advocate (formerly Tax Commissioner in Utah and currently an active member of the AICPA's State & Local Taxation Committee). The management strategy is to recruit talent from outside the agency to lead the new operating units, and to pair those individuals with IRS managers to effectuate changes in a short period of time.

The IRS Restructuring and Reform Act of 1998 (IRSRRA '98) charged the Service to:

1. Make paperless filing the preferred and most convenient means of filing Federal tax and information returns;

2. Achieve the goal of having at least 80% of all such returns filed electronically by 2007; and

3. Encourage the private sector through cooperation to increase e-filing of such returns.

The IRSRRA '98 directed the IRS to establish a plan to eliminate barriers, provide incentives and use competitive market forces to increase e-filing.

The IRSRRA '98 also created the Electronic Tax Administration Advisory Committee (ETAAC) to report to Congress annually on the Service's progress in achieving these goals.

The IRS Electronic Tax Administration (ETA) released its strategic plan for e-filing on Dec. 3, 1998. It has two primary goals:

1. An overall goal of achieving 80% e-filing of all tax or information returns by 2007; and

2. An interim goal of having all returns that are prepared electronically filed electronically for tax years beginning after 2001.

(Details of the plan are available at http://www.irs.ustreas.gov.)

Electronic Signatures

For the 1999 filing season, every taxpayer who prepared and filed a 1997 Federal income tax return electronically, without the assistance of a paid preparer, should have received a postcard advising that the taxpayer had been selected to participate in an IRS pilot program for filing completely paperless returns. The postcard assigned a 5-digit electronic signature number (ECN) to be used by the taxpayer only for the 1999 filing season. The Service will not maintain or replace the ECN assigned; if a taxpayer loses the postcard, he will not get another ECN for the 1999 filing season. Married taxpayers filing jointly were also assigned an ECN on a postcard. ECN use eliminates the need to file Form 8453, U.S. Individual Income Tax Declaration for Electronic Filing, for actual signatures when e-filing.

Credit Card Payments

In preparing for the 1999 filing season, the Service encouraged private sector companies to assist in providing taxpayer services. As a result, taxpayers will be able to pay a balance due with credit cards for the first time. Taxpayers can e-file the return at any time prior to April 15,1999 and then transmit the balance due at any time up to April 15, using one of the following options:

* Call 1-888-2PAYTAX (U.S. Audiotex) to pay with American Express, Discover and Mastercard (Audiotex charges a fee for this service);

* Intuit/MacInTax software users can use Discover cards; and

* Automated clearing house (ACH) debits to bank accounts can be authorized on the e-filed return. When electing this option, taxpayers with refunds due will receive them quickly, often within two weeks of the filing date.

Preparation Initiatives

Intuit is providing on-line tax preparation software and electronic filing free to households with annual incomes of $20,000 or less. The company estimates that 50 million filers (43% of all individual returns filed) would be eligible to use this free service beginning in January 1999.

A pilot project using public key infrastructure and encryption technology for digital signatures will be conducted within the IRS ETA during the 1999 filing season, to determine its feasibility for the filing public at-large.

During the 1999 filing season, taxpayers in Indiana and Kentucky who qualify for Telefile can file both their Federal and state returns with one phone call. All taxpayers eligible to telefile were mailed a packet enabling them to do so.

Marketing

The IRS ETA will also conduct a marketing campaign ("Click, Zip, Fast Round Trip") during 1999, using a variety of media to send out the message that e-filing is quick, easy and reliable. This campaign will emphasize the added benefit of knowing that the Service not only received the return but accepted it. Although future audit is possible, this is rare, because the computerized checks have a high accuracy level. (Many taxpayers now use certified mail, which still does not verify that the return was actually ever processed.) Taxpayers who e-file will receive confirmation of acceptance (a processed return) or rejection, within 24 hours in most cases. Also, refunds are processed faster, often in less than two weeks after filing a return.

EROs

The IRS hopes to sign up additional electronic return originators (EROs) to increase the volume of e-filing. EROs are given a promotional kit to advertise as an "IRS E-file provider," which even includes "e-file" stickers to place on the client's return. About 8,000 EROs were selected to participate in a pilot project this year; this program will enable returns to be e-filed without transmitting Form 8453.

Other E-filing Projects

The plan lists a number of other projects intended to accelerate the growth of e-filing:

* 1040 integrated filing and payment (ACH debit) (available for the 1999 filing season);

* Electronic account resolution (not yet available);

* Accelerated refund (cuts refund processing to less than 14 days; not yet available);

* Integrated filing and payment by credit card (available for the 1999 filing season);

* Check-off limited power of attorney (not yet available);

* 1040 integrated filing and payment by Telefile (not yet available);

* Foreign aspect returns (identifies forms to be added to e-file options; not yet available);

* More forms and schedules (adds forms and schedules to e-filing on a continuous basis);

* Granulized rejects (provides ERO clearer reason for a rejected e-filed return; not yet available);

* Combined Federal-state acknowledgement files (not yet available);

* Federal-state Telefile (pilot program in Indiana and Kentucky for the 1999 filing season);

* Tax preparer notes (permits "white" schedules (including tax preparer notes) to be included in e-filed returns; not yet available); and

* 1040X (add to e-file form; not yet available).

There are 45 total projects listed in the initial IRS-ETA Strategic Plan. All of these projects are intended to increase e-filing, by enabling taxpayers, preparers and states to work with the Service to transmit data electronically and find incentives for doing so. The fact that not all forms and schedules may be e-filed remains a barrier to many practitioners; who do not wish to be involved if they cannot use the same processes and procedures for all their clients. The IRS ETA recognizes these concerns and is working to solve this problem. However, given that modernization and Y2K projects within the IRS have a higher priority, these modifications may have to wait.

The ETA continues to seek ideas to add other projects, involve the private sector in e-filing and "reinvent" the filing system to make it easy fast and responsive to taxpayers and preparers.

Editor's note: Professor Martin is a member of the AICPA Tax Division's Tax Executive Committee.

D.C. Currents is designed to heighten awareness of the Division's work and keep readers apprised of Tax Division activities involving tax policy, technical issues and other practice support matters.

The author's views, as expressed in this column, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specified committee procedures, due process and deliberation.

If you would like additional information about this article, contact Professor Martin at [phone] or [e-mail].