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Electronic filing; a case study.

ELECTRONIC FILING A Case Study

For the 1989 tax filing season, the IRS designated the Volunteer Income Tax Assistance (VITA) site at the University of Akron's Center for Taxation Studies as a pilot electronic filer. The pilot project, with minor exceptions, resembled any electronic filing environment except it was operated by volunteers and no fees were charged for its services. Over 600 VITA clients were serviced during the 1989 tax season. Almost 90% of those clients qualified for a refund and elected the electronic filing option. This article shares the experiential results from electronic filing in this environment.

Primary Control Issues

Broadly speaking, four categories of incremental effort are necessary for electronic filing to be undertaken. They involve control of:

1) Tax preparation software,

2) Individual Forms 8453,

3) Electronic filing process, and

4) Client computer files.

Electronic filing is an activity which is separate from the preparation of the client's tax return and follows from the computer prepared tax return. Automatic electronic filing occurs when the tax preparation software directly permits one to move from the preparation software and into the electronic filing software without preparer involvement. Electronic filing actually involves three separate operations: (1) a logon to the IRS computer, (2) the sending (transmittal) of client tax return data and (3) the pick-up of the IRS acknowledgment file. Typically, these separate operations are bundled in the electronic filing software.

For clients who qualify for electronic filing, the practitioner must have confidence that the initially captured tax return data is the same data that is transmitted to the IRS.

Tax Return Software and

Control

A condition precedent to electronic filing is the presence of a return entitled to a refund. One aspect of preparer control is to make certain the tax return software accurately and correctly transfers all credits and prepayments to both the printed tax forms and into the electronic file format.

At the VITA site, both the tax return software and electronic filing software were in endless updates during the 1989 tax filing season. Each update increased the potential for a software logic error. To guard against the presence of programming logic errors, a controlled testing procedure must be established by the preparer. An overall, comprehensive tax preparation system test needs to be performed by the preparer immediately following the installation of all software updates.

The preparer needs to create a test file which can be run immediately following each update. This test file should be created well in advance of the tax season to include data usually encountered by the preparer. The printed tax return should be compared against the return generated from the test. The preparation software passes data to unique printers which affords an additional opportunity for program logic errors. If the preparer uses more than one type of printer, testing should be done for each printer option.

The test file should be validated for electronic filing also. Although the test file is not actually transmitted to the IRS, the contents of the electronic file must be reviewed. A screen print out in conjunction with the DOS command, "TYPE", provides hardcopy documentation for evaluation purposes.

Form 8453 Control

Becoming an IRS-accepted electronic filer increases the preparer's incremental responsibility. Limited responsibility exists for the preparer when the client owes taxes since the preparer merely provides properly completed tax forms and instructs the client to make a check payable to the IRS and mail before the filing deadline. However, if the client is entitled to a refund and the electronic filer option exists, the preparer is responsible for:

(1) Reviewing Form 8453 with the client;

(2) Obtaining the client's signature on the Form 8453;

(3) Securing all W2s from the client;

(4) Safeguarding the Forms 8453, and W2, and other documents until a successful electronic transmittal is made;

(5) Receiving a successful acknowledgment from the IRS; and

(6) Mailing the completed Forms 8453 (with attachments) to the IRS.

Form 8453 plays a critical role in the electronic filing process. Some of the control problems encountered by the VITA site were: (1) clients failed to sign the Form 8453; (2) some W2s became detached and, consequently, were missing from the Form 8453 at the time of filing; and (3) some Forms 8453 were temporarily misfiled. Also, some data were miscoded from the W2s due to variations in where W2 data were presented.

It is critical for the practitioner to set up controls over Form 8453. A chronological log should be created for all clients serviced. The log should note whether the client owed taxes or was entitled to a refund. For clients due a refund, Form 8453 should be verified as to accuracy and completeness and should be signed in the client's presence. Regular electronic filings should be checked against the chronological clients log.

The following scenario describes a typical electronic filing sequence:

(1) Ten clients were served on Day 1 and 10 Forms 8453, with attachments, were obtained.

(2) On Day 2, an electronic filing was made for the client data generated on Day 1.

(3) Twenty clients were served on Day 2 and 20 Forms 8453, with attachments, were created.

(4) A second electronic filing was made for Day 2 clients.

(5) The IRS acknowledgment for Day 1 (received when the Day 2 filing occurred) indicated eight clients were accepted from Day 1 (therefore, two returns were rejected).

(6) As part of Day 3's business, the practitioner has two responsibilities: (A) to have eight Forms 8453 ready to be mailed to the IRS (with attachments) and (B) to maintain 22 Forms 8453 (the 20 from Day 2 and the two rejects from Day 1) to support pending or future IRS transmittals.

At the VITA site, due to preparer's errors, a few clients were electronically transmitted multiple times before all errors were eliminated from the clients' tax return file. At any point, the preparer is responsible for total control over all Forms 8453 and ancillary materials.

Weekly, the Forms 8453 for clients whose tax returns had been electronically accepted by the IRS were mailed to the IRS. The chronological client control log was updated to identify clients for whom Forms 8453 were mailed to the IRS.

Control Over Electronic

Filing--Some Problems

On February 10, the third time the VITA site made an electronic filing, the electronic filing software failed for no discernible reason. Because 76 client files had accumulated (due to the need for error corrections from prior acknowledgments and new clients), the BSC software was used for the transmittal. BSC, like most standalone communications software, requires specialized knowledge of communication commands. The electronic transmittal file was manually constructed at the VITA site.

The transmittal had the appearance of failing as soon as IRS contact was made. The PS/2 locked up, was inoperable and was turned off. Based upon this experience it was apparent that the VITA site should have selected an external modem instead of an internal modem. Line tests can be performed when external modems are in place that are impossible with the internal modem.

On February 13, the VITA site electronically contacted the IRS for the acknowledgment file from February 10. The contents of the IRS acknowledgment file were garbled, thus giving credibility to the assumption that the February 10 transmittal had failed. The 76 files from February 10 were re-transmitted. On February 14, the acknowledgment file for February 13 contained rejections because the clients had previously been accepted under different Declaration Control Numbers (DCN). Although the VITA site's PS/2 locked up on February 10, in reality, a perfect transmittal had been accomplished. The garbled acknowledgment file received on February 13 was incidental to the February 10 electronic filing.

On February 13, the VITA site should have telephoned the IRS at its "1-800" electronic filing trouble desk and requested that the February 10 acknowledgment file be rehung. The IRS will retrieve and rehang an acknowledgment tape when requested. The IRS telephones the preparer when the old tape is ready.

In early March, the telephone used for electronic filing went dead during filing. A quick cable substitution disclosed that the modem telephone cable was inoperable. The university's computer center tested the two-wire modem cable and discovered the cable was defective. A replacement of both jack ends failed to produce a working cable. Upon request, a UDS dealer in Cleveland replaced the modem cable. It became apparent that some previous transmittal problems were due to a defective modem cable.

In addition to potential hardware difficulties, the preparer might encounter software problems because of events the software vendor did not anticipate.

During the month of February, the VITA site encountered frequent problems with automatic electronic filing. VITA personnel assumed automatic electronic filing had failed due to inexperienced volunteers. However, by mid-February, several vendor provided software updates were received. Following installation of these software updates, automatic electronic filing worked without further difficulties. The conclusion must be that some problem transmissions were related to software differences.

The preparer is virtually helpless in isolating hardware failures and software difficulties. The presence of both problems in February 1989 at the VITA site made electronic filing extremely difficult.

Control Over Client

Computer Files

From the daily universe of all clients, only those taxpayers qualifying for electronic filing had to be identified. The VITA site constantly monitored that clients entitled to a refund were validated for electronic filing.

The IRS-accepted Declaration Control Number (DCN) appeared at the top of the Form 8453 before the form was mailed to the IRS. New DCNs were assigned with each electronic filing.

Note: Assume client A was assigned DCN 108 on Day 1, but client A's tax return was rejected. If client A's tax file was corrected and re-transmitted on Day 3, then a new DCN, say 333, was assigned. If client A was accepted by the IRS on Day 3, DCN 333 must be reported on Form 8453.

At any given time, the preparer has two sets of DCNs: (1) those pending and (2) those accepted. With electronic filing, preparers must maintain total control over each client's file from the moment of the file's creation until both the file and DCN are accepted.

As noted above, a garbled acknowledgment file occurred after the VITA site's February 10 transmittal. The automatic electronic filing software used by the VITA site automatically transferred the DCN for accepted returns from a temporary file into a permanent DCN history file. The garbled acknowledgment impaired the DCN history file and resulted in a loss of DCN data. The solution elected at the VITA site was to erase the DCN history file and to create a new DCN history file. The computer history on about 100 DCNs was, therefore, lost. Following this loss, the IBM Model 30 286 hard disk was backed up with a tape back-up system at least weekly. The lost DCN history file was separately re-constructed using a spreadsheet program.

Client tax return data was captured by volunteers on 5-1/4" floppy disks at one of the four IBM PCs. The floppies were copied to the IBM PS/2. The floppy disk's data were retained as originally captured by the VITA volunteer. Clients qualifying for electronic filing were built into identifiable transmittal files on the PS/2. If a qualifying client failed to pass the electronic filing validation test, only the PS/2 file was corrected, not the data on the floppy disks.

For rejected clients, the files were audited and corrected based upon the IRS rejection codes. Only the first encountered error was noted by the IRS codes. Therefore, it was possible for the same return's data to have multiple rejections before its ultimate acceptance. Multiple preparer input errors of different types resulted in continuous IRS rejections until all errors were corrected. Form 8453 served as a hard copy reminder of unfinished old business.

Based upon VITA site experience, the most frequently encountered rejection codes, in frequency rank order, were as follows:

002--Key numeric data field was not in the prescribed form, as follows: (a) Money amount fields had to be numeric, zero-filled and right justified. (b) Other numeric fields could not contain any non-numeric data and had to be zero-filled and right justified. (c) Certain fields could not be negative. For example, a Capital Gain Distribution from Form 1040 had to be positive.

022--Either a state code was not present or it did not equate with valid state codes recognized by the IRS.

070--Spouse's Social Security Number was not numeric or was not a non-resident alien.

082--The total itemized or standard deduction of Form 1040 was significant and not equal to the total deduction of Schedule A.

The tax preparation software used by the VITA site permitted entry of illegal characters for electronic filing. The possibility of a volunteer entering these characters aggravated the reject situation.

For non-validated and rejected files, extensive amounts of time were expended auditing the clients' data files housed on the PS/2. Corrections were only made to the client data files on the PS/2. The original files on floppy disks were newly modified. Back-up was very important.

Conclusion

At any point in time, control over the entire electronic filing process is critical. To summarize these control issues, assume a practitioner served 60 clients during a tax filing season and made two electronic filings with the IRS and the attributes in Exhibit 1 applied:

At any point in time, the total number of clients serviced by a practitioner should equal the sum of [1.a + 2.a + 2.c + 3.a + 4.a + 4.b], (i.e., 1 + 28 + 6 + 5 + 7 + 13 = 60). Also, the total number of electronic filings to be made should equal the sum of [2.a + 3.a], or 33 in this example. The practitioner needs to establish a control log to assure capturing the above illustrated designations. The VITA site established client control logs during the 1989 tax season.

In spite of the difficulties encountered during the first year of operation, the Center for Taxation Studies at the University of Akron intends to continue offering an electronic filing service at its VITA site. Because the VITA site serviced a large number of low income, elderly and handicapped taxpayers, the electronic filing benefits to clients far outweighed the difficulties encountered with electronic filing.

The learning curve for the entire electronic filing process, both for manual controls and for microcomputer communication, is very steep. By April 3, 1989, the VITA site at the University of Akron was operating very efficiently and effectively. VITA clients who owed a balance to the IRS were mailed completed tax forms within two working days following their appointment date. Clients entitled to a refund from the IRS had their tax returns electronically filed the day following their appointment. Clients reported receiving refunds from 18-24 working days from the date of their VITA appointment. For clients due a refund, Forms 8453 were routinely secured, W2s were accurately affixed and client signatures were obtained. The DCNs for accepted clients were transcribed to the Forms 8453. Weekly, batch transmittals of Forms 8453 were made to the IRS. The percentage of errors declined drastically as the weeks of preparation progressed.

Law and accounting students who participated in the electronic filing program gained invaluable experience in tax return preparation and in dealing with the public. The electronic filing feature proved a tremendous public service on the part of the University of Akron. Also, the university gained publicity (i.e., television, radio, newspaper) because of its participation in the pilot project.

In summary, the total electronic filing experience was a good one. However, the additional control responsibilities, assumed by an electronic filer, should not be understated. In the electronic arena, there is more paperwork, added needs to verify software logic and an increased chance for human error. This article has identified some of the problem areas and suggested solutions.
COPYRIGHT 1990 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Wilson, E. Lee; Metcalf, Richard W.; Lieberman, Alvin H.
Publication:The National Public Accountant
Date:May 1, 1990
Words:2642
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