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Electronic filing: what's in it for tax preparers.

Over the next several years, as the IRS spends 9 billion dollars to implement their Tax Systems Modernization (TSM) plan, tax practitioners will have no choice but to rethink the way they do business.

TSM is the first concerted IRS effort to bring together a patchwork of independent computer systems, originally designed more than 30 years ago. With an integrated tax processing and customer service system in place, the IRS plans to offer taxpayers "a one-stop administrative process for tax guidance."

To this end, the IRS is developing a number of TSM subsystems, including the Document Processing Systems (DPS) for inputting tax returns and other documents; a Wide Area Network (WAN) to connect components of the new computer system together using ultra high speed data communication links; and the Electronic Management System (EMS) for receipt of returns electronically and for the exchange of information with other taxing authorities.

Already, the IRS has spent a pretty penny to get tax preparers and taxpayers on board with EMS and specifically electronic filing. Their efforts to date, which include national promotions and seminars, are paying off. More than 55,000 tax firms participated in the electronic filing program in 1991. A whopping 10,876,141 electronically filed returns were received by the IRS this last filing season. Even more astounding is the accuracy rate for these returns -- over 97%!

The IRS projects that by 1998 more than 50% of all returns will be filed electronically. To ensure hitting this mark, the IRS is currently working on several major enhancements that will enable over 95% of all individual returns to be filed electronically. Their expanded program plans include:

* Continued acceptance of tax due returns nationwide, due to successful testing during the 1991 tax season.

* Widespread marketing of a "File now and pay by April 15 program."

* Credit card legislation that would allow payment of tax due by credit card (no pending).

* Elimination of the last piece of paper in the process, starting with an "Electronic signature" test pilot program.

These and other IRS efforts, such as programs for electronically transmitting informational, corporate, partnership and other types of returns, are likely to result in billions of taxpayers and businesses demanding electronic filing services.

How It Began

In 1985, an IRS research study showed more than 20% of all tax returns were being prepared on some type of computer. It was then the IRS recognized these returns were being printed out, mailed to them and same data, previously in computer readable format, was being re-keyed into the IRS computer system. This process was slow, prone to errors and also very expensive. The initial concept of electronic filing was to link the preparer's computer directly to the IRS computer. In 1986, the IRS tested the concept with five tax preparation firms who filed some 25,000 refund returns. Since then, the program has changed, expanded and evolved into an effective method of sending tax returns to the IRS.

Today, electronic filing is by far the most successful program in tax administration since the IRS automated their processing in the 1950s. It is one of the most visible and most important aspects of the IRS's Tax Systems Modernization plan. According to a spokesman in the IRS Public Affairs office, electronic filing is regarded as "the best thing since the proverbial sliced bread." It's not hard to figure out shy.

Electronic filing significantly reduces the IRS's labor costs. An electronic return costs about four cents to process whereas a paper one costs around 50 cents. In addition, paper returns average a 16% error rate, while the electronic average is under 3%.

But what's good for the goose isn't always good for the gander. Or is it? If electronic filing means greater efficiency, less paper, lower costs and fewer errors for the IRS, what does it mean for the tax preparer?

The Practitioners Perspective: "More Clients Are Asking For It"

Particularly among taxpayers who are due refunds from the IRS, electronic filing is catching on fast. Bill Opaska, a veteran tax preparer in Pittsburgh, Pennsylvania, who used the indirect method to file 100 clients' returns electronically this past tax year says, "A lot of individuals use their tax refund as a windfall to take a vacation or pay a pressing bill. These clients want to get their money back from the IRS as quickly as possible. They're thrilled when their refund shows up in their bank account 14 to 16 days after I transmit their return to the IRS."

As more and more taxpayers seek out electronic filing, the opportunities for practitioners to boost their business by offering this service continues to increase. Electronic filing not only generates extra fees from existing clients who are due refunds. It is also an effective way of attracting new clients who are in search of faster refunds.

Several practitioners found this to be true and cited "word of mouth" as a big factor behind the increase in demand for electronic filing services |is greater than~ James Bone, Jr., has been offering indirect electronic filing in his Wyoming, Pennsylvania, practice since 1989. "Clients tell friends and colleagues that they received their refund in two weeks and that I can do the same thing for them. A lot of new clients have walked through my door as a result of electronic filing."

Knowing When the IRS Receives Returns Is a Big Advantage

The IRS guarantees acceptance or rejection notification of electronically filed returns within 48 hours of receipt. As part of this acknowledgement process, the IRS's computer system checks each return for accuracy, on a field-by-field basis, verifying that all data has been entered properly and that there are no major errors. If there is a mistake, the tax preparer can avoid long, drawn-out delays by immediately correcting the return and transmitting it again.

There's a comfort factor for tax preparers in knowing that the IRS has received their returns and that they are correct. Wayne Ayers of Roanoke, Virginia, for example, has been in the tax preparation business for 24 years. Just in the past few years, he has electronically filed thousands of returns directly to the IRS. "A certified return receipt doesn't prove that the IRS received a client's return on a specific day. With electronic filing, the IRS has your client's return usually within 60 seconds and you have proof that it's been accepted."

In One Way or Another, "It's Profitable"

By offering electronic filing services, practitioners open themselves up to a number of profitable possibilities. Electronic filing can help attract new clients and more revenue per customer. It usually cuts down on the amount of time preparers spend corresponding with the IRS. It gives practitioners the opportunity to provide clients with faster refunds and refund anticipation loans. And, it is often an effective way to stand out from the pack and compete in today's marketplace.

While some preparers choose not to bill clients for electronic filing returns, most charge between $20 and $50 for the service. Since its introduction, Marvin Cok has been charging his clients in Spartanburg, South Carolina, a $25 fee for indirect electronic filing. "In real numbers of returns, electronic filing has increase about 20% per year for me." Marvin filed 240 returns electronically through a service bureau during the 1990 tax season.

For Bill Opaska, "this second year I increase my customer base by about 12% though electronic filing." Bill's fee is $20 for each return he files electronically and only transmits returns he has prepared. On the other hand, Tim Meredith does not charge for the service as long as he has prepared the return. "It's a real good advertising point when everyone else is charging $20. In 1988, I transmitted about 75 returns and in 1989 I sent around 500 electronically." This past season, Tim electronically filed between 800 and 900 returns directly to the IRS for his clients in the Morristown, Tennessee, area.

Increase of as much as 100% in the number of electronic transmissions were reported by practitioners for the 1991 tax season. Some preparers believed electronic filing gave them a competitive edge because it allowed them to provide clients with another valuable service. Others found that it brought in more business and revenue. All agreed that their investment in electronic filing software -- regardless of whether they used the direct or indirect method -- quickly pays for itself.

"It's A Real Winner"

Now celebrating its 10th anniversary with 30 offices throughout Ohio, Kentucky and West Virginia, DanTax, Inc., a franchise tax business, is finding that electronic filing is a highly profitable service. Company Vice President, Claudette Huggins, reported that electronic filing generated nearly $93,000 for participating DanTax offices during the 1990 tax season. "It's been a great financial boom for us. Especially since we use in-house software and transmit directly to the IRS. If we had gone through a service bureau, we would have given up about $30,000 of the income produced from electronic filing. Next year should be even better because all of our offices will be offering electronic filing services to clients."

"Only a few short years ago," Claudette recalls "maybe one out of 10 clients were asking for electronic filing. This last year, it was more like one out of every three clients. Electronic filing fits right in with how we work with our clients. Service has always been and always will be our Number One priority at DanTax. There's no question that electronic filing is a service our clients want."

"There Are Still Some Kinks to Work Out"

The verdict is till out on the subject of electronically filing balance due returns. Many said they cannot imagine clients paying a fee to transmit an amount due return. Suggestions to get taxpayers on board with this program ranged from offering an incentive, such as 10% IRS discount on the amount owed, to making it mandatory for balance due returns to be filed electronically.

However, William Buerger, a private practitioner in Hunlock Creek, Pennsylvania, had a different perspective. He pointed out that "knowing the IRS has accepted the balance due return before the deadline is like having an insurance plan."

On the topic of the IRS' support of tax preparers, the reviews were mixed. "We're saving the IRS a lot of money and they don't even have an 800-number for electronic filing," according to James Bone, Jr. Marvin Cok believes, "The IRS needs to work the bugs out more quickly, like correctly matching primary and secondary Social Security numbers" (an area the IRS is committed to enhancing this tax season). But as far as Tim Meredith is concerned, the IRS is doing a good job: "I work with the electronic filing center in Cincinnati. It's run like a business. And it's amazing how helpful the people there have been."

Transmitting Prepared Returns vs. Those Off the Street

While some practitioners indicated a willingness to accept self-prepared returns for electronic transmission, others are reluctant to do so because of the potential problems such returns can present. "What concerns me the most about electronically filing off-the-street returns," says Claudette Huggins "is if there's a mistake in the return, the taxpayer can have much longer IRS delays than ever before. An incorrect calculation or an accidental name reversal that is not immediately detected by the IRS can cause tremendous problems in the electronic filing process. I've seen these kinds of errors take the IRS six to eight months to straighten out."

Some Final Words of Advice

From all indications, electronic filing's popularity is growing by leaps and bounds. As Tim Meredith remarked, "If you don't offer electronic filing, those clients who want it will go elsewhere." "It's a convenience that more and more clients want an another money-making service for your practice," as William Buerger sees it. Claudette Huggins of DanTax is firmly convinced that "Practitioners who don't offer it within the next three years will be out of business."

Perhaps Wayne Ayers summed it up best: "Electronic filing is just part of the computerization of taxes and the Internal Revenue Service. It's necessary, and a lot easier to do than most practitioners think. There's no doubt about it ... pretty soon it sill be just like another ta form you fill in."

One thing is for sure. Whether or not the IRS' overall Tax Systems Modernization succeeds, electronic filing is a winning proposition for the IRS, taxpayers and practitioners. Over 14 million returns are expected to be filed electronically this coming tax year. What was the "wave of the future" not long ago is unquestionably here to stay. Tax practitioners should get ready for it now or the wave may sweep them away.

Jim Petersen is the president of Best Programs, Inc., in Reston, Virginia, and can be reached at (703) 709-5200.
COPYRIGHT 1992 National Society of Public Accountants
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Title Annotation:Debits & Credits; IRS Tax Systems Modernization plan
Author:Petersen, Jim
Publication:The National Public Accountant
Date:Dec 1, 1992
Previous Article:A look at the making of the tax bill.
Next Article:Sheltering your profits: how owners of small businesses and professional practices can reduce taxes.

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