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Get with the program! The IRS ELF.

White House officials seeking to streamline costs as they "reinvent" government need look no further than the Internal Revenue Service for a model of bureaucratic efficiency. The U.S. tax agency's Electronic Filing program (ELF) has been widely applauded as one of the government's most successful efforts ever--capable of saving U.S. taxpayers upwards of $80 million annually in tax form processing costs.

Electronic filing also offers tax preparers an opportunity to improve client service, streamline operations and broaden their client base. All that's required is basic computer hardware, some affordable electronic filing and communications software and permission from the IRS.

Electronic Filing Defined

Electronic filing is the computer-to-computer transfer of income tax information between a tax practitioner and the IRS. Rather than filling out the traditional paper forms, the tax practitioner uses a personal computer to complete clients' tax returns, then electronically transmits the returns to the IRS. In many cases, the only paper required is Form 8453 which provides a taxpayer signature and the taxpayer's W-2 form. In time, even this paperwork may be replaced with an electronic signature device.

Brief History

Electronic filing is a direct result of the popularity of computerized tax returns. In 1985, 20% of individual tax returns were being prepared on a computer. Recognizing that the percentage would only be increasing, the IRS sought to eliminate the need for tax practitioners to key in information, print a paper return, which would be rekeyed into computers at the IRS.

A limited test (five tax practitioners filing 25,000 electronic returns) in 1986 showed that the program was viable. In 1990, the U.S. tax agency's Electronic Filing program (ELF) was declared a success and made available throughout the United States. This year, the IRS estimates that more than 15 million 1993 returns will be filed electronically.

Everyone Wins

Electronic filing offers benefits for all parties involved: the IRS, the tax practitioner and the taxpayer.

For the IRS, electronic filing significantly streamlines processing costs and dramatically reduces error rates.

The agency estimates the cost of paper tax return to be between $3.28-$4.28 to sort, process and store. Electronically filed returns, however, cost only $2.53 each or a savings of 75|cents~ to $1.75 per return. If all of the 116 million income tax returns expected in 1993--individual or business--were filed electronically, the U.S. taxpayers would save at least $78 million.

Equally important is the increased accuracy of electronic returns. The IRS estimates the error rate on electronically filed returns to be less than 2%, as opposed to 17% on paper returns. The reduction is due to sophisticated error-checking processes in the electronic filing software and in the IRS computer.

For the tax preparer, electronic filing can provide a means of improved client service and greater revenue potential.

One benefit of electronic filing to the tax practitioner is the ability to arrange for a Refund Anticipation Loan (RAL) to clients who have overpaid their taxes.

RALs are short-term loans from a bank or credit union based on a client's overpayment. The electronic filer (tax practitioner) indicates a refund due on the taxpayer's record. The IRS reviews the return to ensure the refund is valid and that the taxpayer is paid-up on all Federal debts (student loans, tax payments, child support payments, etc.). Upon approval, the IRS acknowledges the validity of the return with a direct deposit indicator, which triggers the lending institution to deposit the refund in a special account in the taxpayer's name. The refund less filing and loan fees, is then deposited in the taxpayer's account. First-time filers are prohibited from applying for RALs.

For a while last spring, the IRS considered dropping the direct deposit indicator, jeopardizing RALs, because of the potential for fraud. However, after assessing the risk of fraud and the demand, the agency decided in July to continue providing the direct deposit indicator and implement additional fraud reduction checks.

Electronically filed returns are more accurate than paper returns because of the electronic filing software's error-checking capabilities, which minimize errors. For taxpayers, RALs are not the only benefit of electronic filing. The system allows taxpayers to file early to fulfill their filing obligation, but not pay the taxes due until April 15.

Wide Range of Forms

Exhibit A lists the tax forms that can currently be filed electronically. The IRS expects that more than 95% of individual returns will be eligible for electronic filing by next year. Exhibit B lists of tax forms that cannot be filed electronically at this time.

Another benefit of electronic filing is the ability to file Federal and state returns simultaneously in some states. Indiana, Kansas, Louisiana, Mississippi, New Mexico, New York, North Carolina, South Carolina, Utah, West Virginia and Wisconsin currently participate in the Federal/state return program. Kentucky, Maine, Michigan and Oklahoma are currently testing the program for future implementation.

Getting Started

Getting started with electronic filing is simple and can be accomplished in the following five steps.

1) Obtain hardware. Purchase a personal computer and a modem. A local computer vendor can be very helpful with both. (Those who may file more than 400 electronic returns annually should first read Step 4 below.)

2) Obtain software. Three types are required: tax preparation (for preparing the returns on the computer), electronic filing (to meet IRS standards) and communication and database (for managing transmissions with IRS computers). Nearly 30 packages are available. Look for a wide variety of features and ease of use. Make sure the tax preparation software supports all popular forms and schedules and that the electronic filing software supports RALs, state returns and filing through a service bureau or third-party transmitter.

3) Obtain IRS permission. To register with the IRS as an electronic filer, complete Form 8633 before December 1, 1993. Only revised forms will be accepted after this date. Receiving permission can take up to two months, so start now.

4) Decide whether to file directly or indirectly. If you anticipate electronically filing fewer than 400 returns, file indirectly through a service bureau or third-party transmitter that will act as an intermediary between you and the IRS. Returns will be transmitted on your modem to the service bureau, which will then forward the returns to the IRS. Service bureau charges generally range from $1 to $5 per return.

If you expect to file more than 400 electronic returns annually, think about purchasing a 4800-baud synchronous modem (around $1,000). This will allow you to file directly with the IRS.

5) Inform current clients and prospects. The efficiency of electronic filing and the continued availability of RALs are powerful marketing tools. Make sure clients and prospects are aware that you offer electronic filing.

Only The Beginning

The initial success and overwhelming popularity of electronic filing has impelled the IRS to accelerate its modernization program. The program will continue to grow as the agency seeks additional means of easing the tax-filing burden for taxpayers.

Electronic filing is here to stay and savvy tax practitioners have already realized the competitive advantages of offering taxpayers a computer-age method of meeting an age-old obligation.

Exhibit A

The IRS currently supports electronic filing of the following forms and schedules:

Forms: 1040, 1040A, 1040EZ, W-2, W-2G, 1099R, 1116, 2106, 2119, 2210, 2210F, 2441, 3903, 4136, 4137, 4255, 4562, 4684, 4797, 4835, 4952, 4970, 4972, 5329, 6198, 6251, 6252, 8283, 8396, 8582, 8606, 8615, 8814, 8815, 8828, 8829

Schedules: A,B,C,C-EZ,D,E,EIC,F,R,SE

Exhibit B

The following returns are currently excluded from electronic filing:

* Decedent returns, including joint returns filed by surviving spouses.

* Returns with a power of attorney in effect for the refund to be sent to a third party.

* Paper or electronically filed amended or corrected returns.

* Returns containing forms or schedules not listed above.

* Returns for any tax period other than the current tax year.

* Returns for taxpayers with foreign addresses.

* Returns directly from preparers, collectors or firms who have not been accepted in the Electronic Filing Program. (This does not include drop-off collection points or branch offices, which are included under the parent firm's application.)

* Returns subject to community property rules with filing status "Married Filling Separately."

* Returns with temporary social security numbers (within the range of 900-00-0000 through 999-99-9998).

* Returns with dollars and cents entries.

* Returns containing more than:

a. 30 statements b. three Schedules E c. three Schedules C d. two Schedules F e. one Schedule SE per taxpayer f. 20 Forms W-2 g. 30 Forms W-2G h. 10 Forms 1099-R i. one Form 2106 per taxpayer j. one Form 4137 per taxpayer k. four Forms 4562 l. one Form 5329 per taxpayer m. three Forms 6198 n. three Forms 6252 o. two Forms 8283 p. one Form 8606 per taxpayer, or q. one Form 8829 per each Schedule C.

* Returns containing more than one of each schedule or form listed above and not specified in these exclusions.

* Returns containing an entry in Schedule F, Conservation Expense Deduction.

* Returns containing an entry in Form 4355, Tax from Property Ceasing to be at Risk Tax.

* Returns containing an entry in Form 4835. Conservation Expenses.

* Returns containing an entry in Form 6251, Foreign Tax Credit line.

* Returns containing Form 8283 where Property type box checked is equal to "Art More than $20,000."

* Returns requiring special consideration or procedures for completion, such as returns for taxpayers who have formally requested and received waivers from the IRS or returns for taxpayers who have changed accounting methods.

Jim Petersen is President and CEO for Best Programs, Inc.
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Back to School: The Revenue Reconciliation Act of 1993; electronic filing program
Author:Petersen, Jim
Publication:The National Public Accountant
Date:Nov 1, 1993
Previous Article:What does RRA '93 mean to real estate?
Next Article:State taxation of former residents' pension - the source tax.

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