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Why electronic tax filing is hot.

This high-tech technique is a boon to preparers and speeds client's refunds.

Electronic filing - the paperless, computerized transmission of income tax information by tax preparers to the Internal Revenue Service - continues to grow in popularity. The IRS prefers it over paper returns, tax preparers say it's accurate and more efficient than using paper returns and taxpayers, if owed a refund, get the money sooner.

This article explains the primary benefits of electronic filing for preparers and their clients, what every CPA who prepares tax returns should know about electronic filing, why the IRS prefers it to filing paper returns and how it can be implemented even by small tax preparation firms.


In the 1992 tax year, the IRS processed about 116 million income tax returns. About 104 million (almost 90%) of them were paper forms, which had to be sorted, typed into the IRS computers, processed and then stored. The IRS estimates the processing cost of paper tax returns is at least $3.28 and as much as $4.28 each. Electronic processing, however, costs about $2.53 per return.

Electronic filing began in 1985, when IRS research found that one in five income tax returns was prepared on a personal computer (PC). In 1986, the IRS successfully tested computer-to-computer transmission of returns with five tax preparation firms. The program was expanded nationwide in 1990, and its growth since then has been rapid. From 1989 through 1993, the number of electronically filed returns increased tenfold - to 12.1 million from 1.2 million. Next year, the IRS expects more than 15 million returns to be filed electronically. The number of tax firms filing returns electronically has grown, too - from 38,000 in 1991 to about 55,000 in 1992.


Electronic filing is relatively easy. For step-by-step guide, see exhibit 1, page 6

The IRS accepts electronic returns only from tax preparers, service bureaus or third-party transmitters with electronic filing identification numbers (EFINs), which can be obtained by filing IRS form 8633. The process takes up to 60 days. The list of federal tax forms and schedules that can be filed electronically is fairly long (see exhibit 2, page 70).

Electronic filers must have an IBM-compatible PC with a modem as well as tax preparation, electronic filing and communications software. After completing computerized returns with the tax preparation software, preparers use the electronic filing software (which often is built into tax preparation packages) to format the returns for processing by the IRS computers.

There are two ways of filing returns electronically with the IRS: directly or via a service bureau or third-party transmitter. Filing directly is cost-effective only for high-volume preparers (those who file 200 or more returns) because it requires a special high-speed modem and special software. The modem alone costs nearly $1,000. Indirect filing, via service bureaus or third-party transmitters, is easier and requires less costly hardware. No special equipment is necessary - only the type of modem that PCs use to connect to bulletin boards or to exchange data with other computers; such modems cost between $50 and $200. With indirect filing, service bureaus act as electronic transfer stations between preparers and the IRS, charging a $1 to $5 fee for each return. The return can be transmitted to the bureau or third-party transmitter via an ordinary modem. Some service bureaus also accommodate low-volume preparers, creating electronic returns using the preparers' paper forms. Keying charges generally range from $15 to $20 per return.

Whether filing directly or indirectly, taxpayers still must mail a paper form - IRS form 8453, which must be signed by both the taxpayer and the preparer - to the IRS after the electronically filed return has been accepted.


For preparers, electronic filing lowers processing costs. Other than the one paper copy for the client, there are no returns to print and collate and only one IRS form 8453 per client to mail. The IRS currently is testing an electronic signature program that, if successful, will eliminate the last piece of paper in the process.

For taxpayers, fast refunds and direct deposit of refunds are the primary advantages of electronic filing. Another benefit is assurance their tax returns were received by the IRS; when the return has been received, the IRS transmits an acknowledgment.

Another plus for clients is the prospect of receiving refund anticipation loans (RALs). RALs are short-term loans applied against the refund, generally arranged by the electronic filer (usually the preparer) and a local lending institution. Preparers initiate the process by requesting a RAL on the electronic return. After the IRS has acknowledged the amount of the refund and notified the filer that the amount was approved, the filer notifies the lending institution, which writes a check for the refund, less filing and loan fees. The process usually takes about two days. The loan then is repaid with the IRS refund, which usually is deposited directly with the lending institution in three to six weeks.

In addition, taxpayers in 15 states can file their federal and state returns electronically in one transmission to the IRS, which transmits the state data to the appropriate tax authority. Federal and state electronic filing currently is available in Kansas, North Carolina and South Carolina; more states will be added for the 1993 filing season.

There's little doubt that electronic filing is winning acceptance among tax preparers, taxpayers and the IRS. All stand to gain from the technology.

Electronic filing steps

1. The preparer applies for an electronic filing identification number.

2. Tax returns are prepared on IBM-compatible personal computers with a tax preparation software package.

3. Electronic filing software formats the returns for processing by IRS computers.

4. Communications software establishes a link between the preparer's computer and either the IRS, a service bureau or a third-party transmitter and sends the returns.

5. Within 48 hours, the IRS acknowledges receipt of the return. A refund anticipation loan is granted, if requested.
Forms and schedules
available for electronic filing

The IRS supports electronic filing of the following forms and

Forms. 1040 2106 4136 4835 8283
 1040A 2119 4137 4952 8582
 1040EZ 2210 4255 5329 8606
 W-2 2210F 4562 6198 8829
 W-2G 2441 4684 6251
 1099-R 3903 4797 6252

Schedules. A C E F SE


* ELECTRONIC TAX FILING - the paperless, computerized transmission of income tax information - is growing in popularity. It saves money for the Internal Revenue Service, it's more efficient for tax preparers and if a taxpayer is owed a refund, it speeds the payment from the U.S. Treasury. * THE IRS ESTIMATES more than 15 million returns will be filed electronically next year. Last year 55,000 tax preparers used the technology. * TAX PREPARERS CAN file electronically either by transmitting the data directly to the IRS or indirectly via a service bureau or third-party transmitter. Generally, direct filing is most cost-effective for preparers handling at least 200 returns. * ELECTRONIC FILING of both federal and state returns is currently available in Kansas, North Carolina and South Carolina. It is being tested in a dozen more states.

JAMES F. PETERSEN is the founder, chairman and chief executive officer of Best Programs, Inc., Reston, Virginia. KEITH A. WASHINGTON, CPA, is development manager at Best Programs.
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Washington, Keith A.
Publication:Journal of Accountancy
Date:Oct 1, 1993
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