You've Got a Refund!

With system upgrades, software freebies and bonus services, the IRS lures taxpayers online.

The move to e-filing is great news for the tax agency. Eliminating paper returns helps the IRS slash operating costs. The IRS estimates that it costs 56 cents to process an electronic return, as opposed to $2.71 for paper processing. The agency already had trimmed more than $100 million from its cost of tax processing this season several weeks before the April 15 filing deadline.

By late March, the IRS had received 47.6 million returns via its Internet and telephone filing systems. Agency officials projected that 53 percent of this year's individual returns would arrive electronically-a big boost from last year's 40 percent. (Participation in electronic filing had been growing at just under 5 percent per year since 2001.)

Taxpayers who file electronically like the system. They give the IRS higher marks than those who file by paper, according to the American Customer Satisfaction Index, an annual survey conducted by the University of Michigan Business School and two other groups. E-filers rated the IRS well above the federal government average, and higher even than private-sector firms Nike and Phillip Morris. Paper filers, on the other hand, rated the IRS behind low-scoring companies such as Comcast.

Taxpayers who file online receive their refunds at least twice as fast, says JoAnn Bass, acting electronic tax administration director at the IRS. If they have to pay additional taxes, they can do so by credit card or with a direct withdrawal from a bank account. E-filers get confirmation their returns were received and timely notification of mistakes such as incorrect Social Security numbers-and they don't have to trek to the post office by midnight on April 15.

Still, there is work to be done. Congress set a goal in 1998 for the IRS to receive 80 percent of all returns electronically by fiscal 2007. To get there, the agency will have to overcome some significant obstacles.

For starters, only 61 percent of Americans use the Internet, according to research conducted in 2003 by the Pew Internet & American Life Project. Among those who do use the Web, some avoid financial transactions out of concerns about security. And, perhaps most important, the companies that transmit electronic returns to the IRS charge as much as $40 or more for their services.

To encourage taxpayers to file online, the IRS continues to enhance and simplify its e-filing system. A recent change, for example, allows taxpayers to attach PDF files of documents such as appraisals of donated artwork. "We have to make the system so simple that either taxpayers themselves or preparers would prefer to use it," Bass says.

Cost is another obstacle. Last year the agency set up Free File, a three-year agreement with a consortium of 18 companies to offer certain groups no-charge e-filing service. Each firm selected segments of the population it would serve for free, based on income level, age, location and other factors, but together they must cover at least 60 percent of taxpayers. The agreement can be renewed when it expires.

Even if individuals shy away from online filing, the IRS has made life easier for tax preparers, who process more than half of individual returns. They have at their disposal a suite of electronic services allowing them to register power of attorney, access clients' tax data and ask IRS officials questions online. "During the day, they want to be dealing with the clients, not waiting on the phone for the IRS," Bass says.

Whether these initiatives will be enough to carry the IRS to its goal is unclear. "If we're actually going to meet it or not, who knows," Bass says. "It is a good stretch goal."

LOGGING ON

Since 1986, the number of tax returns filed electronically has increased dramatically, but it still may fall short of the IRS' goal to reach 80 percent by fiscal 2007.

Source: IRS; Corbis Photo