IRS to test public-key tech for electronic tax filings

The Internal Revenue Service this month awarded a contract for a pilot program to take place next year that will test the technology that permits taxpayers who send their returns electronically to sign them digitally.

The IRS awarded a contract to VeriSign Inc., Linthicum, Md., to conduct the pilot program, which will include only IRS employees and will test public-key infrastructure technology. PKI is a framework of law, policy and procedures for the use of digital signatures, which verify the authenticity of electronic documents.

Currently, taxpayers who file their tax forms electronically— about 25 million taxpayers this past tax season— also must send the IRS a signed paper form that the IRS can use to verify the identity of the individual named on the digital form. Unlike the pilot program, the current electronic system does not involve using the Internet. Taxpayers send their returns to a transmitter, such as Intuit Inc., which guarantees privacy and then transmits the taxpayers' returns to the IRS using secure telephone lines.

The pilot program marks the second time the IRS will attempt to develop a completely paperless method for filing tax returns to encourage the less expensive and easier electronic filing. The first attempt was in 1995, when the IRS introduced the controversial Cyberfile, formerly known as GO-ELF, a multimillion-dollar system that allowed taxpayers to file tax returns over the Internet.

But in 1996 the IRS abandoned Cyberfile after the agency received harsh criticism from government officials who said the IRS had failed to perform a thorough analysis of Cyberfile's technical weaknesses, particularly inadequate security safeguards to protect taxpayer information on the Internet.

Stephen Holden, national director for electronic program enhancements at the IRS, said the IRS has learned lessons from Cyberfile and promises to move with caution with the latest electronic filing.

"We are moving much more deliberately,'' Holden said. "There are a number of companies that are providing security and authentication, so we are able to benefit from the maturity of the market."

For example, in Phase One of its pilot program, the IRS will provide electronic signatures and security limited to e-mail messages sent among a group of 50 IRS workers, Holden said. Phase One will concentrate on assisting the IRS in evaluating the technical, policy, procedural and business aspects of deploying a PKI in support of electronic filing.

Under Phase Two, the IRS will use two electronic filing applications from VeriSign's partners, Intuit and UWI.COM, to provide Internet-based security for filing tax returns without the need for a handwritten signature on a hard-copy return. Holden said 5,000 IRS employees will be included in this phase.

Patricia Edfors, president of PNE Associates, Reston, Va., said the piloting approach in a controlled environment is a smart move, but she is not convinced that the exercise will teach the IRS how to deploy the technology to the mass taxpaying community.

"When you move from the manual world to the cyberworld, it is difficult to prove identity,'' Edfors said. "PKI is a good form of technology for certain filers. The approach of piloting the program in a controlled environment is smart, but these are low-risk filers. They are not the average taxpayer. Deployment will be in a less-controlled environment.''

The IRS has been trying to encourage more taxpayers to file returns electronically since 1990, when the agency began allowing taxpayers to file taxes from their home PCs. The percentage of taxpayers filing electronically has increased. In 1997, 19.1 million taxpayers, or about one out of six, filed their tax forms electronically. In 1998, 24.6 million taxpayers— about one in five— filed electronically.

The IRS offers three ways to file tax returns electronically: E-file, which allows taxpayers to file electronically with a tax practitioner; Telefile, which involves submitting tax information over the phone; and online filing using a home PC.

"Using a digital certificate and a secure tax filing application from either UWI.COM or Intuit, taxpayers will enjoy a convenient, secure e-filing option from their home computer without the need to submit any paper forms,'' said Jim Brandt, director of federal markets at VeriSign. "Taxpayers can be confident that their tax return is cryptographically protected from eavesdropping on the Internet and that it will be received on time and without modification en route.''

Nick Piazzola, vice president of VeriSign's federal markets division, said the pilot will provide the full PKI functionality required to issue and manage the digital certificates, and the IRS may select one or both of the proposed electronic tax-filing applications by Intuit or UWI.COM.

Intuit plans to modify its tax-preparation software package, TurboTax OnLine, to include a digital signature application. Digitally signed forms will be submitted to the IRS through the Intuit World Wide Web site.

UWI.COM, however, is offering its new InternetForms technology, which will enable a taxpayer to download a tax form, locally prepare and digitally sign the form and submit it directly over the Internet to the IRS.

If the pilot program is a success and market research suggests that taxpayers will use it, Holden said he will offer it to the taxpaying public.

Holden expects taxpayers to be reluctant to use the software initially, but he said the software eventually should catch on— a reaction that would be similar to the initial response during the advent of automated teller machines.

"Surely if [PKI] works for Citicorp and some of the largest financial institutions, it can work for the IRS,'' said Ted Julian, an analyst for Forrester Research. "The IRS deserves credit for thinking about how it can leverage technology to better serve customers.''