IRS torn between e-enforcement and e-filing

Internal Revenue Service officials say they are caught between devoting technology resources to booking tax evaders and helping taxpayers file electronically.

Addressing a tax industry group yesterday, Mark Matthews, the IRS’ deputy commissioner for services and enforcement, said the agency needs to expand e-file and build an enterprise data warehouse that the chief financial officer’s division could use to track tax collections.

By law, the agency must receive 80 percent of all tax returns electronically by 2007. The agency also needs a tax collection data warehouse, which the Government Accountability Office highlighted in its review of the IRS’ fiscal 2004 financial statements. GAO found weaknesses in the IRS' ability to track unpaid taxes and minimize improper refund payments.

“Where we can, we are starting those steps toward mandating e-filing, pushing in that direction,” Matthews said.

Much of his talk at an electronic tax filing conference, however, centered on the agency's success in exposing tax fraud. Matthews spoke at the annual meeting of the Council for Electronic Revenue Communication Advancement, a nonprofit industry group representing tax preparers and tax preparation software companies.

During the 2005 tax season, more than 50 percent of all taxpayers filed electronically, contributing to the IRS Web site’s sky-high traffic ranking, Matthews said. “We are cautiously optimistic that we are going to beat Britney Spears this year, unless she pulls out the baby pictures,” he said.

Beginning in 2006, large companies and tax-exempt organizations must file their tax forms electronically. The new regulations will apply first to corporations worth more than $50 million and to tax-exempt organizations with assets of at least $100 million. The threshold will drop in 2007 to include businesses and tax-exempt organizations worth $10 million.

The IRS’ modernized e-filing system will soon support the common 1040 tax return form. Modernized e-File (MeF) is a Web-based system that uses the industry standard Extensible Markup Language for tax forms.

The IRS plans to expand the modernized e-filing system to include 1040 tax returns by January 2009. Officials said they expect to receive about 90 million electronically filed 1040 tax returns that year.

By 2010, the IRS will no longer accept proprietary e-file forms, only the standard MeF, officials said.