Electronic tax-filing system gets few takers

The Internal Revenue Service processed less than a tenth of the volume it had expected for its new Modernized e-File system for individual tax returns during the most recent tax season, according to a report released today by the Treasury Inspector General for Tax Administration.

From February to April, IRS officials had hoped to process 9.3 million individual returns through the new system but instead received only 752,320 such returns, the audit report states. That represents only 8 percent of the anticipated volume.

One reason for the trickle is that the system appears to be erroneously rejecting a large number of the individual returns submitted. The IG said faulty business rules for the system might be responsible.

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The IRS has been replacing its existing e-filing system with a Web-based system. The agency has been processing business tax filings through the modernized system since 2004 but has found the processing of individual returns through the system to be “significantly challenging,” the report states.

Due to the low volume of tax returns received through the new system, the IRS hasn't been able to accurately assess its ability to handle large volumes of electronic returns.

"The IRS is counting on the Modernized e-File system to become the dominant system for processing tax returns," said Russell George, Treasury's IG for tax administration. "However, our report found that, so far, it is not performing up to expected levels."

Auditors recommended that the IRS establish processes to monitor the transmission and processing of individual tax returns through the Modernized e-File system, work with the tax return preparation industry and state governments to identify problems, and encourage taxpayers to use the system in the 2011 filing season.

IRS officials agreed with those recommendations.