Taxes '01: E-filing chugs on

Like a child learning to walk—take a few steps, stumble, get up, try again—the Internal Revenue Service is determined to make electronic filing of tax returns a part of American life.

"This isn't some test project anymore," said Terry Lutes, who directs the IRS Electronic Tax Administration.

Indeed, the IRS expects 45 million Americans to file their income tax returns online this year, up from 35 million in 2000. As of March 9, 24 million taxpayers had filed electronically. The total individual returns filed, electronically and by traditional means, was about 127 million in 2000 and is expected to be about 130 million this year.

But the agency has a long way to go. The IRS has embarked on a 15-year, $10 billion modernization plan that will transform tax filing from a paper-pushing system to an interactive online program for taxpayers. The goals of the program, called IRS Prime, include delivering tax refunds in two or three days and enabling taxpayers to receive e-mail messages from the IRS about their returns as well as track the status of refunds online. IRS Prime was launched in December 1998 with the award of a contract to Computer Sciences Corp.

Recent Missteps

The IRS path to e-filing has included a few stumbles:

The General Accounting Office, the investigative arm of Congress, reported this month that there were security lapses in the e-filing system during the 2000 tax season. H&R Block, the nation's largest commercial tax-preparation service, complained that the IRS' new system enabling taxpayers to select personal identification numbers was flawed, forcing some taxpayers to file their signatures the old-fashioned way, by mail, in addition to filing their tax returns electronically. The IRS continues to offer the TeleFile service, which enables taxpayers using Form 1040EZ, the simplest tax return, the option of filing their taxes by telephone. But it is a limited service that likely will not be expanded. So far this year, there's been a 15 percent drop in the number of taxpayers using TeleFile. Audits of tax returns fell to a low of one per 217 returns in 2000, about half the rate for 1999. The drop in audits, part of a two-decade trend, accompanies declines in IRS collection efforts such as seizures, liens and levies imposed on those who owe back taxes. The IRS said it would have a better record with electronic systems. Behind the scenes, the IRS presses on. Every year, the agency adds new components to modernize a system that still requires paper tapes to store old records and clerical workers to type in 34 elements for each tax return. Although many of the IRS' computerized systems and procedures are invisible to the taxpayer, IRS officials say the agency is building the foundation for a new era of e-government.

For example, the agency has put 83 tax forms online this year, making it possible for 97 percent of individual taxpayers to file electronically. It has consolidated its mainframe computer system, cutting the number from 67 computers at 12 locations to just 20 mainframes at three data- processing centers. The agency is also working to make telephone service faster and smoother for taxpayers seeking assistance.

Growing Interest

"We don't think we're going to get 100 percent electronic returns in the next few years," Lutes said. But the idea is catching on. A study released this month found that taxpayers are becoming more willing to communicate with the IRS via the World Wide Web, but they are also concerned about the security of their personal information.

"What we found is that the traditional taxpayer isn't so traditional anymore," said Jonathan Light, vice president of American Management Systems Inc., Fairfax, Va., the technology consulting firm that conducted the study.

The report, "The 21st Century Taxpayer: Tax Compliance Enters the Information Age," also found that taxpayers are demanding the same level of service when conducting business with the government that they demand of interactions with the private sector.

In fact, taxpayers are gravitating to the IRS Web site in increasing numbers to find information. In February, the IRS site ranked 44th on the list of the 50 most-visited Web sites, as measured by Media Metrix Inc., which tracks Web traffic. The company found there were 6.7 million visitors to the IRS site in February, up 64 percent from February 2000, when it had 4.1 million visitors.

The pace of traffic to the IRS is increasing in other ways, too. Last year, nearly 110 million taxpayers contacted the agency by telephone for information, and the IRS processed more than 215 million individual and business tax returns, all requiring some handling by IRS personnel during processing because the system is not fully automated.

And for the first time, taxpayers in all states with a state income tax can file their federal and state returns in one electronic transmission. More than 8 million taxpayers have already done so this year.

Security Concerns

But as the popularity of e-filing grows, so do concerns about security. Those worries were heightened with the release earlier this month of the GAO report on the vulnerability of IRS systems.

Even though IRS Com-missioner Charles Rossotti said there was no evidence that any data was stolen, GAO auditors were able to break into the IRS system. "IRS did not adequately safeguard tax return data on e-file computers. Our tests, conducted in May 2000, showed that access controls over IRS' electronic filing systems were not effective in adequately reducing the risk of intrusions and misuse of electronically filed taxpayer data," the report said.

The report has raised questions about whether the public is ready to trust its sensitive tax data to a vulnerable online system.

"The road to a secure e-filing system still has a lot of potholes in it," said Pete Sepp, National Taxpayers Union spokes-man. "One of the reasons why e-tailers have had trouble attracting customers is the fear of security. Many people are so concerned that they are not ordering through a secure Web site. That translates doubly so to tax filing. If you are concerned about turning over credit card numbers, imagine the fear over sensitive data being compromised."

Nevertheless, Rossotti assured GAO auditors that the IRS has tightened its, security program and improved its security infrastructure, and now meets federal information security requirements. He said the IRS is reviewing the feasibility and costs of encrypting electronic tax return information when it is transmitted.

"To put it simply, taxpayers can feel safe and secure using e-filing during the 2001 filing season," Rossotti told GAO. "We have strengthened our systems', security, and we will remain vigilant to keep our e-filing process the safest possible."