E-filing popularity taxes IRS systems

The Internal Revenue Service has found that online tax filing may not be as easy as it first seemed. The IRS' initiative to bring the benefits of e-filing to businesses is forcing the tax service to accelerate an information systems upgrade.

Individuals are already filing online — more than 47 million filed electronically last year and 54 million are projected to do so this year. The joint government/ industry partnership offering the Free File e-government initiative is intended to make that option even more popular.

But individual citizens file a relatively small portion of the total tax returns the IRS receives every year. Businesses make up a larger group — in both their numbers and the sheer size of their returns.

The IRS' e-filing infrastructure cannot yet support these large returns, said Mary Ellen Corridore, the initiative's project manager. Corporate forms can be up to 36,000 pages just for the form response, she said.

The forms are straining the agency's systems, which were due for an upgrade, just not so soon. "We knew that we needed to develop a whole new modernized e-file system," Corridore said.

The Expanding Electronic Tax Products for Businesses initiative's biggest project is enabling companies to file their corporate income tax form 1120 electronically. While the initiative has progressed on many fronts, it will have to take a step back as it overlaps with and moves into the overall IRS business systems modernization effort, Corridore said, speaking Feb. 11 at the E-Gov Web-Enabled Government conference in Washington, D.C. E-Gov and Federal Computer Week are both owned by 101communications LLC.

For the 1120s, the IRS has focused on using Extensible Markup Language to make it easier to file multiple returns and the many attachments that are often included in them. The tax-specific XML forms developed also will help automatically validate much of the information, saving IRS employees time, Corridore said.

The IRS' e-government initiative has become so much more complex than agency executives anticipated that the tax service is writing a new business case to support the initiative's needs.

The initiative team is working with the Office of Management and Budget to find interim funding while revising the business case to fit the modernization requirements, she said.

Initiative leaders also expect to launch another project within the next month. The Internet Employer Identification Number (EIN) project will allow companies to apply for and receive their employer number online, reducing the application time, Corridore said.

Currently, companies must apply by fax or mail. On average, the fax process takes four days and mail takes 10. By moving the process online, applying will take only five seconds, she said.

Even with e-filing growing 16 percent annually, the IRS is still unlikely to meet the congressionally mandated goal to process 80 percent of tax returns electronically by 2007, Robert Wenzel, acting IRS commissioner, admitted Feb. 13 to the House Ways and Means Committee's Oversight Subcommittee.

But the move to enhance the infrastructure to handle the 1120 forms will not only improve that tax filing area, but will allow the IRS to support many other electronic returns, said Kevin Belden, chairman of the IRS' Electronic Tax Administration Advisory Committee.

And that is very much on IRS officials' minds. "This modernized system is very important to us and our customers," Corridore said.

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Free File making progress

Only a month after its launch, the Internal Revenue Service's Free File e-government initiative is showing results, with almost 640,000 returns filed through the innovative public/ private partnership, officials said Feb. 13.

Free File is one of many ways the IRS is hoping to make electronic filing easier for citizens. These initial reports on the returns filed through Free File are "very encouraging," said Robert Wenzel, acting IRS commissioner, testifying before the House Ways and Means Committee's Oversight Subcommittee. The almost 640,000 returns represent about 22 percent of the 2.9 million returns filed electronically so far this tax season, he said.

"Cost to the taxpayer has been a barrier to further e-file growth," he said. "That has changed with Free File."

The 17 industry partners in the Free File Alliance — which must meet strict business, security and privacy standards set by the IRS — will report the number of returns filed via the program every month.