Electronic Income-Tax Filing - History

By the time the IRS introduced electronic filing during the 1986 tax year, more and more taxpayers had begun preparing their returns on personal computers. The agency's main idea was to cut its own costs of processing returns. Every year thousands of temporary employees had to be hired to sift through mountains of tax returns, and then check and enter the data by hand into IRS computers. E-filing eliminated much of that human labor. In 2001, according to the agency, processing an e-return cost only 74 cents, compared to about $1.50 for a traditional paper return.

E-filing was tested in three cities in 1986 and proved so successful it was expanded to four more cities the following year. In 1988 the program included 14 states. From the beginning, e-filers did not submit returns directly to the IRS. They were transmitted to an IRS-authorized private agent, usually an established tax firm, which transmitted them to a regional IRS office. Intermediaries usually charged a fee, anywhere from $25 to $75, for e-filing returns. One attraction of the service for taxpayers was the promise of a refund check in as few as two weeks. To sweeten the deal, the tax firms sometimes offered, for another fee, "refund anticipation loans"—a check for the expected refund issued as soon as the return was sent to Washington. Following the e-submission of a return, taxpayers affixed their signature to a paper form and mailed it to the IRS separately.

The rationale for using intermediaries to e-file at the time was partly that the modems and other necessities for e-transmission were still expensive and uncommon in most homes. Ironically, for the first few years the IRS did not have the technical capability to transmit returns electronically from regional offices to its headquarters in Washington. They had to be copied to magnetic tapes, which were then mailed to IRS headquarters.

In 1988 the lure of quick refunds drew 583,462 e-returns. In mid-March 1990, with still nearly a month to go until the filing deadline, the IRS had received 3.5 million returns. In 1992, 11 million e-returns were made. In 1993, the IRS approved commercial software for the 1040PC—a tax form that could be filled out on a PC, printed, and then mailed to the IRS. Even those helped trim IRS costs because of the higher accuracy compared to older methods.

Despite demands from some congressional members that taxpayers be allowed to transmit their tax forms directly to the agency rather than forcing them to pay an intermediary to do it, the original system has survived. However, by the end of the 1990s tax returns could be submitted to authorized businesses for further transmission using a software package approved by the IRS. In 1998, 500,000 individuals filed from home. The following year, that number mushroomed to 2.5 million. In 2001 the paper signature form was eliminated for those electronic filers and replaced by a five-digit number that the IRS issued to each e-filer. Together with specific information from the previous year's tax return, that number was used to identify each taxpayer.