Electronic Income-Tax Filing - History, Advantages And Disadvantages

Electronic filing of taxes enables professional tax preparers and most taxpayers to submit tax returns to the Internal Revenue Service (IRS) and some state agencies via computer modem. Taxpayers have various options for filing their taxes electronically. They can use special tax software to prepare their returns, and then transmit the completed forms electronically to an authorized intermediary who will forward them to the IRS. They also can take a completed paper form to an authorized intermediary for transmission, or have an authorized preparer complete their taxes and transmit them. As of 2001, taxpayers could not transmit their completed tax forms to the IRS directly via the Internet. A limited number of taxpayers also can file returns using a touchtone phone. In 2001, only taxpayers who were expecting a refund could e-file. However, that year the IRS announced that, under a pilot program in nine selected states, e-returns would be accepted from taxpayers who owed the government taxes.

In addition to filing electronically with the federal government, taxpayers can file state taxeselectronically in some states. Using an IRS program called Federal/State E-File, taxpayers transmit their state and federal returns together to the IRS. The agency then forwards the state return to the appropriate state's tax board. The service initially was available in 37 states and the District of Columbia.

The number of tax returns filed annually has paralleled the rise of the World Wide Web. In 1986 the IRS reported about 25,000 electronic tax returns. In 2001 more than 40 million federal income tax returns, of a total 130 million, were filed electronically. However, the IRS must find ways to inspire ever more taxpayers to e-file—a 1998 act of Congress required that 80 percent of all returns be made electronically by 2007.