Electronic Tax Filing Gets Easier
Tracy Byrnes
12/23/98 - 10:28 AM EST
The Internal Revenue Service is moving slowly toward paperless tax returns. Last year, only 20% of returns were filed electronically. The service's ambitious goal is to have 80% of returns filed electronically by 2007. E-filing isn't free for everyone -- costs can range from $10 to $45 for a federal return -- but there still are some obvious benefits. If you are owed a refund, you'll probably get it back a week or two earlier. And if you e-file, you'll know immediately if something basic is wrong with your return. You simply won't be able to electronically submit an incomplete return. That will prevent you from, say, transmitting a return that doesn't include your Social Security number. It would take the IRS weeks to notify you of this error via snail mail. Still, most of the major accounting firms are making only minor use of electronic filing, so it's clear the process isn't quite ready for prime time. But the IRS is improving it little by little, and a number of private companies are stepping in with Web sites or specialized software to make electronic filing easier. Here's a look at what's new with e-filing for the 1998 tax year. Big Guys Aren't Biting
H&R Block (HRB Quote), the nation's biggest tax-preparation firm, is a big proponent of e-filing. The company has been filing electronically since 1986, when it first became possible, says spokesman Todd Ransom. It filed 18 million returns last year, and 5.9 million were transmitted electronically. That represents 51% of all the electronically filed tax returns received by the IRS last year. But the big accounting firms, which typically handle more complicated returns than those prepared by H&R Block, aren't as enthusiastic. "The primary advantage to electronic filing is to get your refund back quicker. And if we did our jobs correctly, individuals should not really have big refunds," says Tom Ochsenschlager of Grant Thornton in Washington, D.C. And if a client does get a refund, Grant Thornton recommends that it be applied to next year's tax bill. "It's an interesting idea, but it was not designed with the professional preparer in mind," says Bill Fleming, director of personal financial services for PricewaterhouseCoopers. Accounting firms still must print returns for their records and for clients to read and sign. In addition, the IRS requires each individual office of these large firms to have its own identification number. This costs money. So for now, it's still cheaper for those firms to mail returns. But "as a large accounting firm, it's incumbent on us to offer service," says John Devlin, director of tax services and the e-file coordinator for Deloitte & Touche in Washington, D.C. So big firms will be using e-filing more and more in a few years. But they all need time to be convinced that returns will be transmitted accurately. For now, Deloitte & Touche will use the system just to transmit extension requests for late filers on April 15. Still Not Saving Any Trees, Though
As the accounting firms have discovered, e-filing is not paper-free. The same goes for individuals. Even if you file electronically, you still must submit Form 8453-OL -- U.S. Individual Income Tax Declaration For On-line Services Electronic Filing. This form will validate your return and must be mailed the next working day after you get an email saying that your return has been transmitted. You must sign the form and attach any additional schedules or statements, such as your W-2s or broker statements. And you also must give your consent on the form to have your refund directly deposited into your account, if that's what you wish. And if you owe Uncle Sam money, you still must attach your check, made out to the U.S. Treasury, to Form 1040-V -- Payment Voucher. But you can eliminate that form altogether by having your bank account debited or by charging the balance to your MasterCard, American Express or Novus/Discover card. With e-filing, "you're not saving paper, just time," says H&R Block's Ransom. You still may want to print your return. There are instances when you will need a hard copy, for example, to accompany a mortgage application. If You've Done This Before
If you e-filed last year, you won't get the IRS' usual thick booklet of blank forms this year. You'll just get a postcard with your identification label that you can slap right onto Form 8453-OL if you're e-filing. But if you were among the 12 million taxpayers chosen for the IRS' On-Line Pilot Program, you won't even have to deal with Form 8453-OL. Instead, you'll get a postcard with an e-file customer number. All you have to do is enter that ECN into your online return, and it'll count as your signature, according to the IRS. Eventually, this simplified procedure will become more widespread. With an ECN, you are not required to file W-2s and Form 1099-Rs. But if you need to include any other attachments -- like broker statements or footnotes -- you still must file Form 8453-OL. Costs Can Add Up
E-filing costs vary but can add up for the individual who braves the waters alone. If H&R Block prepares your return, the electronic transmission is built into your cost. If you prepare your own return and don't have access to the Internet, you still can e-file through H&R Block for $48 for a federal return and $20 for each state return. That's not cheap. If you live and work in different states, you'd have to pay $88. H&R Block agents must check your return to make sure it's transmittable, so you're paying a bit extra to have someone double-check your work. A cheaper alternative is to file online using special Web sites set up by the well-known tax software firms. In mid-January Intuit's (INTU Quote) TurboTax site will offer a Web version of the same tax-preparation software you'd buy in stores, says TurboTax spokeswoman Jennifer Roberts. There's no need to download any software to your PC. You simply enter your tax-return information into the forms on the Web site. There's no charge until you want to view, print or file a completed return, says Roberts. The cost: $9.95 for a 1040EZ return and $19.95 for a regular 1040. Each state return will cost $4.95. Those fees include e-filing. But if your gross income doesn't exceed $20,000, then you won't have to pay a dime to file your federal or state returns. Students ought to love this deal. The best part of having access to this software on the Web is that your tax-return information is saved on TurboTax's hard drive. So you can pull up your tax return from anywhere. If you still want to buy the software, TurboTax Deluxe will cost you $50 for the federal edition (though retailers often offer discounts). If you use the software on your own PC, the first return you e-file is free, but additional returns cost $9.95 each. TurboTax state software will run you $27.95, and e-filing returns will cost $4.95. No freebies here. Note that only 35 states and Washington, D.C., are participating in the state e-file program at this time. Check out the chart on the IRS' Web site to see if your state is included. Keep in mind that each software manufacturer has a different list of states it handles. TurboTax, for example, offers e-filing for only 30 of the 35 participating states. Another Web-based tax-filing program is offered by Securetax.com. This was the first tax-preparation and electronic-filing application designed for the Internet, says Bob Barr, the assistant commissioner for the electronic tax administration at the IRS. The 1998 version, which just became available, allows you to e-file in all 35 states and D.C. Even better, for $14.95 you can file your 1040 and state returns. There's not yet a Web version of H&R Block's Kiplinger's TaxCut software. But beginning Jan. 15, you can fill out and file a 1040EZ return directly from the Kiplinger Web site for free. If you don't qualify to file a 1040EZ return, you can download the basic version of the Kiplinger's TaxCut software from the Web site for $19.95 and install it on your own PC. Then your first federal e-file is free, with additional returns costing $9.95. The deluxe version of Kiplinger's tax-preparation software is too large to download, so you have to buy it at the store for around $40 (again, look for discounts). The great part is that all the state returns are included -- TurboTax requires you to buy them separately. However, TaxCut allows you to e-file state returns only for California and New York. It'll cost you $4.95 for each state e-filing. There are many other Web sites that will allow you to prepare and e-file your return. We'll look at more of them in a future article. Meanwhile, if you run across one, rest assured that any company that qualifies for electronic transmittal must first go through a rigorous application and suitability process, says the IRS' Barr. TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.
