Electronic Tax Filing Offers A Do-It-Yourself Approach
April 29, 2011
Filing personal federal income taxes electronically used to mean filling out an electronic tax form and sending it to Intuit Inc.'s TurboTax or H&R Block's network repositories. Then it meant waiting for them to send a batch of consumers' taxes across private network lines to the IRS's server. Oh yes, it has also meant paying a middleman. But now the IRS has decided to make the direct electronic tax-filing conduit that has long been a luxury for businesses available to consumers. ``Businesses are already familiar with Electronic Federal Tax Payment Systems, but starting this month we've extended the full service to consumers,'' says IRS electronic tax payment spokesperson Winford Stern. ``And this is really the beginning of a new tax payment system where eventually people will need no cash receipts, no accountants.'' This means that save for the analytical advice you may need an accountant for, the H&R Blocks of the world will no longer be necessary to access that private network that sends taxes, byte by byte, to the IRS. You may even save money on an accountant if the taxes are simple and you get the hang of the calculations. ``Taxes are becoming significantly simpler because of technology -- a very straightforward process with none of the procedures that have made it an emotional quagmire until now,'' says Michaele Bynum, president of Wolff New Media, publisher of Internet books, including the just-released Net Taxes, a guide to paying taxes on-line. Electronic versions of the book can be purchased and downloaded at the New York-based publisher's Your Personal Network site. Enrolling in the new program can be done by calling the IRS at (800) Tax-Form and asking for Form 9783. Once it's mailed back, the IRS will send a personal identification number. The PIN enables a caller to key in numbers to pay any kind of tax liability owed to the IRS. Mr. Stern adds that while paying state taxes may one day work the same way, those systems are significantly behind the IRS in terms of being made available to consumers. The same laws that exist in the physical world apply to these electronic filings, including the new Taxpayers Bill of Rights. ``It's not a different tax-paying infrastructure, just a different channel,'' says Mr. Stern. He adds that while filing electronically may result in a faster refund, public perception and industry rumor that the likelihood of being audited may be greater because electronic returns are lumped separately from paper returns, are myths. The PIN triggers access to an account and informational updates. Dollar amounts keyed in are extracted from the account and settled automatically through the automated clearinghouse by NationsBank or First Chicago National Bank -- two settlement banks the IRS is using for the system, says Mr. Stern. Electronic filing must still be followed by mailing in W-2 forms, though. Once the IRS has all documents, it will send acknowledgment that your taxes have been received. Filing can also be done from a PC. NationsBank or First Chicago will send the Windows-based software needed. With the PC option, once the software is installed it works like most on-line banking systems: You dial into the bank with a modem and access the bank's servers that handle these transactions. Updates can be saved as files on your computer's hard drive. Everything can be done electronically, except pay federal income taxes on the Internet. The reason the IRS stops short of transferring tax payments via the Internet and clings to its private network is simply for security, says Mr. Stern. ``The whole reason the electronic filing system exists now is because taxes are sent on a point-to-point, secure network,'' says Jayme Byers, director of Tax Technology Solutions at New York-based accounting firm Ernst & Young. It's point-to-point from your PC to, say, NationsBank, and then point to point from the bank to the IRS; the phone method dials directly into the IRS dedicated server. ``But it (transactions) will happen one day over the Internet as well -- when secure encryption technology is evolved more.'' While Mr. Stern agrees that an Internet-based tax filing system may be in the future, he would not hazard a guess as to when. ``There would have to be guaranteed security before it were possible,'' Mr. Stern says. What you can do on the IRS' Web site is download any tax form you can think of, save the one -- Form 9783 -- that you need to enroll in this service because it contains the same type of magnetic ink that personal checks have. Since this ink requires using optical character recognition technology to capture the image intact, the Internet is still not advanced enough to translate the information. Magnetic ink and OCR capability raise another interesting issue: a world in which cash receipts will not be necessary. Mr. Byers and Bobby Mack, national director of Ernst & Young's personal financial counseling practice, agree that cash receipts should be kept for now, regardless of the futuristic visions to which IRS officials may allude. Though OCR documents have gained popularity as admissible evidence in court, it's not an overarching admissibility. For example, while many banks now send image-captures of canceled checks -- and not the checks themselves -- with an account holder's monthly statement, and courts of law across the board accept these images as checks, there are not enough legal precedents yet set for individual consumers who used OCR technology to scan a number of receipts into a computer, saving them as files. This uncertainty surrounding at least one issue of electronic files begs another question: Are their risks associated with filing electronically -- for instance, the IRS network crashes and records of your payment get zapped into some cyberspace version of the Black Hole? ``On the contrary,'' says Mr. Byers. ``Electronic filing offers much greater assurance that your tax return is received and processed, simply because the IRS sends acknowledgment that it has received your taxes.'' In the physical world, if you send your taxes from the post office by certified mail, their is no assurance of security, says Mr. Byers. When you get that green receipt back in the mail the only thing the IRS has acknowledged is that the office has received an envelope -- not your actual taxes. Besides, adds Mr. Byers, while it is possible for the IRS to lose an electronic file, it is also possible they can misplace paper. Despite these fears having automated tax-filing tools suddenly at everyone's fingertips opens up options for many -- options that also make another middleman's job suddenly of questionable worth: the accountant. ``I used to use an accountant, now I don't bother,'' says Mr. Bynum, who swears it's not just to legitimize the more than 20 do-it-yourself on-line books he sells. ``Accountants are now worried because all they're doing is using tax preparation technology -- and now that everyone has the same access they don't have any competitive reason for existing,'' Mr. Bynum adds that this will ring even more true as time goes on and software, such as TurboTax, becomes more advanced in terms of analytical ability. Intelligent agents, which Vastsoft Corp., Apple Computer Inc. and other developers all say are coming, and coming fast, corroborate Mr. Bynum's hypothesis. Vastsoft officials, for one, say that intelligent agents could prompt a software program to ask the user questions based not only on predetermined criteria, but on computative analysis performed as the user fills in data. Mr. Byers and Mr. Mack, however, argue that this is still vaporware. ``For simple tax returns, yes, automation can rid the need for our services,'' says Mr. Mack. ``But as you go up the complexity ladder, tools don't help right now -- they're computational, not analytical.'' True, if you get a pair of shears, you no longer have to take your dog to the vet for trimming --that's a simple procedure, Mr. Mack says. ``But if your dog needs surgery, having a scalpel in your hands won't help. The same is true for taxes.''
