Electronic tax filing refers to various systems that enable individuals and small businesses to file their tax returns and make tax payments through electronic data transfer. In 1996, the Internal Revenue Service (IRS) began requiring businesses that owed more than $47 million in payroll taxes annually to make their monthly payments via telephone or computer through the Electronic Federal Tax Payment System (EFTPS). Development of this general methodology of tax filing culminated in new regulations issued by the U.S. Treasury in January 2005. With that regulation, corporations with assets of $50 million or greater and filing at least 250 returns annually were required to file their income tax returns electronically for years ending after December 31, 2005. After the first effective year is over (thus no later than 2007) the threshold drops to $10 million in assets and 250 returns annually. Smaller corporations—and individuals too—may at their option file taxes electronically as well. In fact 8 million business filed taxes electronically in 2005; 68.5 million individuals filed electronically in the same year, up 11 percent over 2004. Meanwhile telephone-based filing (known as the TeleFile program) was discontinued as of August 16, 2005. The U.S. Treasury is well on its way toward achieving one of its goals—maximum tax filing by electronic means.
Small businesses that utilize a payroll service may already be engaged in filing at least their payroll taxes electronically without being aware of it—because the payroll service may be doing so on their behalf. Those not yet engaged in filing taxes electronically in any way can begin by visiting the IRS site entitled "Approved IRS e-file for Business Providers" accessible at http://www.irs.gov/efile/article/0,id=118516,00.html. The site is organized by various tax forms and provides the names, telephone numbers, and profiles for organizations approved by IRS to provide e-filing services. Price information is provided in most cases. The small business may be working with an outside public accountant—another point of contact to explore transition from paper to electronic filing. Web addresses sometimes change. Should that be the case, access to the most recent site should be available through www.irs.gov.
PROS AND CONS
The IRS prefers businesses to submit their taxes via electronic means because the costs and error rates for electronic tax filing are dramatically lower than those for paper filing. Critics of this approach have worried in the past (Mike Dries writing in Milwaukee Business Journal in the 1990s being an example) citing the very large number of small businesses and the then-anticipated lack of technological sophistication of owners. Since that time, however, market forces, effective technical support by the IRS, and entrepreneurial energy have changed the situation. Low-cost services and very effective software products have emerged to make the process essentially painless for even very small enterprises.
Tax preparation is ultimately algorithmic in nature and therefore very well-suited for computerized methods—especially for small businesses in which complexities are relatively low. Software aiding the business owner in preparing taxes is designed to acquire from the owner those elements of information not automatically captured from the accounting software with which the tax package interacts. Typically, also, the owner is shown intermediate results and can iterate the procedures until the right results are reached. Some packages also provide the user with direct access to tax regulations and definitions so that more fuzzy issues can be resolved. Finally, many small businesses use electronic filing indirectly by having their accountants do the job—so that a highly skilled interface person mediates between the software and the owner.
E-FILING AND STATES
Electronic tax filing is available in every state as well, but, as Kathleen Hunter reported in Stateline.org, the rate of electronic filing at the state level lags that experienced by the IRS except in three states, Kansas, Massachusetts, and Ohio. The principal reason for this lag appears to be that fewer states provide advanced services, such as allowing users to check the status of their refunds online. Tax preparation software typically comes with the necessary forms and facilities for filing state taxes at the same time as federal taxes.
Dries, Mike. "Dialing for Dollars." Milwaukee Business Journal. 7 September 1996.
Higginbotham, Keith. "IRS Expands Electronic Tax Filing." Knight-Ridder/Tribune Business News. 5 January 2001.
Hunter, Kathleen. "States Lag Feds in Electronic Tax Filing." Stateline.org. Available from http://www.stateline.org/live/ViewPage.action 11 April 2005.
Mosquera, Mary. "Snowball Effect: Maine's move to online services picks up speed—and users." Government Computer News. 11 October 2004.
United States Department of the Treasury. Internal Revenue Service. "e-file for Business and Self-Employed Taxpayers." Available from http://www.irs.gov/efile/article/0,id=118520,00.html. Retrieved on 1 March 2006.