Summary

The prospect of a prompt refund makes electronic filing very appealing for most taxpayers. These expedited refunds come at a price, however. Taxpayers have to pay a third party to prepare or electronically transmit the returns and must pay yet another fee if they want to obtain the expedited refund through a financial institution. The Internal Revenue Service's (IRS) research suggests that this cost deters most people from filing electronically unless they need their refunds right away. In promoting electronic filing, IRS has focused on attracting more preparers and transmitters. Although this approach has boosted the number of taxpayers filing electronically, about 90 percent of all individual income tax returns in 1992 were still filed in traditional ways. GAO believes that IRS needs to make electronic filing more appealing and more available to a broader segment of the population. IRS also needs to address various operational issues that if effectively resolved could make electronic filing more appealing and help IRS more fully realize the benefits available through this technology.

GAO found that: (1) electronic filing appeals to taxpayers who are most in need of their refunds and who seem least able to afford the cost; (2) the median fee for preparing a tax return is $70, the median fee for filing it electronically is $22, and the median fee for a refund anticipation loan is $35; (3) many taxpayers are not using electronic filing because of the cost; (4) taxpayers not filing electronically appeared to be better money managers, and were in no hurry to receive tax refunds; (5) 61 percent of potential tax preparers and transmitters cited the cost of hardware and software as a barrier to their participation in the electronic filing program; (6) many potential filing markets remain untapped because IRS promotes electronic filing primarily among tax preparers who deliver electronic filing services to taxpayers; (7) only 15 percent of the individual income tax returns filed in 1992 that involved refunds were filed electronically; (8) IRS has allowed certain taxpayers to file by telephone and has made electronic filing available to taxpayers who owe additional taxes; (9) IRS recently developed an electronic filing marketing plan focused on tax preparers and transmitters; and (10) inefficiencies in the electronic filing system include the need to submit paper documentation in support of the electronic transmission, limitations on the number of forms and schedules that can be filed electronically, the need to correct electronic return errors on two different systems, the need to print and transship copies of electronic returns to various IRS locations, and inadequate detection of electronic filing fraud.