Classic Computer Magazine Archive COMPUTE! ISSUE 151 / APRIL 1993 / PAGE S9

How to file your tax return electronically. (Compute's Getting Started with Personal Money Management)
by Alfred C. Giovetti

Last year, 10.9 million returns were filed electronically, which represented an increase of 44.5 percent over the prior year. Most of the people who file electronically do so in order to get a faster refund. Electronic filing offers other advantages, such as IRS acknowledgement that the return was received and accepted, and increased accuracy of returns. In addition, MECA's TaxCut manual points out the "cocktail factor" advantage of winning points with your friends when you tell them you've filed the modern way and received your refund already.

Going Direct

Ninety percent of electronic filers select direct deposit, which puts the refund directly into your bank account as quickly as ten days after transmission to the Internal Revenue Service. This is faster than the 2 or 3 weeks it takes to receive a mailed IRS check on an electronically filed return, and much faster than the typical 6 to 8 weeks it takes when your check is mailed through a traditional paper-filed return. Direct deposit isn't only quicker, it's also safer for elderly people or those who live in high crime areas. With direct deposit, there's no need to carry the refund check to the bank.

The direct-deposit electronic-filing procedure is simple. A voided blank check is mailed to the IRS, attached to the Form 8453 electronic-filing declaration, which authorizes the IRS to deposit the refund into the taxpayer's savings, checking, IRA, or money market account. Routing Transit Numbers (RTN) and Depositor Account Numbers (DAN) must be circled on the avoided check and entered into part II of Form 8453.

Month-long delays have occurred when bank rules conflict with the direct deposit procedure. Some banks prohibit the deposit of a joint return check into individual accounts, while some small banks or credit unions may not accept Direct Deposit into accounts that are "payable through" another bank. If you want to use direct deposit, check with your bank first, or be willing to have the return delayed by as much as six months.

Restricted Membership

Not every return can be filed electronically. The IRS has a list of 21 return situations that are excluded from electronic filing. This list includes another list of 39 forms and schedules that can be filed electronically. Most personal and professional tax preparation packages automatically check for the exceptions and requirements for filing electronically. The IRS accepts or rejects the return based on these same initial checks when it receives the transmitted return.

Most personal software manufacturers use third-party transmitters to send your return to the IRS via modem. The personal tax preparation software may allow you to transmit this data via modem to the third-party transmiter directly or to mail the information on a disk. Some software allows you to fax or mail paper records to a third-party transmitter, who then puts the information into its own software prior to transmitting it to the IRS. UTS, TaxCut's third-party transmitter, reported that 99 percent of returns filed last year were accepted by the IRS. The IRS acknowledges every electronic return it receives within 48 hours.

Even if the IRS accepts your electronic filing, refund processing may be delayed for months if your social security number(s) are recorded incorrectly on the form; if your name has changed due to marriage or other reason, and you haven't reported it to the Social Security Administration on the appropriate form; or if you owe outstanding federal tax, federal student loans, or state child support. If any of these situations exist, you should file a traditional paper return, and work the problems out with the government separate from the tax filing.

Electronic filing tends to be more accurate, simply because the IRS has a much higher error rate with the paper-filed returns (which are entered electronically by the IRS' data-entry employees) than the error rate that's found on the electronically-filed returns (where the data is entered by the taxpayer, tax professional, or third-party data entry personnel). Last year, the error rate on electronically filed returns was only 2 percent, compared to a 21-percent rate on standard paper returns.

The IRS performs a preliminarily check on the electronically transmitted return data for accuracy. Inaccurate returns are rejected and can't be retransmitted to the IRS until they're correct. The third-party transmitter checks and recalculates the returns to reduce the error rate even further. Clerical checks by the data input personnel at third-party transmitters further reduces the change of errors. Fewer errors mean fewer problems for the taxpayer and the IRS.

Less Than Perfect

Electronic filing isn't paperless. Form 8453 (Declaration for Electronic Filing); information documents, such as W-2s, W2Gs, and 1099-Rs; and signature documents, such as multiple support agreements and other supporting material documents, must be submitted by mail to the third-party IRS-approved transmitter. Most third-party transmitters file your return with the IRS within several days of mailing, faxing, or modem transmission to their offices. Third-party transmitters will provide the taxpayer with a written confirmation of acceptance by the IRS.

At this time, personal tax software doesn't support electronic filing of balance-due returns (where money is owed to the IRS) or Refund Anticipation Loans (RALs, where a third-party bank loans the anticipated refund to the taxpayer for a fee). Those who wish to electronically file balance-due returns or participate in RALs will have to go to a professional preparer who's also accepted to participate in the electronic filing program.

Last year, H&R Block electronically filed 6.7 million returns. Of these electronically filed H&R Block returns, 6.1 million (91 percent) were filed with refund anticipation loans (RALs). H&R Block may file most of the electronically filed returns, but it doesn't have a monopoly on electronic filing. There are tens of thousands of professional preparer participants who can file your return electronically for you.

RALs aren't very cost effective and have virtually nothing to recommend them despite their popularity. Even though the fee appears small (typically between $30 and $45 on refunds of up to $3,000), the true annualized cost of these loans is high, ranging from an 80-to 90-percent effective annual interest rate.

For most taxpayers, paying credit card interest of 15 to 35 percent is a bad use of credit, but much better than the ridiculous cost of lending with RALs. Most people can borrow the money from their bank against the paper version of the tax return at 20 percent of the cost of a RAL.

Last year, 45,000 of the returns filed were balance-due returns. Those who have simple balance-due returns may wish to consider filing a Form 1040PC as an alternative to going to a paid preparer to electronically file a balance-due return. Personal software packages that support 1040PC returns support balance-due and direct-deposit filing of these returns, and will generate the Form 9282 payment voucher that allows you to pay the balance due anytime after you file the return, up to April 15. The restrictions on filing are similar to those for electronic filing. MECA's TaxCut has a special 1040PC review that checks the return to see if it passes 26 requirements for filing.

Combining State and Federal

Currently there are seven states (Kansas, Minnesota, New York, North Carolina, South Carolina, West Virginia, and Wisconsin) which participate in a joint federal/state electronic filing program. Several others, including Maryland and California, have their own separate electronic filing program.

Last year, 158,000 returns were filed under the federal/state electronic filing program.

Most state electronic filing is still limited in testing, with a limited numbers of paid preparers and professional software companies participating. California has a new scannable ADS summary form similar to the 1040PC, which speeds your mailed check to you within 2 weeks.

If you electronically file your tax return, don't mail a duplicate copy of the IRS, as this will further delay your return processing and your refund, for months. If your return is rejected by the IRS for electronic filing, the third-party transmitter will inform you of what to do next.

The IRS suggests that you request Publication 1345, Handbook for Electronic Filers of Individual Income Tax Returns and Publication 1342, Electronic Filing of Tax Returns--The Wave of the Future if you need more detailed information on electronic filing.