A record-breaking year for e-filing: as the number of e-filed returns increased to record levels in 2007, the IRS issued new rules and procedures designed to improve the e-file system and to continue to increase the number of e-filed returns.

• Author: DaLomba, Laura Hurteau

EXECUTIVE SUMMARY

* The trend toward e-filing continued in 2007, with tax practitioners and individuals preparing their own returns e-filing a record number of nearly 80 million returns, accounting for over half of the returns received by the IRS.

* Beginning with 2007 returns, practitioners must use the self-select PIN or the practitioner PIN method for signature verification for electronically filed returns.

* Beginning in 2008, nonfiling small tax-exempt organizations (less than $25,000 in gross receipts) are required to e-file Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990, or 990-EZ.

* Authorized IRS e-file providers, including EROs, that obtain taxpayer information by the internet directly or through third parties in order to prepare or e-file returns are now required to register their websites.

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2007 was another record-breaking year for tax returns filed electronically with the IRS. Of the 139.3 million returns received by the IRS in 2007, just under 80 million were e-filed. That represents 57.4% of all returns filed in 2007. Compare that to a decade ago, when only 15.8% of the total returns were e-filed. (1)

It is not just tax practitioners that have helped increase those numbers. While tax practitioners account for 57.4 million electronic returns, the remaining 22.6 million submissions came from individuals preparing their own returns, either through the IRS Free-File program or with user-friendly over-the-counter tax software programs that offer electronic filing as part of the package.

Part of the increase in e-filing is due to IRS and state mandates requiring electronically filed returns for business and individual returns. (2) Although many practitioners were already voluntarily participating in the e-file program, the mandates have forced others to get started. Now, those practitioners are not only e-filing the required returns, they are e-filing many others as well, including extension forms. The benefits of e-filing are becoming well known to practitioners, prompting them to more readily embrace the concept. Benefits include:

Cost savings: E-filing uses less paper and less ink toner, and it saves on wear and tear on office equipment. There is also a potential saving in personnel time, including less time spent on trips to the post office and processing certified mail requests.

Confirmation of receipt and acceptance of returns: Once a return is transmitted to the IRS, an acknowledgment of receipt and of acceptance or rejection is returned to the transmitter within 48 hours. Notification is received if a return is rejected along with an explanation. If the discrepancy can be corrected, the return can be re-transmitted up to the later of the due date or five days after the rejection notification. If the rejection cannot be corrected, a paper return must be submitted by the later of the due date or 10 days after the rejection notification.

E-filing eliminates postage and return-receipt requests. It also eliminates post office visits on deadline days and waiting in long lines to obtain a stamp for proof of timely mailing. E-filing assures practitioners and taxpayers that returns have been filed timely. Also, error detection related to Social Security number or name discrepancies is performed on transmission to the Service. These errors can be corrected immediately instead of receiving a tax notice months later.

Accuracy: Paper...