February 07, 2006 - Thirteen states now mandate that tax preparers electronically file their clients’ individual tax returns. More such mandates may be required, if the Internal Revenue Service (IRS) is to ever realize its vision of widespread e-filing, argues the Federation of Tax Administrators.
Last week, when reports surfaced that the IRS is five years behind its goal of having 80 percent of all returns electronically filed this year, FTA President Harley Duncan said that his organization has concluded that the e-filing growth that has occurred is primarily due to the state mandates. An FTA report found that almost half of the 16 percent growth in federal e-filing in 2004 was due to state e-filing laws in effect that year.
The e-filing laws apply only to the filing of state tax returns and forms, they also encourage e-filing to the IRS, according to the FTA. “If you file for the state electronically, there’s no business reason not to file the accompanying federal forms electronically as well. It doesn’t matter which government makes the mandate because both can get the benefit,” said FTA Government Affairs Associate Verenda Smith. The FTA report, “Electronic Filing Mandates: Lessons Learned,” available at www.taxadmin.org/fta/ftapub.html, while largely praising the state mandates underway for expediting the processing of returns, also analyzes the pitfalls and offers succinct summaries of the e-filing initiatives by the states with individual tax return e-filing mandates. They are; Alabama, California, Connecticut, Massachusetts, Michigan, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, Utah, Virginia and Wisconsin. Jurisdictions with business tax e-filing mandates are: Connecticut, the District of Columbia, Florida, Illinois, Iowa, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, North Dakota, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas and Wisconsin.
Mandates requiring the electronic filing of individual tax returns apply to tax practitioners who submit a minimum, ranging from 100 to 200, depending on the state, of returns annually. New York and Massachusetts also allow preparers to have their forms submitted with bar codes containing all the return data. Rhode Island mandates that the developers of tax prep software provide bar coding capability. Among the states with penalties for non-compliance, New York is assessing a $50 per return fine on practitioners who fail to file electronically this tax season, unless their clients opt out of e-filing.
The FTA is not actively encouraging more states to adopt e-filing mandates, but it expects that information sharing may attract others to the concept. “This is an up-and-coming idea and we’re sure that state officials will want to hear from other officials that have been mandating e-filing. We can share that knowledge in large volumes,” Smith said. The FTA report notes that e-filing mandates can be difficult to implement and therefore recommends, that mandates be phased in over time, allow some “hardship” exceptions for practitioners and let taxpayers opt out under certain circumstances, among other things. The FTA report’s conclusion that state mandates will drive widespread federal form e-filing echoes a 2004 report by the IRS’s Electronic Tax Administration Advisory Committee (ETAAC), which concluded, “Federal e-file growth may now be entirely dependent on what states may be doing rather than because of incentives offered by the IRS.”
The ETAAC and FTA reports emphasize that e-filing mandates in higher population states have been especially critical to the federal e-filing growth. They both note that if not for e-file mandate in California and Michigan, the growth in federal forms e-filed during 2004 would have dropped to 9 percent from 15 percent