"Virtually every country in the world had the ability for taxpayers to go online and file taxes. We didn't," said Mark Forman, associate director of e-government and information technology in the White House budget office.
That changed Thursday with the launch of Free Filing, a government partnership with 17 private tax software companies that lets 60 percent of taxpayers, or 78 million, file returns online for free.
Eligibility requirements from the participating companies are generally based on factors such as age, adjusted gross income, state residency, military status or eligibility to file a Form 1040EZ or for the Earned Income Tax Credit. Taxpayers can complete an online questionnaire to determine if they qualify.
The IRS received nearly 85 million paper returns last year and 46 million electronic returns. Officials estimates 54 million will file electronically this year.
The IRS is pushing electronic filing because it reduces errors, speeds processing time, is cheaper and provides better security for private information. But among the reasons that millions of people have cited in continuing to file paper returns is it costs more.
"E-file is quicker. E-file is more accurate," said Robert Wenzel, acting IRS commissioner. "E-file is the best way to confirm the IRS received your return and it's the fastest route to a refund."
Refunds generally are received within 10 days if forms were filed electronically and requested direct deposit.
Electronic tax filing started at the IRS long before the Internet age.
Tax professionals were the guinea pigs in the first test in 1986 simply because, "who else had computers?" said Terry Lutes, director of the IRS' Electronic Tax Administration.
That year, just 25,000 returns were electronically filed out of almost 102 million. The program went nationwide a few years later, but still, only tax specialists had access, he said.
"The volume increased over time, but nobody was sure it would take off," Lutes said.
With the 1990s came telephone filing. But it was and still is limited to lower-income taxpayers. The process can be cumbersome – a special packet is required. That technology now seems dated with the Internet.
Electronic filing went nationwide in 1997, but not without glitches along the way. High volume caused some problems in transmitting returns and there were initial delays in direct bank deposits of refunds.
The IRS was criticized in 2000 for having ineffective controls to ensure the security of transmitted data. A government audit found that people could gain access to IRS systems and intrusions could not be detected. Those problems were fixed.
Earlier electronic returns also required a separate paper signature form to be mailed. Later, personal identification numbers were introduced and identities validated by including adjusted gross income and total tax figures. Those changes confused many taxpayers.
Truly paperless filing was not available until 2001. But that year, as many as 15 percent of e-filed returns were initially rejected for such things as math errors or mismatched Social Security numbers.
Surprisingly, the computer system used to introduce e-filing in 1986 is the same one being used today. "It shows what you can do with technology if you're creative enough," Lutes said.
For the tax preparation industry the agreement with IRS is a relief because it stipulates that the agency will not offer its own free electronic tax services as part of its effort to increase paperless filing.
The IRS says the Free File program should make filing easier than ever for taxpayers and the agency.
"We have less paper coming in these days, so we've needed fewer people processing those returns," spokesman Terry Lemons said. "It's allowed us to free up resources for other resources, particularly customer service."
Taxpayers can use an online questionnaire at the Free File Internet site that will help identify free services for which they may qualify.
Eligible taxpayers can link directly to a participating company's free service Web site and prepare returns using the proprietary software. Completed returns will be sent electronically from the company to the IRS through secure phone lines. Taxpayers then will receive a confirmation that the file was received or rejected.
People wanting to file electronically can do so if they owe taxes and pay later. Taxes can be paid electronically by authorizing funds withdrawal from a checking or savings account or credit card, or they can mail a check to the IRS by April 15.
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