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E-FILING: NO BENEFIT FOR THE SAVVY?

January 22, 2007

A reader asked whether e-filing makes sense for "savvy" taxpayers. I think it does, but he raises some interesting issues for folks who prepare their own returns. It seems that some of the software hassles involved can make it more convenient to drag a paper return to the post office than to e-file from home. Our email exchange is in the extended entry below.

Reader Eric starts the dialogue:

Joe:

You said in a recent post that certified mail is one of your favorite topics. I had a related question: Does e-filing provide any real benefits to a savvy taxpayer?

I understand that e-filing saves the government money and I would never do a return without tax software. But when I looked closely at the IRS' stated Benefits of E-Filing in Pub. 17, I discovered many of the "benefits" were irrelevant:

1. Free to file: Only if your AGI is low enough.
2. Get your refund in half the time: Relevant only if you're getting a refund and lending your money to the government interest-free.
3. Receive electronic proof of receipt: True, but your certified mail method is equally effective.
4. If you owe you can authorize an electronic debit: True, but you can also use EFTPS with a paper return.

And my biggest pet peeve ...
5. IRS computers automatically check for errors: Yes, e-filing will immediately tell you if you entered an incorrect Social Security number, but not much more. The IRS' statements imply that e-filing prevents tax preparation errors, which is not true. If you enter an incorrect number on Schedule A, your return will be wrong whether you filed electronically or on paper.


Cheers,

Eric

I responded:

Eric-

You are basically correct, but as a practitioner there is one benefit that may be underappreciated. When we e-file a return, we know it's been filed on time.

We have 1040 clients across the state and in other states from New York to California. E-filing is a big logistical help. We can get a pdf review copy to the client electronically, who can approve us and electronically give us their approval to e-file. If you ship a paper copy to a client, any number of things can delay it. Once they get their paper copy, taxpayers have been known to forget about it and leave it in a drawer until they get an IRS notice 18 months later. You don't have to worry about a client forgetting to sign, or sending both the federal and state returns to the IRS, or worse, to the state.

E-filing is still a minor hassle, but at least we know when we use it that everything has been done timely. Sure, it's garbage in, garbage out, but that's true with paper.

For a savvy taxpayer, all of these problems can be avoided, but even savvy taxpayers can miscalculate postage or mis-address or mix up an envelope. And I don't see any real downside to e-filing.

If you don't mind, I'd like to post your thoughtful question and my response.

Regards,
Joe Kristan

Eric writes back:

Joe:

I appreciate your comments and you can use mine in a post. A few minor points ...

I'm sure the practitioner benefits are correct, but when I mentioned lack of benefits to "taxpayers" I was thinking of self-filers. And I should have been more specific because several of my issues relate to tax software quirks. I've found that in some cases paper returns require less time than electronic ones. For example, TurboTax Online requires taxpayers to subdivide medical expenses into about a dozen categories, from lab work to medical facilities to eye exams. That data input can take a lot of time whereas the paper return only requires an entry on one line (And if you're using software for a paper return you can just use a total number on a detail sheet because the main Sch A is the only data you're sending to the IRS.)

In regard to your lack of postage and incorrect address comments below ... I suppose that does happen, though I wouldn't place those people in the category of "savvy" taxpayers - especially when the Postal Service does the weighing and applies the postage.

Cheers,


Eric

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