e-File History - Electronic Tax Filing in the United States
The electronic filing or e-Filing method of filing one’s taxes has been around for over 30 years. The history of e-Filing began in 1986 as a small test program where only 5 tax preparers from the metropolitan areas of Cincinnati, Raleigh-Durham, and Phoenix agreed to participate. Since then, eFiling has grown to become commonplace, serving millions of taxpayers every year.
The Origins of e-Filing
In the 1980’s, processing your taxes became increasingly difficult. While tax preparers started to use special computers and software to simplify their job, they still had to print out all the forms and mail them to the IRS. The storage costs incurred by the IRS for all of the paper tax forms alone was quite high. In response to the emergence of new technology in the decades leading up to the 1980’s, the IRS began to use computers to process the returns. With both the IRS and tax preparers leveraging the emerging capabilities of computers to prepare and process tax returns, relying solely on paper forms made little sense and, in fact, it increased the chances of making errors.
The early e-file process involved the tax preparer using a machine called Mitron, which was a tape reader with a modem. The tax preparer would insert the tape with all the tax data on it before transferring the tape to the IRS. Upon arrival, an IRS agent would transfer the tape to a machine called a Zilog (or Zylog). The Zilog S8000 was, for the time, a small supercomputer, which would read the data on the tape and organize it in a manner that could be read by the IRS’s Unisys system.
In 1986, those five tax preparers filed approximately 25,000 returns using this efile method. The success of the program prompted the IRS to expand it to more cities. In 1987, 66 tax preparers agreed to participate in the expanded program and filed 78,000 tax returns. In an effort to improve the system, the IRS added an electronic Direct Deposit option; this provided the option for the refund money to be wired to a bank account of one’s choice. In 1988, the IRS discontinued the use of Zilog S8000 and switched to the IBM Series I processing system. This change meant that the employee didn’t have to plug the phone into the modem anymore, making the process a little simpler.
e-File - a Success Story
The success of e-file drew attention from other tax preparers. While the increased attention was a positive thing for e-file, the method drew some skepticism. Some tax preparers were worried that this was just a way to gather and organize more data for audits. However, using the e-file system actually reduced the need for an audit. In addition, the chance of making an error while using e-file was estimated at 1%, while the chance of making an error while filing on paper could be as high as 20%.
In 1988, Maryland and Washington, DC residents filed 60,000 tax returns. The success convinced the IRS to persuade as many tax preparers as possible to switch to an e-file system. However using e-file required purchasing the necessary computers, and many skeptical tax preparers were slow to adopt it.
In 1990, the IRS expanded the e-file service nationwide; that year, 4.2 million returns were filed. In addition, large national tax-preparer companies started using e-file. Having large tax companies agree to use e-file eliminated many doubts among smaller tax companies and sped up the e-file adoption process.
e-File in the 21st Century
In 2002, the IRS added an option to use a PIN instead of a signature when preparing taxes, thus completely eliminating the need to use paper during the process. By 2005, 68.4 tax returns were filed through e-file. Half of all taxes returns were filed using the e-file system. In 2010, the IRS ceased mailing out copies of that year's Form 1040 (learn about the history of Form 1040), and has instead made them available online.
Businesses have also embraced the benefits of e-file. In 2003, the IRS e-file system added Forms 941 and 944, which allow companies to file employment as well as annual tax returns.
Currently, e-File is wildly popular, having seen over 1 billion returns filed throughout its history and more than 122 million tax returns e-filed in 2013. How to prepare to eFile. Find more e-file statistics information and see the growing popularity of electronic tax filing in the United States. Additionally, see a detailed overview of the history of taxes and the history of the tax code.
Want to enjoy the benefits of e-filing for yourself? Prepare a tax return and enjoy the benefits of free efile tax filing on eFile.com.
Curious about the what tax filing was like before e-filing existed? Check out our detailed overview of the tax history in United States and the world.
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