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 five tax preparers from the metropolitan areas of Cincinnati, Raleigh-Durham, and Phoenix agreed to participate. Since then, e-filing has grown to become commonplace, serving millions of taxpayers every year.
Currently, e-File is wildly popular, having seen over 1 billion returns filed throughout its history and more than 195 million tax returns e-filed in 2020 alone. New to electronic filing? See how to prepare to eFile and find more e-file statistics; see the growing popularity of electronic tax filing in the United States. Additionally, see a detailed overview of the history of taxes, the history of the tax code, and an overview of us here at eFile.com.
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. 2003 saw the creation of Free File; an IRS program created by partnering with Free File Alliance, an association of multiple tax software companies. This made e-filing free for certain taxpayers who met different criteria (income, filing status, etc.). 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.
Modernized e-File or MeF made its debut in 2004 which was seen as the next generation of electronic filing. By 2005, 68.4 million tax returns were filed through e-file. Half of all tax returns were filed using the e-file system and the Telefile system was retired. Through the next few years, MeF was made mandatory for businesses falling under certain criteria - these were businesses with $50 million or more in assets in 2006 before being lowered to $10 million or more in 2007.
Congress made it mandatory for tax preparers who file 10 or more individual income tax returns to file electronically in 2009. 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. In 2011, e-filed returns hit the threshold of 100 million returns. Also in 2011, the IRS introduced the identity protection personal identification number or IP-PIN for protection of taxpayer identity. This was reserved for identity theft victims, but the IRS opened the program to any taxpayer who wanted one in 2021.
MeF is now used across the country to e-file tax returns, tax amendments, and even tax extensions. The ability to attach supporting documentation through PDFs is also available.
In years like 2019 and 2020, electronic filing has become more accepted and normal, making up more than 90% of all tax returns filed in 2019 and 2020; see how electronic tax filing has grown. Preparing and e-filing your taxes online can be free generally if your only income is from Form W-2. See the tax services offered by eFile.com and compare our pricing to popular tax preparation platforms. We offer DIY online taxes as well as person-to-person Taxpert® support to answer any of your questions. Most taxpayers can e-file their returns unless they are submitting certain tax forms which cannot be e-filed as dictated by the IRS and/or states.
Furthermore, the IRS has moved towards allowing more forms and return types to be e-filed through MeF. This includes the tax amendment Form 1040-X which is accepted via electronic filing on many platforms. As shown in the Electronic Tax Administration Advisory Committee's (ETAAC) Annual Report to Congress, individual taxpayers were able to e-file 3.5 million amended returns from August of 2020 through May, 2022. This has effectively removed this many returns from the paper submission flow which is, in the Taxpayer Advocate's words, ancient.
Additionally, via the report, the IRS was given five recommendations to continue to enhance modernized e-file:
- Congress should provide the IRS will better funding.
- Congress should give the IRS better financial and legislative support.
- The IRS should improve e-filing so most, if not all, forms can be filed electronically for federal and states.
- The IRS should greater encourage taxpayers to acquire and use an IRS issued IP PIN.
- The IRS should work with states and software providers to enhance payroll and information return e-filing.
As each generation of U.S. Citizens become more confident in online tax preparation platforms, e-file has proven to be safer, faster, and easier than traditional paper filing. Taxpayers enter data into programs which calculate all the amounts for them while gathering forms. eFile.com offers this preparation in addition to e-filing, allowing users to prepare their return with ease without memorizing any complicated tax forms. Sign up for a free account now and prepare your return - eFileIT on eFile.com.
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 e-file 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 tax 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 positive 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 a tax 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, D.C. 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. Through the 1990s and early 2000s, Telefile was used to file 1040-EZ returns - this was done over the telephone.
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. Use tax software like eFile.com to e-file your taxes online without having to handle paper forms; it's less taxing!
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