ChipSoft Puts More Byte in Electronic Tax Filing

Because of a new software package offered by ChipSoft, the San Diego company that makes the popular tax-preparation software program known as TurboTax, individual taxpayers can now arrange to have their returns filed electronically without the help of a professional tax preparer.

The software package, called ChipLink, allows TurboTax users to send their returns from modems in their own homes to an IRS-approved transmitting company, which then electronically files the returns with the Internal Revenue Service. Except for participants in one pilot program in Boston, only those taxpayers who are owed a refund may file their taxes electronically.

In addition to eliminating a trip to the post office, electronic filing shortens the time it takes for the IRS to issue a check to taxpayers. Although they must pay extra for the service, taxpayers filing electronically receive a receipt by mail and can expect to get a refund check four to six weeks earlier than they would by filing by mail.

ChipLink makes market leader ChipSoft the first tax-preparation software company to offer electronic filing capabilities for the individual taxpayer, and it positions the 5-year-old company for another potentially lucrative segment of the tax software industry, which analysts say exceeds $60 million nationwide.

So far this tax season, only about 3,000 individual TurboTax users have purchased ChipLink to file their returns electronically. But ChipSoft founder and President Michael Chipman said electronic filing may one day be as common as the personal computer.

“Tax software is being discovered,” said Chipman, 43. “For a lot of people, it hasn’t occurred to them that they could use their computers to file their taxes. But the word is beginning to get out that tax software is extremely useful, and it’s a rapidly growing market.”

Tax attorneys and professional preparers warn that all tax software programs, including award-winning TurboTax, have limitations and that taxpayers with complicated finances should consult with a professional for personalized advice. But they also say that most wage earners who file their taxes on paper stand to benefit from tax preparation software--especially ones that offer electronic filing capabilities.

“For the typical salaried employee who thinks of a tax return as being a refund item, it’s fabulous because it speeds up the time in which that refund is issued,” said Paul J. Dostart, chair of the tax department of the law firm Gray, Cary, Ames & Frye in San Diego. “But electronic filing does not obviate the need to have a professional adviser. If you miss a deduction because you don’t know to add it in, TurboTax is not going to put it in for you.”

The introduction of ChipLink to the software market this tax season coincided with the IRS’ decision to give the green light to electronic filing nationwide. For the past four years, the IRS has conducted pilot programs to test the feasibility of allowing professional tax preparers to file their clients’ returns electronically.

In the 1989 tax season, some 1.2 million tax returns were filed electronically nationwide. Now that the IRS has made electronic filing a national program, the numbers of electronically filed returns are soaring. As of Feb. 27, some 2.8 million tax returns were filed electronically, more than twice the number filed electronically by the end of the 1989 tax season.

So far, all the electronically filed returns have been for taxpayers owed a refund from the government. A pilot program in Boston is experimenting with the possibility of allowing taxpayers who owe the government money to file electronically and then pay the debt with a credit card, but IRS officials said they do not know when such a service would be available to the taxpaying public as a whole.

“Everybody wins through electronic filing,” said Kathy Stockham, the electronic-filing coordinator for the IRS’ Laguna Niguel district, which includes San Diego. “The benefits to the government are tremendous, which is why we started. The tax preparer benefits because they get to offer another service to their clients . . . and taxpayers get a more accurate return.”

The electronic filing program has not been glitch-free, however.

This week, a computer tape containing some 53,000 electronically filed tax returns that was en route to an IRS computing center was misplaced, delaying refunds for electronic filers in the Southeast and Central regions of the country by as many as three weeks, said IRS spokeswoman Judith Golden in Laguna Niguel.

“This is the first time this has ever happened to electronically filed returns,” Golden said. “It was an unfortunate mishap, but it only resulted in minor delays for a relatively small number of people.”

To avoid mistakes and to discourage criminal activity, the IRS requires all electronically filed returns to be sent through preapproved transmitting companies, rather than allowing individual taxpayers to directly file their returns electronically.

Most transmitting companies will accept floppy discs from individuals who have worked up their own returns on tax preparation software. But TurboTax users who buy the ChipLink software package (suggested retail price: $12) are spared the trouble of shopping for a transmitting company because the software links them directly to Nelco, an IRS-approved transmitting service based in Wisconsin.

Nelco, a 38-year-old company that also publishes and distributes tax forms, charges TurboTax users $15 to transmit their returns to the IRS. So far this tax season, Nelco has electronically filed more than 108,000 returns. Although TurboTax customers make up a large part of its business, Nelco accepts returns from the customers of more than 50 software vendors, said Nelco marketing representative Jeff Watzka.

Since 1984, privately owned ChipSoft has offered two versions of TurboTax--a standard software package for individuals and a more complicated version, complete with client billing capabilities, for professional preparers.

Although exact figures are not available, TurboTax software makes up “the lion’s share” of the tax preparation software market, followed by Andrew Tobias’ TaxCut, J. K. Lasser’s Your Income Tax and Ask Dan About Your Taxes, according to Dataquest analyst Gladys Francis.

“TurboTax is certainly the best one on the market right now as far as the public is concerned,” Francis said. “They’re buying it up.”

By the end of this fiscal year ending July 30, ChipSoft expects to post $20 million in revenue, up nearly 45% from last year’s revenue of $14 million. This year, total unit sales hit 300,000, a 60% rise from the year before, Chipman said.

“I think the existence of electronic filing may alert people to the fact they can do their taxes on computer,” Chipman said. “But since we only see 1% (of our customers) signing up for it so far, I wouldn’t say it’s a big thing yet. But my sense is it will grow.”