E-Filing Taxes Yields Quick Result, Slow Headache
Filing your tax return electronically speeds up your refund and lowers your chance of audit.
But as with most things tax-related, e-filing is also more cumbersome and complicated than it needs to be.
This was brought home to me last weekend as I struggled to help a graduate student friend file her relatively simple 1040A federal and 540A state forms. What should have taken a few minutes in fact took two days and resulted in several times the paperwork that would have been generated had we done her return by hand. Not only that, but we still had to mail in a form before the process was complete.
I had been intellectually aware of the IRS’ slow progress on e-filing but hadn’t had to face the issue personally; although I do our taxes four or five times each tax season to test various tax preparation software, my husband and I ultimately send our rather complicated return to an enrolled agent for preparation and filing.
The good news about e-filing is that, although the process isn’t speedy, the turnaround time is.
You can get a refund from the IRS in as little as 10 days, and usually within two weeks, by e-filing and using direct deposit. Refunds are even faster with the state Franchise Tax Board. Compare that with refunds from paper returns, which typically take four to eight weeks to process.
E-filing eliminates a middleman. Instead of sending a paper return to a vast processing center, where it is typed into the tax agency’s computer by an employee, your return is zapped, albeit somewhat circuitously, to the computer itself.
E-filing also reduces the chances of a service center audit. Your return isn’t accepted if the math doesn’t add up, if Social Security numbers are wrong, if you’ve failed to fill out crucial boxes or if you’ve made one of a number of other errors that typically trigger a “you goofed” letter from the IRS or FTB.
(Service center audits are relatively benign; the letters typically ask for more information or assess additional taxes and interest based on errors. E-filing does not increase or decrease your chances of the more complicated face-to-face audits, which are based on other criteria.)
Faster refunds and fewer audits have helped boost e-filing this year. The number of people filing electronically from their home computers has nearly doubled from last year, to 3.5 million as of April 2. Professional tax preparers have finally embraced e-filing as well, submitting 21 million returns, up 16%.
Another advantage to e-filing is that there is no question whether the tax agency received your return. You don’t have to stand in a long post office line and pay for certified mail, return receipt requested; that never proved your return actually made it to the right place, anyway. (Some people send in empty envelopes, and others send state forms to the federal address and vice versa.)
Instead, the IRS and FTB send you an electronic acknowledgment and code when your returns have been accepted. Unfortunately, you have to wait 24 to 48 hours after filing your return to receive the code. That delays the completion of your filing because you can’t complete the process--by mailing in the form--without that code.
There are several reasons for the delay. First, your return does not go directly to the tax agency computer. Instead, it’s put in a batch with others that were prepared using the same vendor’s software. TurboTax, for example, gathers all the returns sent to it and sends them in a high-speed bundle once a day to the IRS and to appropriate state tax agencies. Software vendors used by professional tax preparers do the same thing.
Once your bundled return reaches the IRS, it is transferred to computer tape that is transported physically by an IRS employee to another computer. This seemingly inefficient transport was designed as a deliberate break in the transmission process to keep hackers from accessing the IRS’ computers. This slows down processing that would otherwise take a few minutes, at most.
The FTB’s system is somewhat more direct, but the state agency requires the 24 hours to ensure electronic returns are properly filed and processed.
Another frustration is that, for most people, electronic filing still isn’t paperless. Unless you were part of a pilot IRS program that doled out personal identification numbers, you still need to fill out, sign and mail in Form 8453 to complete your federal return. (You also need to include the electronic acceptance code you received from the IRS.)
To make matters more confusing, the FTB system is paperless, and has been for several years. So you’re supposed to fill out and sign a separate Form 8453 for your state return, including the acceptance code, but you’re not supposed to send it in. Instead, you’re to keep it in your files along with supporting documentation for your return.
Explaining all this generated six pages of instruction for the federal return and five pages for the state return when using TurboTax. I initially went through and highlighted relevant portions of these instructions for my friend to read, including copious sticky notes to guide her through the process of looking up her acceptance codes, writing them on the proper forms and figuring out which ones to mail and which to keep.
It all seemed ridiculously complicated, especially when you consider that my friend found filling out her tax forms was too daunting to tackle alone. Finally, I had her sign the forms and I took care of the rest.
It’s also a bit aggravating to have to pay for electronic filing, considering how much money it saves the government. Although e-filing is included in the cost of most online tax preparation, professional preparers tend to charge for it, because their software vendors charge them. Because more than half of the nation’s returns are professionally prepared, President Clinton’s idea of a tax credit in exchange for electronic filing would be a nice way to ease that slight pain.
The IRS has no immediate plans to streamline its system or go completely paperless, although it does hope to further shorten the turnaround time for refunds.
The tax agencies’ concerns about security are laudable, and it may be appropriate for IRS and FTB to tread cautiously when taxpayers’ confidential financial information is at stake. At the same time, it is now possible to borrow money, buy a car and sign up for insurance with completely electronic transactions. Someday, hopefully soon, it should be possible to file a truly electronic tax return and do it in less time than it takes to read the tax code.
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Several readers responded to my March 24 column about unsuitable annuity sales to the elderly by requesting contact information for elder law attorney Ed Long and his nonprofit company, Healthcare & Elder Law Programs Corp. Its phone number is (310) 533-1996, its e-mail address is Hlp4srs@aol.com, and its Web site is https://www.help4srs.com.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
