E-Filing Makes Paperless Debut for 2000's Tax Returns

By LIZ PULLIAM WESTON

Jan. 12, 2001 12 AM PT

Technologically savvy taxpayers--and those who just like getting their tax refunds faster--will find a few changes in the federal and state electronic filing systems this year.

The big news is that taxpayers can now file truly paperless returns with the Internal Revenue Service for the first time.

The IRS, which began accepting electronic returns for 2000 on Tuesday, no longer requires taxpayers to mail in W-2s or forms with their signatures. Instead, the agency lets taxpayers select their own personal identification numbers, which serve as a kind of digital signature when the return is filed.

“It’s a great improvement,” said John Stoller, an Encino certified public accountant and longtime proponent of electronic filing. “The idea is to be paperless, and they’ve finally done that.”

E-filed returns can shave weeks off the time it takes to get a tax refund, especially if you elect to have your refund deposited directly into your bank account by the IRS. Instead of a four-to-eight-week turnaround, taxpayers can get their money in two weeks or less. The IRS hopes that big carrot will induce more taxpayers to give up filing paper returns.

The agency is also under a deadline. Congress has ordered that 80% of the nation’s individual tax returns be processed electronically by 2007. Last year, just 27% were e-filed.

The IRS still hasn’t managed to make the process free or direct. Taxpayers must use intermediaries--tax software companies or professional tax preparers--to e-file. Plans for the IRS itself to offer Internet filing were scrapped several years ago because of security and technical concerns, and the project has yet to be resurrected.

Still, the IRS’ new PIN system eliminates the extra step of having to mail in a form with W-2 attachments and a signature.

The vast majority of taxpayers will be able to use the PIN system if they choose. Any taxpayer who filed a 1040, 1040A or 1040EZ last year or who used the IRS telephone filing service is eligible. So too are taxpayers who didn’t file last year but who were 16 or older by Dec. 31.

A few taxpayers cannot use the paperless system. Those who have a Social Security card stamped “Not valid for employment” are ineligible, as are people under 16. Taxpayers who are required to file certain attachments, such as the appraisal form for a noncash donation to charity, also cannot use a PIN. More information about who can use the system and how it works can be found at https://www.irs.gov.

Taxpayers who use commercial tax preparation software or professional tax preparers will be guided through the process of selecting a five-digit PIN for their federal return.

With tax preparation software, for example, users are prompted to enter some identifying information, including their names, Social Security numbers and two key bits of information from last year’s tax return: adjusted gross income and total tax bill. That information, plus the five-digit number they select, serves as their identifying “signature” when they file.

Those who don’t happen to have last year’s tax return handy can just call the IRS’ hotline and ask for the income and tax information.

The IRS has run into some problems in the past giving out tax data over the phone. An internal audit in 1997 found that people could easily obtain other taxpayers’ income and tax information.

Auditors back then obtained confidential tax information in 96 out of 109 telephone calls and often persuaded the IRS to mail tax information to an address different from the one recorded in the agency’s records--a troubling security breach.

Since then, the agency says it has tightened its procedures, requiring the caller to give out more identifying information. In recent calls, agency representatives asked for Social Security numbers, current addresses and dates of birth, occasionally adding other questions such as asking the caller’s filing status or the name of an employer.

The perceived need for more security is also behind a change instituted by the state Franchise Tax Board. The state’s e-file system has been paperless since its 1994 debut, but this year the board will require four-digit “customer service numbers” for taxpayers who want to file electronically.

The tax board decided to add the numbers to prevent problems, not in response to any foul-ups, said spokeswoman Denise Azimi.

“A concern was brought up in our board meetings that we might want to add” another layer of security, Azimi said. “We’re very concerned about security and want to do everything we can to secure people’s confidential information.”

Unlike in the IRS system, however, taxpayers can’t choose their own number; it’s assigned by the board. Those who e-filed last year were mailed customer service numbers in late December. New e-filers can call (800) 338-0505 to get a number.

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, 202 W. 1st St., Los Angeles, CA 90012. 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.

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Many Snappy Returns

The Growth of e-Filing

More individual taxpayers are filing their federal tax returns electronically.

No. of e-filed individual tax returns, in millions

1998: 25

1999: 29

2000: 35

2001*: 42

Percentage of total tax returns

1998: 22%

1999: 24%