Electronic tax filing refers to various systems that enable individuals and small businesses to file their tax returns and make tax payments through electronic data transfer. In 1996, the Internal Revenue Service (IRS) began requiring businesses that owed more than $47 million in payroll taxes annually to make their monthly payments via telephone or computer through the Electronic Federal Tax Payment System (EFTPS). The threshold for electronic filing was scheduled to drop to $50,000 in annual payroll taxes by January 1, 1997, but the deadline was pushed back to June 30,1998. In addition, two bills were introduced in Congress that would make electronic payments of payroll taxes voluntary for small businesses with few employees. When this system is eventually phased in, there will be a 5 percent penalty for late payments and an additional 10 percent penalty for non-electronic payments, which will still be accepted.

To enroll in EFTPS, a small business must fill out IRS Form 9799, the Electronic Federal Tax Payment System Business Enrollment Form. Experts recommend completing the necessary paperwork well in advance, because it can take more than 10 weeks to process. At the time Form 9799 is filled out, the business owner must choose from two payment options: an Automated Clearinghouse (ACH) debit or an ACH credit. For the debit option, funds are automatically withdrawn from the taxpayer's bank account by an IRS-appointed bank. For the credit option, the taxpayer's bank initiates the transfer of funds to the IRS-appointed bank. When it comes time to pay taxes, the small business simply needs to call a toll-free number to the appropriate bank, and provide information such as the business's tax ID number, the amount and type of taxes owned, and the period to which the payment applies. Afterward, the business receives a confirmation number from the bank indicating that the electronic transfer has taken place.

It is possible for individuals and home-based businesses to file their taxes electronically as well. In the past, the business owner would prepare his or her taxes on the computer using a tax preparation software package, then transmit the completed return to an online service, such as Compuserve. The online service would convert the file to meet IRS specifications and pass it along. In 2001, however, the IRS announced that it was making electronic filing through its Web site ( www.irs.gov ) available to the majority of America's 142 million taxpayers. The IRS projected that 45 million people would take advantage of electronic filing in 2001—an increase of 30 percent from 2000—and set a goal for 80 percent of taxpayers filing online by 2007.


The IRS prefers businesses to submit their taxes via electronic means because the costs and error rates for electronic tax filing are dramatically lower than those for paper filing. As Keith Higginbotham reported in the Knight-Ridder/Tribune News Service, typical paper tax returns have an error rate of 20 percent. Thanks to built-in math calculators and other automatic checks, electronic filing reduces this error rate to less than 1 percent. In addition, the IRS claims that electronic filing means faster refunds and instant confirmation that a return has been received.

But critics worry that converting 1.2 million businesses to an electronic tax filing system is such an enormous undertaking that it will create a significant potential for error. "While the amount of paperwork will be reduced under the new system, so will the number of IRS personnel, or at least that's the intention," Mike Dries wrote in the Milwaukee Business Journal. "Computers will have to work flawlessly to achieve a zero-defect system." Others feel that the system places an undue burden on the nation's small business owners. "For small-business owners who approach emerging technologies with wonder and suspicion, the Internal Revenue Service is about to give you another reason to dread paying taxes," Dries stated.

In reality, however, new electronic tax filing systems probably seem scarier than they will actually be. The IRS is offering companies free software to help them meet electronic filing requirements, and has also issued specifications for companies that wish to develop their own software. In addition, private software vendors are entering the electronic tax filing software market. Some private versions of the software come packaged with financial applications, so that companies can draw data directly from their financial systems and put it into the ACH file format required by the IRS. Tax professionals, payroll services, and banks are also developing a wide variety of systems to help small businesses with electronic tax filing. For more specific information on the requirements, see the IRS site on the Internet at www.irs.gov.


Barlas, Stephen. "Electronic Avenue: A New Deadline for Electronic Tax Filing Gives Small Businesses a Break—For Now." Nation's Business. October 1997.

Dailey, Frederick W. Tax Savvy for Small Business. 2nd ed. Berkeley, CA: Nolo Press, 1997.

Dries, Mike. "Dialing for Dollars." Milwaukee Business Journal. September 7, 1996.

"E-filing Myths and Facts." Byte. March 1997.

"Electronic Filing Can Be All Gain, No Pain." ABA Banking Journal. April 1995.

"File from Your Home Computer." Journal of Accountancy. May 1996.

Higginbotham, Keith. "IRS Expands Electronic Tax Filing." Knight-Ridder/Tribune Business News. January 5, 2001.

Weston, Randy. "Tax Software Vendors Compete against the IRS." Computerworld. January 13, 1997.

SEE ALSO: Tax Preparation Software

Also read article about Electronic Tax Filing from Wikipedia

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