A recent report by the Treasury Inspector General (IG) for Tax Administration focused on the need for the Internal Revenue Service to expand its electronic filing capabilities to better manage the processing of returns and address the current backlog.
To put the need in context, the report highlighted the cost difference for processing a paper return compared to an electronically filed return in 2020. It costs approximately $.36 to process an electronically-filed individual Form 1040, but increases to $15.21 if filed in paper form. A Form 1041 costs $.37 to process electronically and $14.02 to process a paper return.
E-filed returns can also be quickly and automatically checked for more than 1,000 possible errors before the IRS accepts the return for processing giving e-filed returns a greater degree of accuracy, compared to a paper return that requires an individual to keypunch all the details, which was a key contributor to the backlog of processing during the COVID-19 pandemic. While the agency has been relatively successful in getting individuals to electronically file their returns (a 93.4% e-file rate in 2020), it is not having the same success getting businesses to do the same (63.3% e-file rate in 2020). That number goes down to 49% when looking at employment tax returns.
The IG noted that the agency has not taking previously recommended actions, including:
- Developing a business tax return e-filing strategy
- Developing a less burdensome electronic signature process for employment tax returns
- Working with the Treasury to consider revising current requirements and/or creating new requirements for e-filing business returns
The IG also called upon the IRS to more aggressively identify business that are non-compliant with e-filing mandates and assess the noncompliance penalties. The report noted that in 2018, there were 897 corporate taxpayers that were mandated to e-file but still filed paper returns. The agency could have assessed more than $2.4 million in penalties that were not assessed on these corporate filers due to “potential implementation issues.”