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Monday, March 14, 2011

The pros and cons of filing taxes electronically

Taxes can be filed electronically either through a tax preparation software or directly via the online version of tax software producers or accounting service providers. Electronic filing of taxes has been an official method and accepted by the U.S. Internal Revenue Service since 1986 (irs.gov). There are many advantages to both Government and tax filers when tax information is filed electronically.

The Internal Revenue Service Restructuring and Reform Act of 1998 was enacted as law for the purpose(s) of modernizing and streamlining the tax authority's operations in addition to assisting tax payers with their tax preparation and making adjustments to other tax filing rules. However, even with the many advantages, there are also some disadvantages of electronic tax filing that may sometimes by overlooked. This article will discuss the pros and cons of filing taxes electronically. However, prior to that, the following brief introduction and instructions for free e-filing of taxes is a good place to start:


Pros of electronic tax filing


The number of tax filers who have used electronic tax filing has increased steadily for several years. This is due to the pros of electronic tax filing in addition to the U.S. Department of the Treasury's administrative goal of making the tax filing process digital. For the government, a predominantly digital tax filing process saves the government money in data entry expenses and shifts responsibility of finding errors to the tax preparation software, and individual tax filer. The tax filer pros of filing taxes electronically are listed below:

• Faster refund: Refund processing time may take as little as 2 weeks
• Efficient: Recording and transmitting of tax information is faster
• Less paperwork: Paper tax forms such as form 1040 do not need to be mailed
• Digital copy: Digital copies can be stored on a computer or disk
• No mailing costs: Transmitting of data itself is included in the service
• Can transfer federal information on to State tax application
• Math check and guided completion aids in tax filing accuracy
• Reduces need for expensive "anticipated refund loans"
• Online payment of taxes via multiple methods

Con of electronic tax filing


• Not always free: For high income earners and State tax returns a fee may be charged
• Will owe taxes faster if tax is due: If a tax filer owes taxes, the more efficient method could lead to faster processing of official acknowledgement of owed taxes.
• May not accommodate some complex tax filing procedures: 2% of tax forms and/or procedures cannot currently be accommodated by electronic tax filing.
• No paper copy unless one is printed: Paper copies may be desirable in some cases
• Personal information transferred through a third party: When intermediary services are used, their database may store personal tax information.
• Increased risk of computer identity theft: Stored tax information may exist on  personal storage devices, a financial services firm and the tax authority.
• Computers may inaccessible by some segments of the population

Disadvantages of electronic tax filing are sometimes overlooked in the interest of acquiring a faster tax return. Some of the cons of digital tax filing may be minor as data encryption become more advanced and there may always be people who are either located to remotely to have internet access or do not have access to a computer. Despite these cons of electronic filing, the availability of electronic tax filing is useful if not beneficial to many tax filers for the reasons illustrated in this article.

The U.S. Department of the Treasury has actively promoted electronic tax filing for several reasons which include reducing costs modernizing the tax processing system and reducing paper requirements of the IRS. The number of electronic tax filings have become a major form of tax filing in recent years and are likely to continue as such in the future if past tax filing statistics trends remain strong indicators.

Source(s):

1. http://www.irs.gov/efile/article/0,id=120353,00.html
2. http://www.treas.gov/press/releases/rr1915.htm
3. http://www.irs.gov/newsroom/article/0,id=170407,00.html
4. http://www.pmstax.com/gen/bull9808.shtml

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