Electronic Tax Filing: Are Cell Phones the New Frontier? (Opinion)

On April 15, TV news crews will converge on designated late-night mailboxes to ask procrastinating tax filers why they waited until the eleventh hour to get their midnight postmark. Their answers will be predictable. What's remarkable is these live hits are chronicling the tale of a minority -- taxpayers who file using paper and postage stamps.

Last year, the IRS received nearly 58 percent -- or 90 million -- of all returns electronically. About 27 million of those were filed electronically from home computers.

E-filing has been the IRS's Holy Grail for more than a decade. The 1998 IRS Restructuring and Reform Act codified a goal of 80 percent of returns filed electronically by 2007. The agency is behind by 22 percent and two years late.

The stakes are higher than they may first appear. The legitimacy of the U.S. tax system depends on the level of voluntary compliance -- and promoting e-file adoption is key to easing compliance.

In 1986, when e-file began, the IRS received only 25,000 returns via modem from a few third-party preparers.

Enter the tax preparation software industry. Beyond the brands you know -- TurboTax, TaxACT, TaxCut, among others -- software companies have sustained a partnership with the IRS called the Free File Alliance to provide free e-filing for low-income taxpayers. Nearly 5 million returns were e-filed through Free File in 2008.

According to surveys done for the IRS, 92 percent of users would use Free File again, and 98 percent would tell their friends to. The dilemma is closing the gap between those 5 million who use Free File and the 98 million Americans who are eligible. Boosting adoption is also an issue in the 21 states that mirror the federal Free File model.

The IRS is expanding free e-filing this year while promising to process refunds in as few as 10 days, compared to six to eight weeks for paper forms. Through Free File, software companies are making fillable forms available for free to everybody for completing 2008 federal income tax returns, with no caps or income limits.

When Free File debuted six years ago, it was prototypical of what's now commonly known as third-party software as a service and the proliferating universe of Web 2.0 applications.

And this is where history may be prolog. A 2008 study for the IRS on Advancing E-File by the nonprofit MITRE Corp. points to telefiling's decline. In 2005, the IRS and 31 states offered telefile. Now eight states do, and only three of them attract what the study calls significant volume. MITRE observes, almost parenthetically, "As a result of changes in demographics, user behavior, and technology, phone-based e-filing opportunities currently exist that did not during the original development of IRS Telefile."

The point: People who may never own a PC already have cell phones. There's enough computational power in the average cell phone to support online gaming, purchases and -- yes -- filing at least a simple tax return. It may be a next-year -- or 2011 -- proposition, but it may also be the most practical way to reach the e-file targets. With such a development, history may record that mobility was the thing that kept the voluntary tax system viable.

Editor's Note: This article appeared in the April 2009 Government Technology print issue as Tax Filing Must be Free and Mobile.