Technology Drives Online Tax Filing Trend

As journalists chronicle this year's tax filing trends, many see change as an expected progression rather than a shocking leap.

Because of increasing complexities of the tax code, this year will return a substantial increase in the number of e-filers.

Long gone, many experts say, are the days of pen-and-paper tax returns.

"Doing your return by hand? Forget it," said Howard Gordon, a columnist for The Desert Sun in Palm Springs, Calif., and a retired certified public accountant partner.

The IRS Web site says that through the end of March, 49 million tax returns were filed electronically -- a 7 percent increase from last year. For the first time, the IRS expects more than half of all individual tax returns to be filed electronically.

Technology has helped drive this trend by becoming an ally for many Americans.

"It is easier to use the software you buy or download online and it reduces error rate," said Andrea Coombes, a MarketWatch.com reporter.

The trend toward e-filing is "more of an evolution than a revolution," said Kathy Kristof, a business reporter for the Los Angeles Times. "The rules are so complicated, so software is something everyone is using."

But journalists should keep in mind the popularity of e-filing is not likely to decrease demand for professional tax preparers. The tax code's complexity -- condensed in a few thousand pages of rules and regulations -- causes more people each year to seek professional assistance in the filing process.

Though professional preparers use similar software to home users, the professional software may cost 20 times the price of personal versions because of premium tax code features.

"Certified public accountants deal with more complex returns for the most part," Gordon said. "Using TurboTax or other popular personal software is really beyond those people in terms of their financial complexities."

The IRS addresses concern about the prohibitive prices of professional tax preparation and personal software with Free File. Readers may benefit by knowing this three-year-old service is provided free online at IRS.gov.

This year, 3.74 million returns have been filed through the Free File program -- up 44 percent from the 2.6 million returns filed at this time last year.

Sandra Block, a business reporter at USA Today, attributes the increased use of Free File to its accessibility. "In the past, free filing was restricted primarily to low-income taxpayers," she said. But now, anyone who wishes to use the free software may do so.

Because Free File does not cost anything, it may not offer as much support as other software. "More support means more perks available and if you're doing it by yourself at home, you're liable to leave things out unless you are a CPA," Coombes said. "The greater support, the more likely you'll get the full amount in a refund."

Pared-down software versions are sufficient for most people, and software designers have become savvy at anticipating customer issues.

Don't forget to report on congressional issues as well. Tax issues debated on Capitol Hill may also contribute to the mass ushering of online filers.

"If Congress doesn't do something about the alternative minimum tax, it almost makes it mandatory to use some kind of computer program," Gordon said. "It's almost impossible to do the returns on pen and paper because even the simple ones are complex."

The alternative minimum tax equals the difference between an individual's regular taxes and the level individuals with the same income pay. An increasing number of people are subject to the tax each year.

"The code has gotten to the point where the average person just cannot do it without help anymore and that just lends itself to unfairness," Kristof said. Increased utilization of professional tax preparers and the necessities of software to file taxes are symptoms of an "out-of-control tax code," she said.

Indeed, the future of tax filing and the tax code lies largely in politics.

"Congressional leaders can do all these nifty little things through the tax code," Kristof said. "Republicans philosophically believe taxes should be lower and Democrats see the tax cuts for the social programs they create. But it creates such a muddy code."

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism