- Electronically filed tax returns are less expensive for the IRS to process
- E-filed tax returns require more detailed information in order to be accepted by the IRS. For example, the taxpayer’s date of birth, social security number and name must all match or the return will be rejected.
- Electronically filed tax returns do not have mathematical errors.
- E-filed tax returns are available for audit sooner than paper returns, allowing more time before the three year statute of limitations expires.
Electronic filing is popular with taxpayers, too.
- Taxpayers get a confirmation that the IRS has received their tax return in a timely manner.
- Refunds are processed faster
- Saves on postage costs
With all the advantages of e-filing there are some very real disadvantages. First and foremost is the increase in tax-return fraud. The Government Accountability Office reported the IRS detected 642,000 cases of identity theft during the first nine months of 2012, an increase over the 242,000 cases that occurred in 2011. The increase in tax identity theft has been blamed on the increase in electronic filing. It’s simple for criminals to electronically file a fraudulent return using a real name and social security number and a fictitious Form W-2. The thieves take advantage of the fact that the IRS does not process W-2s and 1099s it receives until several months after refunds have been issued. The refund can be sent to an anonymous prepaid Visa or MasterCard. These cards have routing and account numbers needed for direct deposit.
Perhaps the most surprising thieves are tax return preparers themselves. With electronic filing, unscrupulous tax return preparers can send the Form 8879 (authorization to e-file) to the taxpayer, receive the signed authorization, then modify the tax return before electronically filing it. Another form of fraud is when a return preparer changes the bank routing information on a return so the direct deposit refund will wind up in his bank account. The news is filled with court cases resulting in prison terms for tax return preparer fraud.
Along these lines is the fraud committed by individuals with access to personal information: medical billing clerks, bank or credit union personnel, etc. These perpetrators will take names and social security numbers and either sell the information to someone who will prepare multiple tax returns, or prepare the returns themselves. The idea is to get at least a few of those returns through the IRS system and refund in hand before getting caught.
What’s a taxpayer to do?
First and foremost, taxpayers should select their tax return preparer very carefully. Most preparers are professional and want to provide the very best service they can to their clients. Beware of preparers who promise large refunds.
I received an email from the IRS Newswire earlier in the week addressing this very issue. The IRS is intensifying its crackdown on identity theft. IRS Acting Commissioner, Steven T. Miller stated, “As tax season begins this year, we want to be clear that there is a heavy price to pay for perpetrators of refund fraud and identity theft. We have aggressively stepped up our efforts to pursue and prevent refund fraud and identity theft and we will continue to intensely focus on this area.”
Filing on paper?
Paper returns are still accepted and processed by the IRS. The Services requires a Form 8948, “Preparer Explanation for Not Filing Electronically” to be submitted with a paper return if a paid preparer completes the tax forms. In the article, “The Case Against Efiling”, Jay Starkman notes that Mitt Romney’s 2010 tax return contained a Form 8948. He goes on to observe that President Obama’s tax return was ink-signed, indicating he filed on paper as well.
Electronic filing definitely has advantages and as a tax preparer as well as a taxpayer, I prefer it over paper filing. However, with the increase of identity theft, it certainly is worthwhile to consider the alternative of filing a paper return.