FTA FedState E-File Symposium
May 3, 2000

• Survey Methodology
• Executive Summary
• Profiles
• Factors Influencing E-filing
• Future Trends
• Recommendations

• September 1999,
CERCA commissioned
Mellman Group to survey 579 tax practitioners by telephone
• Sample was obtained using an IRS listing of tax preparers
• Selection criteria of tax practitioners
– Prepared and filed tax returns in TY98
– Used tax software to prepare the majority of tax returns
– Must be aware of the e-filing program

• Examine current and future e-file market & ways to increase tax practitioner e-file
– Profile e-filers to assess current and future market
– Understand how and why practitioners’ use efile
– Explore incentives, barriers, and other factors that could impact future of e-file

• E-file market significant and can be expected to grow significantly next tax year
– 33% e-filed in TY98
– 28% expect to join in TY99
• E-filers believe in the program
– 97% of 1998 filers plan to e- file again in 1999
– Also plan to file more returns than last year

• Great potential to expand the market
– 33% currently e- file less than 50% their returns

Customer demand and cost-benefit analysis driving practitioners’ decisions on e-filing
 Don’t e-file because clients are not interested and benefit not worth the additional effort

• Some current e-filers put off by transmission fees, time investment, and cumbersome application process
• But 37% would e-file business returns
• Key benefits as incentives to e-file
– Tax credits for clients
– Ability to electronically access client account status at IRS

• Almost all practitioners aware of e-filing (1% unaware)
• Nearly 60% of e-filers are “heavy” filers -using e-filing for over half of their returns
• About 25% e-filers file over 80% of eligible federal returns electronically
• Average e-filer filed
45% of their eligible federal returns electronically

• Fewer state returns e-filed
– Typical e-filer files 29% of eligible state returns
• Compared to the 45% of federal returns
– 15% e-file over 80% of their state returns
– 72% e-file less than half of eligible state returns

• More likely to be tax preparers than CPAs
– Over 40% of e-filers were tax preparers
– 30% of e-filers were CPAs vs. 50% non-e-filers

Segments who e-file more than 50% eligible returns:

56% practitioners <10 years experience
– 38% with 10-20 years experience
– 27% with over 20 years experience

• More likely to work for large firms and file
2-3 more returns than non-filers
• Average e-filer firm has 9 tax preparers
– Average 3 preparers at non-e-file firms
– Over 60% of non-e-filers are the only tax preparer in their firm
• Both E-filers and non-filers offer a broad range of services such as bookkeeping, payroll and business consulting

• Heavy e-filers tend to focus more on individual tax returns
– 26% filed more than
500 1040’s in TY98
– 50% filed more than
190 1040’s
• Only 5% non-e-filers filed >500 1040’s
• Heavy e-filers tend to
– Not charge a separate fee (20%) and include the fee in their tax prep charge (44%)
– Offer RALS (66%) and,
– Offer other bank refund products

Proportion of Eligible
Returns Filed
RATE OF FEDERAL E-FILING
Average
1%-30%
31% - 50%
51%-100%
RATE OF STATE E-FILING
Average
0%
1%-30%
31% - 50%
51%-100%
E-filers
(n=303)
46%
43%
12%
38%
29%
44%
21%
7%
25%
Least Experienced
Practitioners
(n=63)
Most
Experienced
Practitioners
(n=90)
62%
22%
13%
56%
40%
38%
15%
8%
32%
35%
58%
10%
27%
25%
38%
32%
4%
17%

Service Offered Tax Practitioners
(e-filed TY98)
(n=138)
OFFERED E-FILING
To most clients
Only if refund expected
CHARGED FEE FOR FEDERAL E-FILING?
73%
25%
Yes
No
Include in tax prep fee
CHARGED FEE FOR
STATE E-FILING?
Yes
No
Include in tax prep fee
OFFERED RALS?
45%
16%
37%
(n=73)
41%
37%
19%
Yes 34%
No 66%
OFFERED OTHER BANK REFUND PRODUCTS?
Yes
No
28%
71%
Heavy E-filers
(e-filed TY98)
(n=166)
93%
7%
34%
20%
44%
(n=82)
48%
43%
9%
66%
34%
53%
45%
Light E-filers
(e-filed TY98)
(n=116)
66%
32%
57%
10%
33%
(n=81)
47%
31%
20%
21%
79%
14%
84%

• Reasons given for not e-filing point to the need for a campaign to educate taxpayers and practitioners about electronic filing process
– Highlight possible improvements in the program

• Non-e-filers cite insufficient value for clients compared to the increased cost in time and effort to the practitioner and clients’ lack of interest as their top two reasons for not filing
– Cited by over 50% non-filers

• Lack of information and discomfort with security issues are significant barriers
– ~40% non-e-filers unsure of participation criteria
– ~40% uncomfortable sending taxpayer data electronically

• E-file transmission fees were the second most frequently cited reason not to e-file by e-filers
• Similar numbers of both e-filers and non-efilers agree that the ERO application process and procedures are too cumbersome

Reason For NOT E-filing
(Federal)
The benefit to my clients is not worth my effort
My clients are not interested in E-Filing when I offer it to them
I am not sure what the criteria is for me to participate in IRS E-File program
I am not comfortable sending taxpayer data electronically
Did Not E-file
Strongly/Somewhat
Agree
(n=274)
%
54%
Rank
1
E-filers
Strongly/Somewhat
Agree
(n=271)
%
14%
Rank
6
Difference
(non-efilers – e-filers)
% Points
40
50%
38%
37%
2
3
4
32%
4%
6%
1
10
7
18
34
31

Reason For NOT E-filing
(Federal)
Did Not E-file
Strongly/Somewhat
Agree
(n=274)
%
36%
Rank
5 E-File transmission fees are too costly
The ERO application process and procedures are too cumbersome
It takes time away from other things I could be doing
33%
30%
E-File software is too costly 27%
E-File software is too difficult to use
9%
6
7
8
9
E-filers
Strongly/Somewhat
Agree
(n=271)
%
20%
Rank
2
Difference
(non-efilers – e-filers)
% Points
16
17%
18%
15%
6%
4
3
5
8
16
12
12
3

Reason For NOT E-filing
(Federal)
I am concerned I might lose my Circular 230/ERO privileges if IRS does not accept me as an ERO
I am concerned about possible suspension and/or increased visits by IRS CID after being approved
I am concerned about increasing the likelihood of an audit by IRS
I do not have a modem
Did Not E-file
Strongly/Somewhat
Agree
(n=274)
%
6%
Rank
10
E-filers
Strongly/Somewhat
Agree
(n=271)
%
5%
Rank
9
Difference
(non-efilers – e-filers)
% Points
1
6%
6%
5%
11
12
13
3%
4%
--
12
11
13
3
2
5

• Not e-filing state returns focused more on an understanding of the program and costs
– #1: Practitioners not sure how the program works (39%)
– #2: Practitioners not wanting to pay software fee (27%).
• Additional reasons:
– Requires too much staff time (23%)
– Can’t e-file part-year or non-resident state returns (23%)
– Can’t file multiple state returns (19%)
– Concerns about e-filing state and federal returns at the same time (15%)

TY99
• Over 60% likely to e-file for TY99
– >40% “almost certain” to do so
• Significant increase over 30% currently filing
– 42% who did not e-file in TY98 likely to e-file in TY99

• 97% will e-file again in 1999
– 90% responded “almost certain”
– 61% plan file more returns
– 38% will file the same number
– None plan to file fewer returns

• Customer demand is the leading reason current e-filers plan to e-file more
– >50% indicated e-file increase cited increased customer demand as reason
– 25% cited increase in their own base of clients
– >10% cited increased comfort with the process
– 2% expect to file more refund due returns.

• E-filers are more influenced than non efilers in incentives
• Tested 8 incentives
• 3 out of 8 incentives would influence >50% of current e-filers to file more returns
• 4 out of 8 incentives would be the best motivator for >30% of non-e-filers

Potential Incentives to Participate in IRS
E-filing
To be able to electronically access account status for your clients at the IRS
To be able to electronically correspond with the IRS about your clients accounts
A tax credit on your clients return if E-
Filed
To be able to file Power of Attorneys and/or tax information authorizations electronically
E-filers
Would Influence A Lot
(n=303)
%
56%
Rank
1
Did Not E-file
Would Influence A Lot
(n=274)
%
39%
Rank
1
56%
54%
47%
2
3
4
34%
36%
34%
3
2
4

Potential Incentives to Participate in IRS
E-filing
E-filers
Would Influence A Lot
(n=303)
%
46%
Rank
5
Did Not E-file
Would Influence A Lot
(n=274)
%
27%
Rank
5 Ability to receive client transcripts electronically
Free CPE credits
Streamlining the E-File application process for ERO’s
Increased promotion by the IRS of E-
Filing to taxpayers
37%
29%
28%
6
7
8
25%
20%
10%
6
7
8

• 33% overall practitioners interested
– 11% of those “very” interested
– Marginally rises to 38% if criteria is % eligible returns e-filed
• 45% overall practitioners very disinterested
• 53% e-filers interested in such a program
– 26% of those are “very” interested
– 33% of e-filers “very” disinterested

• Overall, 37% who currently prepare business returns would e-file them
– 60% would not, including 49% not at all likely
• 55% current e-filers would e-file
– 58% heavy e-filers say they would e-file, including
• 49% of those with < 10 years experience
• 43% of tax preparers

• Continue and increase information to practitioners of e-file ease and benefits
• Continue and increase taxpayer education of e-file ease and benefits
• Reduce procedural barriers
• Provide incentive structure