Employment Tax Returns a Huge Obstacle in Meeting Federal 80% E-Filing Goal

The IRS Oversight Board (the Board) recently issued its annual report on the progress that the IRS is making in reaching its goal of having an overall 80% electronic filing (e-file) participation rate for all major types of tax returns by the 2012 filing year. While significant progress is being made, the Board doesn't believe that the IRS will reach the 80% threshold, and one of the primary reasons that the goal won't be attained is because many employment tax returns are still being filed on paper [IRS Oversight Board, Electronic Filing 2010, Annual Report to Congress].

The report states that only 23% of Forms 941 are currently e-filed, with an even lower e-file rate for all other employment tax returns. To get more of these returns filed electronically, the Board recommends that the IRS develop a direct Form 941 e-file portal, similar to the one the Social Security Administration (SSA) provides for W-2 information. The SSA's W-2 Online application allows employers to e-file their Forms W-2 directly to the SSA. The SSA application also performs various computational checks during the process that small businesses find quite useful. The Board believes that it would not be unreasonable to mandate electronic filing of employment tax returns if a direct e-file portal was made available to employers. Large employers currently have to file W-2 forms electronically and all employers now have to make tax deposits electronically.

In addition, the report notes that, in 2005, the IRS discontinued its Form 941 TeleFile application. At its peak, the application accepted over 850,000 employment tax returns via telephone. The IRS, however, has not replaced the TeleFile application with a similar Internet application, and the Board recommends that the IRS do so.

The Board is also encouraging the IRS to develop a more definitive profile of employers that are submitting the bulk of the paper employment tax returns, and to determine whether better marketing by the IRS and/or industry could help increase their e-file participation.

The entire report is on the Department of Treasury website at http://www.treasury.gov/irsob/reports/2011/IRSOB~E-File%20Report%202010.pdf.