A few of the 21 initiatives have been implemented and have resulted in
modest increases in the number of electronic returns. For example, one
initiative called for expanding TeleFile-a program that allows taxpayers
who meet certain criteria to file 1040EZ returns by telephone. About
680,000 taxpayers in 10 states filed returns using this method in 1995
compared with 149,000 in 1 state in 1993, and IRS plans to expand the
program nationwide in 1996. Another initiative called for expanding
cooperative arrangements with states that would allow electronic filers to
jointly file their federal and state tax returns. As of June 9, 1995, about
1.5 million taxpayers in 29 states had used this program compared with
about 635,000 taxpayers in 15 states in 1993.

GAO/GGD-93-40.

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Number of Taxpayers
Using Electronic Filing
Relatively Low Compared
With IRS' Goal

However, other initiatives included in the 1993 strategy have been delayed or dropped. According to the IRS task group, several of these initiatives required legislation. For example, the task group had estimated that IRS could obtain 37 million electronic returns by legislatively mandating that tax return preparers who prepare a large number of individual returns offer electronic filing. That initiative was dropped because, according to IRS and Treasury officials, there was little chance that Congress would pass such legislation. Appendix I provides additional information on those initiatives that the task group said would require legislation.

Because several initiatives that were designed to attract large numbers of taxpayers to electronic filing have not been implemented, IRS' default strategy has been to continue marketing electronic filing to tax preparers. However, that strategy has resulted in a program that primarily attracts individuals who file simple tax returns, are due refunds, and are willing to pay the fees associated with electronic filing to get those refunds sooner.

As shown in figure 1 on page 8, the number of electronic returns increased from about 4.9 million returns in 1990, when electronic filing became available nationwide, to a high of 16.4 million returns in 1994, before dropping to an estimated 14.8 million returns in 1995.

IRS attributes the decrease in electronic filing in 1995 to steps it took to prevent refund fraud. As a result of these steps, refunds for millions of taxpayers were delayed, thereby reducing the major appeal of electronic filing. IRS officials believe that the decrease is temporary.

Even if electronic filing begins growing again, IRS will be hard pressed to reach its electronic filing goal. We estimate that electronic filing, including returns filed on magnetic media, would need to grow at an annual rate of about 32 percent to reach 80 million returns in 2001. That rate contrasts with the 14 percent annual growth rate IRS achieved in 1993 and 1994. As shown in figure 1, if annual growth were to continue at 14 percent, we estimate that only about 33 million returns would be filed electronically in 2001.

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individual income tax form to process on paper. As a result, potentially significant cost savings may be going unrealized.

On the basis of IRS' 1993 service center processing cost estimates (the latest available), it cost IRS $4.53 to process a paper Form 1040, $3.95 to process a paper Form 1040A, and $3.36 to process a paper Form 1040EZ.6 The most costly of the three (Form 1040) accounted for about 59 percent of all individual returns (paper and electronic) processed in 1994, yet Form 1040 accounted for only about 20 percent of the individual returns filed electronically.

On the basis of IRS' processing cost estimates for paper returns and its estimated average cost of $3.08 to process each electronic individual return, we estimated (1) the total potential processing savings that could have been achieved if all individual income tax returns had been filed electronically in 1994 and (2) the portion of those potential savings that went unrealized. Figure 2 shows that the greatest amount of unrealized savings, about $90 million, was for returns filed on Form 1040.

"The 1040A and 1040EZ are less costly to process because they generally contain fewer pages than the 1040 and thus less data for IRS to input and less opportunity for taxpayers or IRS to err. The 1040EZ has one page with no supporting schedules. The 1040A has two pages, like the 1040, but generally has fewer supporting schedules because of limitations as to who can file a 1040A. A 1040A filer, for example, cannot claim itemized deductions, self-employment income, rents and royalties, or capital gains. According to IRS data, it takes an average of 89 and 159 keystrokes, respectively, to enter data into the computer from a paper 1040EZ and 1040A compared with 247 keystrokes for an average 1040. "The savings from electronic filing would be even more if IRS did not have to process the paper signature document (Form 8453) that electronic filers are required to send to IRS. IRS data show that it costs 30 cents to process each of those forms, or about $4.3 million in 1994.