IRS Not Saving Money From Electronic Tax Filing Blizzard

by Mike Godfrey, Tax-News.com, New York

15 February 2002

US tax preparation and tax filing sites are reporting big increases in usage, with a resulting beneficial impact on their results; but the IRS, which is also experiencing heavy demand for its on-line filing service, is not saving any money as a result.

Nielsen//NetRatings said that consumers looking to plan their finances and taxes for the year are flocking to such sites as Taxact.com, TurboTax.com, IRS.gov, Intuit.com and HRBlock.com. Taxact.com was the fastest growing site, with more than one million visitors in January, the measurement firm said. Traffic to TurboTax.com nearly tripled as more than 1.9 million surfers visited the site last month, as compared to 509,000 visitors in December 2001. And Internet users visited IRS.gov in droves as the site attracted more than 6.2 million unique visitors in January 2002, increasing 273%.

Software company Intuit Inc., whose products include TurboTax, reported second-quarter (ending Jan. 31) revenues up 20% and raised its revenue forecast for fiscal 2002 after traffic to Intuit.com shot up 240% to nearly 3.5 million. Revenue from Intuit's professional tax business increased 28 percent over last year's second quarter, the company said. "As a result of the solid quarter and our confidence in the fundamentals driving our growth, we're raising our guidance for pro forma operating income for fiscal 2002 by $20 million to the $300 million to $310 million range," said Steve Bennett, Intuit's president and chief executive officer.

"The popularity of these (tax) sites shows how American Internet users have come to rely on the Web as a planning and organization tool, helping to improve their overall quality of life," said Jarvis Mak, senior Internet media analyst at NetRatings.

Measurement company Jupiter Media Metrix said the top gaining government site, and also the top gaining property overall for January, was IRS.gov, which increased 275% to 7.5 million unique visitors. But the IRS is failing to benefit financially, says a new congressional study. Over four years, e-filing has increased by 78%. Over the same period, the cost of processing tax returns increased 11%, to nearly $1 billion.

The General Accounting Office report calls into question whether taxpayers will ever see one of the dividends anticipated from the Internal Revenue Service's move toward less dependence on paper: cheaper government, because even as the number of electronic returns has risen from 22.9m to 40.9m over 4 years, the number of paper returns has fallen only from 194.5m to 187.4m, giving a total increase of more than 10m returns, or nearly 5%.

IRS Commissioner Charles Rossotti, responding to the report by the GAO, acknowledges the IRS is spending more to process tax returns, but says the financial benefits to government will increase as the IRS improves its e-filing system and more taxpayers use it. The IRS expects about 35% of individual returns to be e-filed this tax season, up from 31% last year. The law sets an e-filing goal for the IRS of 80% in 2007.

The GAO report doesn't dispute that an electronic return is cheaper to process than a paper return. But, the GAO says, potential savings have been swamped by other factors. Among them the fact that the peak filing month for paper returns, which determines staffing levels, has seen no reduction in volumes, and that even e-filings generate paper, since most taxpayers still use paper to authenticate their returns even when they have filed electronically. Whether e-filing becomes a big money-saver for taxpayers depends on improvements at the IRS and greater public acceptance, the GAO says.

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