efile History - Electronic Tax Filing in the United States
The efile (electronic filing) method of filing one’s taxes has been around for 25 years. The history of efiling began in 1986 as a small test program in which only 5 tax preparers from Cincinnati, Raleigh Durham, and Phoenix agreed to participate. Since then, efile has grown to become commonplace, serving millions of taxpayers every year.
The Origins of efiling
In the 1980’s, processing taxes became increasingly difficult. While tax preparers started to use special computers and software to simplify their job, they still had to print all the forms and mail them to the IRS. The storage costs of all the paper tax forms incurred by the IRS alone were high. In addition, with the emergence of new technology in the decades preceding 1980’s the IRS began to use machines and computers to process the returns. With both the IRS and tax preparers using computers to prepare and process tax returns, it made no sense having paper forms; in fact, it just increased the chances of making errors.
The early efile process consisted of the tax preparer using a machine called Mitron, which was a tape reader with a modem. The tax preparer would insert the tape with the tax data and then transfer it to the IRS. At the IRS, an agent would transfer the tape into a machine called Zilog(or Zylog). Zilog S8000 was a small supercomputer, which would read the data and organize it in a way that would be convenient for the IRS’s Unisys system.
In 1986 those 5 tax preparers filed around 25,000 returns using the efile method. The success of the program prompted the IRS to move it past the test stage and expand it to more cities. In 1987 66 tax preparers agreed to participate, filing 78,000 tax returns. To improve the system, the IRS added an electronic Direct Deposit option, so the refund money could be wired to a bank account of one’s choice. In 1988 the IRS discontinued the use of Zilog S8000 and instead used IBM Series I processing system. This meant that the employee didn’t have to plug the phone into the modem anymore, making the process a little simpler.
efile - a Success Story
The success of efile drew attention from other tax preparers. While the attention was certainly a positive thing for efile, the method drew some skepticism. Some tax preparers were worried that this was just a method to gather and organize more data for audits. However, using the efile system actually reduced the need for an audit. In addition the chance of making an error while using efile was estimated at 1%, while the chance of making an error while filing on paper was as high as 20%.
In 1988 Maryland and Washington DC filed 60,000 tax returns. The success convinced the IRS to persuade as many tax preparers as possible to switch to an efile system. However using efile required an investment to buy the necessary computers, and many skeptical tax preparers were slow to adopt it.
In 1990 the IRS expanded the efile service nationwide. That year 4.2 million returns were filed. In addition, large national tax-preparer companies started using efile. Having large tax companies agree to use efile eliminated many doubts among smaller tax companies and sped up the efile adoption process.
efile in this Century
In 2002 the IRS added an option to use a PIN instead of a signature for preparing taxes, thus completely eliminating the need to use paper during the process. By 2005 68.4 tax returns were filed through efile. Half of all taxes returns were filed with the system. In 2010 the IRS ceased to mail 1040 forms (learn about history of Form 1040), and instead just has them accessible online.
Businesses also use the benefits of efile. In 2003 efile added forms 941 and 944, allowing companies to file employment as well as annual tax returns.
Currently, efile is wildly popular, having reached 1 billion returns filed throughout its history, and having had more than 122 million tax returns efiled in 2013.
Find more efile statistics information and the popularity of electronic tax filing in the United States.
Find a detailed overview of the history of taxes and the history of the tax code.
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Detailed overview of the tax history in United States and the world.