Should You File Your Taxes Electronically?

Not necessarily. There are some reasons you may want to stick to the old fashioned way.

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The IRS says that electronic filing of tax returns has become the norm, with 100 million returns filed electronically this year. That's 70% of all returns. The IRS really wants all taxpayers to file their taxes electronically, and has gone out of its way to make it as easy as possible.

So should you get on the electronic filing bandwagon? Not necessarily. For some taxpayers, filing the old fashioned way--on paper--is still the way to go.

Advantages of Electronic Filing

Electronic filing is cheap and easy. Although many people pay for the privilege, you can file electronically for free. If your income is $57,000 or less, you can obtain free tax software called FreeFile that is offered through a private-public partnership with tax filing companies. You can also file electronically by using Free File fillable forms which are available on the IRS website. These are electronic versions of the paper forms. Electronic filing is easily done for a small fee by using tax preparation software. Professional tax preparers universally use electronic filing.

Perhaps the greatest advantage of electronic filing is that you will receive an automatic electronic confirmation that the IRS has received your tax return which constitutes proof that the IRS received your return. If the IRS rejects your return, it will email you a rejection letter explaining the reasons for the rejection.

Another big advantage of electronic filing is speed. If you're owed a refund, you'll get it much faster by filing electronically.

Disadvantages of Electronic Filing

The reason the IRS wants all taxpayers to file their returns electronically is that it saves the agency substantial time and money. Every year, the IRS must hire thousands of temp workers to enter the numbers from millions of paper returns into its computer system. This is expensive, so the IRS only has about 40% of the data on paper returns transcribed. The paper returns are then sent to a warehouse where they are kept for six years and then destroyed. The IRS makes its audit decisions based on this transcribed data. By filing electronically, you give the IRS easy access to 100% of the data on your return instead of just 40%. This may not make much of a difference if you have a simple return--for example, you file IRS Form 1040-EZ or 1040A. But if you have a complex return--for example, you file Schedule C because you have a business--it can make a big difference.

Moreover, if you file electronically, you cannot add written explanations of any deductions the IRS might question. These can help avoid unwelcome contacts from the IRS.

No one can say for sure whether filing a paper return lessens your chance of an audit, but why make life easier for the IRS if you don’t have to?

New IRS rules require professional tax preparers to file their clients’ returns electronically unless the client elects to opt out of electronic filing. To opt out, you must file a special form with your paper tax return. Ask your tax preparer about this.

 October 2012

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