Push To File Electronically Hits Obstacles

More than ever, taxpayers are being encouraged to file their returns electronically. The Internal Revenue Service, many tax professionals and the publishers of tax-preparation software say the benefits include faster refunds, absolute confirmation that the IRS has received the return and fewer chances of mistakes.

The IRS says 99 percent of electronic returns are mathematically correct, compared with approximately 85 percent of paper returns.

And indeed, electronic filing may be the wave of the future. But, according to telephone interviews with a half-dozen taxpayers and messages posted on America Online, Compuserve and the Internet, it may also be a wave that drowns many in its path with extra costs and time-wasting difficulties.

And those planning to use electronic filing to get a loan in anticipation of a refund should know that such borrowing has been more problematic this year than it was last year.

“This is the third year I filed electronically using Macintax, and it may be the last,” said Dennis Mack, a Mount Laurel, N.J., technical representative for a helicopter service company. By accident, Mack entered the wrong Social Security number for a dependent. Rather than informing him of the error right away, the software’s publisher, Intuit, which has to process the return before sending it to the IRS, took two weeks to send his paperwork back to him for correction. “That’s too long,” he said.

“Then, when I tried to retransmit my return, the computer at the other end wouldn’t accept it. I wasted at least 10 long-distance calls before it all worked out.” And even though Mack was supposed to get confirmation in a couple of days that the return was received, he had still not heard anything more than two weeks later.

“I called a half-hour ago, and Intuit cannot find my return, so they’re putting a tracer on it,” he said.

Other people reported much better experiences. Bill Lee, an executive at Kimberly-Clark in Appleton, Wis., and a former certified public accountant, filed electronically for the first time this year, using Turbotax for Windows.

“I was surprised how smoothly it all went,” he said. “I transmitted my return on Feb. 13, got a note in the mail on Feb. 17 that acknowledged the return was received, and the refund showed up in my account on March 3.”

But Lee cautions people who have never filed electronically to review the return carefully before submitting it, since problems will arise if even basics like names are typed incorrectly.

Electronic filing is a term that covers several methods for sending a tax return to the IRS in a computerreadable format. How fluidly the process works may depend on the method employed. While all individual tax returns filed electronically eventually reach the IRS, there are five avenues for getting them there:

Using tax-preparation software and transmitting the return via modem to the service bureau (called an electronic return organization) used by the software’s publisher. The service bureau checks the return for accuracy, puts it in an IRS-acceptable format and passes it on to the agency.

Using tax-preparation software and mailing the return on a diskette to the service bureau.

Using tax-preparation software to file the return to a service bureau through Compuserve or America Online, commercial on-line services.

Having the return completed by a professional tax preparer, who then transmits it to a service bureau or directly to the government.

Using the services at an IRS site that offers electronic filing.

One of the more ballyhooed benefits of electronic filing is that the taxpayer can get a short-term loan for the refund’s amount. Called a refund anticipation loan, it is repaid when the tax preparer receives a refund check from the government.

H&R Block, for instance, calls its loan service Rapid Refund. On March 16, the company and two other tax-preparation businesses were charged by the New York City Department of Consumer Affairs with misleading the public about its electronic filing and refund fees.

Neil Rothfeder, a tax preparer from Wurtsboro, N.Y., said that because of the high cost of such loans - from $50 to $150, depending on the amount of the refund - he never recommends it to clients. For example, for a $1,000 loan with a $50 fee (really a form of interest), the cost for the two weeks it would normally take to get the refund adds up to a charge of more than 125 percent on an annual basis.

“The IRS no longer guarantees banks that a refund is valid and will indeed be deposited in its coffers,” Rothfeder said. Without that government guarantee, a loan is not secured by the refund. Because the loans are now riskier, banks must charge more to cover themselves and in some cases have discontinued them.

As of March 10, this year’s electronic filings have decreased 21 percent compared with the same period last year, and Don Roberts, a spokesman at the IRS, said difficulties in getting a refund loan might be one reason. Another, he said, might be more stringent checking of Social Security numbers.

Filing electronically may not always speed up a refund. An IRS crackdown on fraudulent returns has delayed even some legitimate refunds for up to eight weeks. Electronically filed returns accounted for 43 percent of fraudulent claims in 1994, according to the agency, but made up just 12 percent of all individual returns.

Frank Keith, the chief media representative at the IRS, said: “The agency is not specifically targeting electronically filed returns for fraud. However, because all the information is captured in our computers when a return is filed electronically, it’s simply easier for us to identify fraud with those returns than with paper returns, where we don’t punch in all the data.”

The publishers of tax-preparation software like Turbotax and Tax Cut charge $14.95 for electronically filing the return. That fee is about the same as for many tax preparers like Mr. Rothfeder. Tax-preparation firms like H&R Block charge from $15 to $25 extra for filing electronically.

Eliminating the extra cost for electronic filing is a key benefit of going to an IRS site. But while the service is offered free, there are limitations. For example, only taxpayers with income under $30,000 can file electronically at the IRS office in the New York City borough of Manhattan.

More information on electronic filing is available from the agency’s help line, 800-829-1040, or its TeleTax number, 800-829-4477, for recorded tax information 24 hours a day.