The IRS desperately wants you to file your taxes electronically. Why? Because it saves the agency time, manpower, and money.
In 2006, 73 million tax returns were e-filed, and this year, the IRS estimates that even more of us will exercise our e-filing options. Filing your taxes electronically is faster, easier, and more accurate than filing with pen and paper. It may also be free if you are a taxpayer with an adjusted gross income of $52,000 or less in 2006 (though you may still be charged a fee for filing your state tax return). So what's not to like?
Despite the compelling list of reasons in favor of electronic filing, there are some definite downsides of which you need to be aware. Here are some of the big questions you'll want to consider:
Am I more vulnerable to an audit? The jury is out as to whether electronic tax filing will increase your odds of getting audited. Some tax experts feel that the speed with which returns are processed electronically increases the likelihood of an audit. On the other hand, only a fraction of paper returns will receive the close level of scrutiny that may trigger an audit. Still others argue that e-filing decreases the likelihood of an audit by eliminating many of the common errors (illegible handwriting, faulty addition or subtraction, or failure to sign the return) that plague handwritten returns.
How concerned should I be about my privacy and security? While the IRS insists that your privacy is "guaranteed," any time you send personal information out over the Internet, you assume a certain amount of risk.
Some of the risk is assumed by the IRS in how it handles and stores your information. The good news is that, since a comprehensive report from the U.S. General Accounting Office in February 2001 identified critical weaknesses in the handling of electronically transmitted taxpayer information, the IRS has made a concerted effort to keep our private information private. The IRS now considers electronic filing to be the most secure method of handling your sensitive tax information.
Some of the risk is managed by tax preparers who submit electronically on your behalf. The IRS requires that these companies obtain third-party privacy and security certification and comply with all federal rules and regulations on taxpayer privacy. The IRS also monitors their security measures to ensure compliance.
Finally, some of the risk must be assumed by you. You can mitigate the risks associated with electronic transmission of data from your home computer by:
- Making sure your passwords are secure.
- Logging out of any tax-related programs at the conclusion of your session.
- Ensuring that you have a sufficient firewall and good anti-virus software.
- Installing all updates or patches to your software or Web browser.
- Enabling your wireless router's encryption functions.
- Checking the privacy policies of any of the tax preparation services with whom you do business.
If I owe, will I have to pay immediately? Many folks are under the impression that if you owe money to the IRS, filing electronically means that you have to pay when you file. Not necessarily. According to the IRS website, "You can e-file your return early and schedule your withdrawal or credit card payment for a future date." For 2007, this date is up to and including April 17, 2007. Like all IRS regulations, however, you'll want to check that this is, indeed, applicable to your situation. (After a five-minute phone discussion with a very polite IRS worker, I still couldn't give you a straight answer as to whether my husband and I could exercise this option.)
If you owe taxes, consider paying with a credit card that offers rewards, points, miles, or money back. You'll at least get some perks to mitigate the sting of that tax payment. And if you absolutely can't pay the full amount by April 17, make sure you file Form 9465, Installment Agreement Request, which allows you to make a predetermined number of partial payments.
The biggest lesson? Stay alert to the downsides of e-filing and be vigilant about safeguarding your personal information when dealing with the IRS or anyone else. The risk to your security, while small, is still an important consideration in making your decision to go paperless.
This article is adapted from the Motley Fool Green Light "Money Answers" archive, which features more than 100 articles on personal finance topics ranging from taxes to credit to beginning investing, organized by subject and life stage. For access to this content -- plus the current newsletter, back issues, members-only discussion boards, and advisor blogs -- take a free 30-day trial today!
Fool contributor Elizabeth Brokamp is a licensed professional counselor with a special interest in Robert Brokamp, editor of The Motley Fool's Rule Your Retirement newsletter.