Menu
Tax Notes logo

Tax Agencies Find Paper Passé as They Promote Electronic Filing

Posted on Mar. 5, 2020

As tax agencies worldwide step up their pursuit of companies operating in the digital economy, they are just as doggedly trying to wean taxpayers off paper and toward electronic returns.

A spokeswoman for HM Revenue & Customs said over 98 percent of all U.K. VAT returns and 99 percent of company tax returns are submitted electronically. “While not mandatory for income tax self-assessment, a record 10.4 million customers chose to file their [self-assessment] tax return online by the most recent 31 January deadline,” she said. “That’s 93.95 percent of the total filed.” 

Tax is automatically deducted from the majority of U.K. taxpayers’ wages, pensions, and savings. Individual and business taxpayers who do not have tax automatically withheld or who have additional untaxed income are required to complete self-assessment tax returns. 

Jason Piper, policy lead for tax and business law at the U.K.’s Association of Chartered Certified Accountants, said electronic filing is compulsory for most business taxes. “So only a tiny handful of returns are still made on paper for VAT and corporation tax,” he said. “And ongoing improvements to HMRC’s systems are reducing the number where, for example, the size of PDF attachments such as architectural drawings, etc., was the problem.” 

Piper said that while over 90 percent of U.K. individual income tax returns are being filed online, it took a while for HMRC to migrate that many taxpayers from paper returns. “The current success of the system is probably due to the ongoing development of HMRC’s free submission portal, which has been refined over the years,” he said. “However, the picture is not all rosy, and the complexities of the U.K. system mean that some returns cannot be filed online, as the HMRC calculation engine will produce an incorrect result. Although the absolute numbers are small, the list of possible cases has been seen to increase in recent years.” 

To Err Is Human

The move toward fully automated filing will reduce errors by removing the need to transfer information from paper to computer, Piper said in an email. “If done by hand, then the scope for miskeying and transposition errors is clear,” he said. “If done automatically — i.e. by scanning — then the risk is probably lower, but still cannot be eliminated." 

Piper said HMRC has long maintained that electronic filing is less susceptible to errors, but accountants have generally been wary of such claims. “In particular, extending the reach of electronic tools to include all recordkeeping poses significant risks where taxpayers are not comfortable with the processes,” he said. “HMRC have predicted that integral logic checkers and ‘nudge’ prompts within intelligent software will help taxpayers get their figures right, but these are only relevant to the most expensive, fully integrated account packages. The basic ‘bridging software,’ which simply converts the taxpayer’s spreadsheet records into a format compatible with the HMRC [application programming interface], doesn’t have it, and the taxpayers most likely to make errors are also those most likely to be using the cheaper software.” 

The Australian Taxation Office told Tax Notes it applies data analytics to returns as they are being input electronically to share information about the agency’s evaluation of risk in real time, before the returns are actually filed. “Agents or taxpayers see a nudge message when values at certain labels are high or appear to be missing,” the ATO said. 

Oliver Schweinitz, a partner with Grützmacher, Gravert, Viegener Partnerschaft in Hamburg, said the move to electronic filing in Germany has reduced the rate of taxpayer errors. “It has also led to less litigation, as the software tools used to produce the filings typically contain automated checks,” he said. 

Paul Bleeg, a partner with EisnerAmper in San Francisco, said electronic filing has reduced reporting errors for two reasons. “The software packages that prepare the e-file returns have internal error checks that give you a warning before e-filing,” he said. “Then when you do e-file, if there are errors, the IRS will reject the submission and tell you what the error is.” 

Jay Starkman, a CPA and sole practitioner in Atlanta, said that while IRS statistics indicate that e-filing has dramatically reduced error rates, the agency doesn't test whether tax preparation software guides taxpayers to prepare correct and accurate returns. Starkman said articles he has written for Tax Notes and other publications “highlight errors in tax preparation software that the IRS doesn't catch and [that] might not be made, absent faulty tax software.” 

Risky Business

Piper said electronic filing opens up a number of risk avenues that don’t exist with paper returns. “And it’s not just the authorities who are at risk,” he said. “Taxpayers and agents are also exposed to potential attacks which aren’t an issue with paper returns. The speed at which funds can be moved around once transferred electronically can make it impossible for the authorities to do anything to freeze funds if they are paid out incorrectly, whereas a paper check can be stopped if information subsequently comes to light.” 

Bleeg agreed that electronic filing makes it easier for identity thieves to scam the tax authorities. “The IRS seems to accept these losses as normal and a cost of making their lives paperless,” he said.  “It’s a huge annual loss of dollars; many states have been scammed as well.” He highlighted a case in South Carolina in which the Department of Revenue reported in 2012 that hackers had stolen the identities of at least 3.8 million taxpayers

Starkman said a December 27, 2018, report by the Treasury Inspector General for Tax Administration, which provides independent oversight of IRS activities, indicated that in processing year 2016 identity thieves successfully obtained between $1.68 billion and $2.31 billion in fraudulent tax refunds. “Thieves couldn't do this big a theft operation on paper,” Starkman said. In its report, TIGTA also said the IRS estimated that it had prevented the issuance of $10.56 billion to $10.61 billion in fraudulent tax refunds. 

On August 28, 2019, TIGTA said the IRS has been reallocating resources away from tax identity theft investigations. “That's likely the result of Congress underfunding the agency and mandating in recently passed legislation that the IRS assign more resources to assisting victims of tax identity theft,” Starkman said.

Electronic filing makes it massively easier for tax authorities to audit returns, Piper said. “Aggregated data in a common format is easier to analyze and mine for trends and patterns, to assist both in compliance efforts — identifying high-risk taxpayers for investigation — and also to improve the tax system, as well as offering broader fiscal analysis,” he said. 

Schweinitz said that while electronic filing makes it easier for tax agencies to audit simple returns, more complicated ones continue to pose a challenge for German tax authorities. “Side letters may be overlooked,” he said. “The return forms must contain a free field [for the taxpayer] to enter or refer to opposing views, which leads to later manual checks by the administration. This free field is considered to be a constitutionally warranted due process element [under the] German fiscal code.”

Earlier Due Date for Paper Returns

The U.K. tax year ends April 5. While paper returns must be filed by October 31, taxpayers get an additional three months to submit their returns electronically. Piper said that while the bias in favor of electronic filing provided a strong incentive to eschew paper in the beginning, he suspects the advantage has worn off. “HMRC no longer seems to publish figures for returns received on paper, but until last year, the figure was steady at just over 700,000 for several years, even though the total number of returns filed/issued has been increasing,” he said in the email. “That suggests that whatever reasons people have for filing on paper, they’re compelling ones.” 

Piper said one of the reasons for not shifting to mandatory electronic recordkeeping and filing might be age related, with some older taxpayers not being comfortable with the technology. Other factors include disabilities and even religious preferences, he said. “People born into today’s digitalized society will grow up familiar with online tools, while advances in both medical technology and the development of new interfaces may reduce the number of cases where individuals find it impossible to interact with electronic tools and processes," he said, "although very often, the cost of specialized software interfaces can be prohibitive.” 

At least one reason for sticking to paper is unlikely to ever completely disappear, Piper said. “Of course, there’s nothing that we can do about situations like the U.K.’s 'Exclusions List,' where the complexities of the tax law and its interaction with the real world defy the programmer’s ability to write software that can handle every possible combination of factors,” he said. HMRC publishes an exclusions list identifying scenarios for which its calculator fails to provide a correct result and for which the agency has been unable to provide a workaround. 

Bleeg said it is unlikely Congress would ever authorize an accelerated due date for paper filers. “But I can see the IRS someday mandating that no paper returns may be submitted,” he said. “The IRS has broad regulatory authority and often makes changes without congressional authorization. They have already mandated e-filing only for foreign account reports.” The IRS and the Financial Crimes Enforcement Network started requiring electronic filing for foreign bank account reports in 2013. 

The Old Way of Doing Things

While in some countries, 90 percent or more of the taxpayers file digital returns, the Canada Revenue Agency is taking a small step back by making it easier for people who are more comfortable with paper than computers to submit tax documents the old fashioned way. “We recognize that Canadians have diverse needs when it comes to return filing, and we are committed to making sure no one is left behind,” Assistant Commissioner Frank Vermaeten told Tax Notes. “Filing taxes by paper has become a tradition for some Canadians. They have been doing it that way for years, and it works for them. Those paper filers might feel like the . . . CRA wants to pressure all taxpayers to file electronically. That is simply not the case.” 

Vermaeten said the CRA recently mailed its 2019 income tax package to the 1.7 million individuals who filed paper income tax and benefit returns last year. In an interview published February 24 by the Canadian Press news agency, Vermaeten said the CRA has made changes to the paper tax booklet to simplify language, add notes about new taxpayer benefits, and provide a checklist so that nothing gets missed. 

The ATO said it encourages online filing, but added that taxpayers can still submit paper returns, “depending on what suits their circumstances and preferences.” The office said 98 percent of all filings by individuals during the 2018-2019 financial year were done online.

“Electronic filing can be a hardship for older people and others who are not computer savvy,” Bleeg said. “They may be capable of filling out a simple tax return by hand, but navigating TurboTax or another of these tax software products can be maddening and frustrating.” 

Bleeg said mandatory electronic payments are an even greater hardship for the elderly than e-filing. He said he has a client who was hit with a $66,000 penalty by the state of California after mistakenly keying an amount in the millions of dollars into an online form instead of the correct figure, which was in the thousands. “He suffers from Parkinson’s disease and has severe tremors in his hands that make typing almost impossible,” Bleeg said. “When I disputed the penalty with the California Franchise Tax Board, they told me that the gentleman should have hired an assistant to help him with his online payments. They finally agreed to waive the penalty after we met their demand to furnish a doctor’s letter confirming his Parkinson’s diagnosis, meanwhile putting my client through prolonged and unnecessary humiliation.” 

While the IRS has not mandated the use of electronic payments, New Zealand’s Inland Revenue Department (IRD) said it will no longer accept checks other than “in exceptional circumstances,” effective March 1. On February 24 the tax agency issued a reminder of the impending change. “Inland Revenue is calling time on checks because of their rapidly declining use, the end of the check processing machine’s working life, and unsupported software,” it said. 

In addition to paying online, New Zealand taxpayers will be able to satisfy their liabilities over the phone with a debit or credit card. Westpac Banking Corp. branches will also accept tax payments made either in cash or through electronic funds transfer at point-of-sale (EFTPOS) devices. 

Frank Burgess, a tax partner with BDO in Christchurch, said the IRD’s decision to ban checks involves a generational issue. “Older people are not using technology and therefore rely on checks,” he said. “Maybe from this perspective, IRD and the banks are five or 10 years too soon, as most elderly currently affected will not be an issue in that time. Younger [people] have readily adopted digital banking.” 

Burgess said he recently looked through his own personal checkbook before going to a quarterly meeting of the Chartered Accountants Australia New Zealand's national committee with senior IRD officials, during which the transition to checkless tax payments was discussed. The last check recorded in the book was written by his wife in 2014, Burgess said. “I could not find any that I had written in the checkbook, which went back to 2012,” he said. “And some would call me old as I move closer to 60 . . . yet I do not use checks.” 

Schweinitz said the federal system in the United States, which is based on taxpayer self-reporting and calculation of tax liabilities, is far more efficient than its German counterpart. “Far too many returns are checked manually, be it even for trivial amounts,” he said in an email. “We should also copy the generalized standard deduction system. In Germany there is far too great a focus of the administration to check trivia. Salaries within the tax administration should also be increased to better compensate the increased workload on the few specialized/international departments.”

Copy RID