Written by Tom Umstattd, CPA, April 1, 2002.

Some of my colleagues offer electronic filing (E-File); I do not, yet.  This procedure is currently most appropriate with low-budget, seasonal, non-CPA tax return preparers who prepare 1000s of very fast and easy returns with refunds; we prepare almost no easy returns.  We first looked into E-Filing about 8 years ago and every year since.  When a return is E-Filed, the “pertinent information,” according to the IRS, from a tax return is downloaded via the internet directly into the IRS’s computer system.  E-Filers cannot send explanations or attachments.  When a return is filed via the mail, IRS employees keypunch certain entries from the return.

If a return, as the IRS calls it:  gets “kicked out of the pipeline” or, gets selected with “audit potential” by other means, then an IRS employee looks at the paper filed return with all of the attachments and explanations and professionally decides whether to proceed further.  But for E-Filed returns, were no paper is filed, then the IRS is left with little alternative but to contact the taxpayer and begin the arduous experience of examining the taxpayer’s receipts and records which corroborate his or her income, deductions, etc.  And, if the IRS goes through this much trouble, as many of you already know, they tend to examine everything.  Ray Sommerfield, one of my UT tax professors warned us, “When it comes to audits, the IRS has determined that there’s a lot of gold in ‘them thar hills.’”  For example, we have many philanthropic clients who give more than 10% of their income to charities.  This 10% benchmark is one of the IRS’s benchmarks for high audit probability.  If we can attach statements from 1 or more of the charities proving most of the charitable contributions deduction, we have likely assuaged an audit.  This cannot be done with E-Filed returns.

Perhaps the IRS’s chronic lack of security measures is the best reason not to E-File.  Click here for our privacy policy.  Government investigators each year try to hack into the IRS’s computer system, and each year are able to access private information from E-Filed returns in the IRS’s computer system.  Each year we link to an article on this website concerning this reoccurring problem, but these links seem to expire quickly.  So this year, I have copied an Associate Press article in its entirety.  It is now below.  Note:  a hacker can retrieve information and exit without the IRS even knowing that they were ever there.

Study:  IRS Data Open to Hackers, Thursday March 15, 2002, 1:24 PM ET

WASHINGTON (AP) –Government investigators were able to hack into the Internal Revenue Service computer system last year and access Social Security numbers and other sensitive information from electronically filed tax returns, a congressional report said Thursday.

“We demonstrated that unauthorized individuals, both internal and external to IRS, could have gained access to IRS’ electronic filing systems and viewed and modified taxpayer data contained in those systems during the 2000 tax filing season,” the General Accounting Office report stated.

The investigators said they were able to gain access to taxpayer information because the IRS had not securely configured its operating systems, implemented adequate password management practices or used encryption technology.

The IRS said it had no evidence that real intrusions actually occurred, but the GAO concluded the agency did not have “adequate procedures to detect such intrusions.”

The IRS also said in its response that it had taken steps to better protect taxpayer privacy this year.

Sen. Fred Thompson, R-Ten., Chairman of the Governmental Affairs Committee, asked for the investigation.

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