Should you e-file your business taxes? Is it worth the learning curve? We talked with Gary Brennaman, a tax product manager with Peachtree Software Inc., to find out if it's time for you to go electronic with your taxes. Celebrating their 25th year in business, Peachtree Software, a manufacturer of accounting software products designed specifically for small businesses, has sold more than one million accounting software packages. Here is Brennaman's take on this new tax trend.
Entrepreneur.com: How did tax e-filing come about?
Gary Brennaman: NAFTA passed a federal law in 1996 that stated that the IRS had to begin collecting 80 percent of its revenue and 80 percent of its returns electronically by the year 2007. And of course the IRS had been a paper-based organization, so it had to make a quick transition. And on the payment side, that was fairly easy to do because it already has an electronic solution in place called E.F.T.P.S., and all it did was really expand the functionality of that. However for return filing, it's a larger hurdle for the service to become electronic, so its first approach has been to go after individual filers because they're the largest number of filers, with 80 million to 90 million tax returns each year. And then business filing was the next step, with about 10 million to 20 million filings annually.
|"Right now, it might be a little painful to get involved in it, but in five years, everybody will be e-filing their taxes."|
Entrepreneur.com: Is e-filing fee-based or is it free?
Brennaman: Today there's a cost involved. On the individual side, usually it's a small cost-and in some cases it's a zero cost-but there's also an indirect cost, like if you do a Web-based filing that's electronic. But I think the IRS has done a good job in building electronic return functionality for the individual.
On the business side, it's more complicated because business tax returns are much more complex. There's a lot more information to be reported. The primary business tax forms are going to be broken down into three categories: corporate tax filings for income taxes, partnership income tax filings, and employment tax filings. The IRS doesn't want to be hit with a lot of data all at once, so they've gotten into agreements with third parties that will, for example, take return information from hundreds of employers and batch it into one file and then transmit it at one time to the IRS. So for business tax filers, they're generally going to have to pay a third party a fee for doing that.
Entrepreneur.com: Can any business type (for example, a corporation vs. a sole proprietorship) do e-filing?
Brennaman: In some cases, it just depends. There are certain filings that can be handled electronically today and then others that are in pilot. The corporate income tax filing, the 1120 form, is in pilot for electronic filing purposes, so that's not currently available. The 1065, the partnership income tax return, is also in pilot. I think those will probably be available next year. [Currently,] employers can file employment tax returns electronically.
Entrepreneur.com: Can you e-file your own taxes, or do you have to have an accountant or special software?
Brennaman: Generally speaking, you would have to purchase software. It's usually low fees. There are a couple of vendors that have Web sites that will allow you to file for free. Really all it is is a spreadsheet or a work sheet on a Web site, where you type in your own information and you hit a button and it files it. But most of those vendors are capturing the information to use for marketing purposes. So there's an indirect cost in doing that.
Entrepreneur.com: What are the pros and cons of e-filing? Obviously there's a speed factor.
Brennaman: There's the speed factor, and generally there are a lot fewer errors on electronic filings because the software has built-in validity checking that may not be available on paper-based forms. And for the IRS, the cost is much lower, and it's probably a little bit easier to store the information for both the filer and the IRS. The cons would be security issues and fraud. Fraud has been an issue for the IRS because just up until last year, you had to sign your returns-they needed a physical signature. So that was a hurdle for them to overcome. And finally last year they came up with digital certificates to handle that.
Entrepreneur.com: Is there anything else our readers should know about e-filing?
Brennaman: Right now it's a very fragmented industry. One of the problems is that a lot of the governmental entities that require filing don't accept electronic filing. [In the future, the trend will be that] the data required will become more common across different governmental entities and therefore it will become a lot easier to do. Like you might just have to generate one file and you can satisfy your federal, state and maybe local agencies with one file, whereas today you might have to generate three, four or five files. Right now, it might be a little painful to get involved in it, but in five years, everybody will be [e-filing their taxes.]