New Year’s Resolution for the Federal Government: Make It Easy to Complete Federal Forms Electronically

IRS 1040 Tax Form Being Filled Out

The federal government maintains thousands of forms that citizens, businesses and state and local governments must fill out, but many of these forms are available only on paper. Case in point: the IRS.

The start of a new year marks the beginning of tax season as businesses, non-profits and individuals must begin preparing a number of tax documents in advance of upcoming filing deadlines. Over the years completing tax forms has become easier as the IRS has implemented digital forms for filers and electronic filing options, including the very successful Free File program that partners with private tax service providers  to provide free software for online tax preparation and filing. But while the IRS has made a lot of progress in some areas, it remains woefully outdated in others.

One example of this is the 1099-MISC form which businesses (including households who hire self-employed workers, like a housekeeper) must submit for all vendors, contractors, etc. to which they paid more than $600 per year. Every year trillions of dollars of miscellaneous income payments are reported using this form and the IRS uses this information to increase tax compliance. However, even though this form is widely used by businesses large and small, the IRS still does not provide a simple and affordable way to complete these forms. Instead, businesses have the following options:

  1. They can pay an accountant to complete the form.
  2. They can order the paper forms from the IRS and complete them manually.
  3. They can purchase the paper forms from an office supply store and complete them manually.
  4. They can purchase software to complete the form.
  5. They can use an online 1099-MISC form preparation service.

The cost of completing this form through a service provider varies. The Government Accountability Office (GAO) reported in 2007 that companies charged between $10 per form (for 5 forms) to $2 per form (for 100 forms) to $0.80 per form (for 100,000 forms). The IRS does provide a PDF version of the 1099-MISC form on its website “for informational purposes only,” but this is provided in a read-only form that cannot be filled out electronically. Moreover, the IRS notes that anyone filing a copy of the form that is printed from its website may be subject to penalties.  None of these options are ideal, especially for the majority of filers who only submit a few of these forms. (To put this in perspective, around two-thirds of filers only submit one to four forms.)

Every year a significant portion of these payments are reported using expensive paper-based forms wasting time and resources both of filers and the IRS. (In 2006, the last year I could find data on this, 90 percent of filers used paper 1099-MISC forms.) What’s disappointing is that the IRS has been aware of the need to modernize its 1099-MISC form for many years yet it has done nothing. Since at least 2005 the Internal Revenue Service Advisory Council (IRSAC)—a group of individuals representing taxpayers, tax professionals, small and large businesses, state tax administrators, and payroll professionals—has been publicly calling on the IRS to update their systems to allow filers to submit both computer-generated forms (i.e. fillable and printable PDFs) and electronically-filed forms, but little has been done. And this issue has been brought up with the IRS again and again. For example, in 2010 a GAO official testifying before the Committee on Small Business and Entrepreneurship in the U.S. Senate noted the need to provide easy-to-use electronic and paper-based filing. And most recently the IRSAC brought up this issue again in its 2012 public report stating that “Businesses that do not have a large number of these forms to complete have limited options. The ability to complete and file the Form 1099-MISC on-line would simplify a business taxpayer’s compliance with this tax requirement.”

Ironically, part of the reason that we are stuck in the past is because the IRS was at one point very innovative and forward-thinking. The official IRS 1099-MISC paper forms are printed using special red ink which allows the IRS to use high-speed OCR scanners to automatically process the paper forms. These forms use what is called “drop-out ink” which allows scanners to easily filter out the text and lines from the forms leaving only the data. This technology was a big deal…in the mid-90s. But optical character recognition (OCR) and scanning technology has advanced since then and apparently the only reason filers must still using these old forms is because the IRS has not upgraded its 1099-MISC form processing systems.

Given the unnecessary costs involved in ordering, sending, preparing and filing these forms now, it seems very likely that the costs of upgrading the IRS’s automated processing systems so that it can receive fillable PDFs and implementing an e-filing system would outweigh the costs of not doing so (especially when the costs to filers is factored in). The IRS can base an e-filing system for the 1099-MISC form off of the Business Services Online program provided by the Social Security Administration. This website provides a number of services, such as allowing employers to electronically complete and file up to 50 W-2 forms through its website. And if the IRS wanted to offset the costs of building an e-filing system for the 1099-MISC form or processing PDF-based paper filings, it could do so by charging fees to obtain its legacy paper forms. This will both fund the development of the new system and cut costs by discouraging filers from using the more expensive paper-based filing options.

From the agency’s perspective it might be rational not to upgrade since new technologies entail capital, time, and risk and does nothing to expand the agency’s budget. But from a societal perspective, investing in new technology makes sense when it saves money for the government, citizens and businesses in the long-term.

With that in mind, I’d like to suggest a simple New Year’s resolution for all federal agencies, including the IRS: resolve to consign all paper forms and all non-fillable PDF forms to the dustbin of analog history and create a plan to replace these forms either with fillable PDFs or online forms by the end of the year. Given the potential benefits, this is one resolution that is worth keeping.

Image credit: Flickr user kenteegardin

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About the author

Daniel Castro is a Senior Analyst with ITIF specializing in information technology (IT) policy. His research interests include health IT, data privacy, e-commerce, e-government, electronic voting, information security and accessibility. Before joining ITIF, Mr. Castro worked as an IT analyst at the Government Accountability Office (GAO) where he audited IT security and management controls at various government agencies. He contributed to GAO reports on the state of information security at a variety of federal agencies. He has a B.S. in Foreign Service from Georgetown University and an M.S. in Information Security Technology and Management from Carnegie Mellon University.