Many Happy Returns

By Sophfronia Scott

Filing a federal income-tax return used to be cheap but slow: 25 cents for the stamp and as much as eight weeks for the refund check. But now most U.S. taxpayers can take a high-tech shortcut. For anywhere from $25 to $75, filers can get their money in as little as two weeks by having their return sent electronically by one of 18,000 tax preparers and transmitters. After a four- year test run, the Internal Revenue Service for the first time is making its electronic filing system available in all 50 states this year. By the end of January, 608,350 returns had already been filed by wire, in contrast to & 176,289 at the same time last year, when the service was offered in 36 states. "We are just overwhelmed by the response," says Sonja Norwood, the district manager in Los Angeles for H&R Block. "We're experiencing April in February." The IRS expects to receive more than 2 million electronic returns this year, or about 2% of all tax filings.

To file by wire, a taxpayer must take a completed return -- on paper or personal-computer disk -- to one of the transmitters the IRS has approved for the program. For a fee, the information is entered into the company's computer and sent to the IRS, where it goes directly into the agency's mainframes. The electronic return bypasses time-consuming steps. It does not have to be sorted at an 18-bin station called a "tingle table," numbered and coded by hand and sent to a keypunch operator who enters the data into IRS computers. Instead, the return goes immediately to the point at which it is checked by the computer for mathematical mistakes. After that, the refund is processed. Result: a check usually reaches taxpayers within three weeks -- or two if the filer authorizes a direct deposit into a bank account.

Electronic filers do not entirely escape the paper chase; the IRS still needs a signature, which so far cannot be transmitted electronically. The high-tech taxpayer must fill out and sign the brief form 8453, which declares that the person is filing electronically. This paperwork, along with the taxpayer's W2 forms, is mailed to the IRS by the transmitting firm.

As in all high-tech frontiers, the speedy service has its glitches. The IRS computers are programmed to accept virtually no discrepancies. Even a simple typographical or spacing error will prompt the system to reject the form. "The return has to be almost perfect before it goes through," says Richard Butler, a Chicago accountant. Tax giant H&R Block, which has hawked its service with a high-profile advertising campaign called "Rapid Refund," says its program is going smoothly. But smaller preparing firms have found the system to be a computerized nightmare. "We're experiencing a communication problem with software, and it costs us time, energy and frustration," says Gery Lichtig, a Los Angeles accountant. The IRS contends that with sufficient practice time transmitters will be able to work out the kinks.

For taxpayers who want even faster refunds, many firms are offering refund- anticipation loans. For an extra fee of $30 or more, a tax preparer will give the customer a loan within about a week after the electronic return has been accepted by the IRS computer. But for taxpayers expecting a refund of $1,000 or less, this option would probably cost more than getting a short-term bank loan or a cash advance on a credit card.

The IRS predicts that within a decade more than half of all returns will be sent by wire. The agency intends to encourage the practice, since an electronic return costs an estimated 4 cents to process, in contrast to 40 cents for the sorting and data entry required by a paper version. Over ten years, the IRS figures, such savings could amount to $200 million. So far, the electronic service can be used only by those expecting a refund, which is 70% of all taxpayers. But the IRS is experimenting with a plan to include filers who owe money as well. The ultimate system, still several years away, will allow taxpayers to send returns directly from their personal computers to the IRS.

With reporting by Dan Cray/Los Angeles and Andrew Webb/Chicago