Disadvantage of Electronic Filing

The IRS encourages electronic tax filing, promoting how much easier it is when you go paperless. According to the agency, 90 percent of individual taxpayers were expected to pay electronically in 2018. There are more than a few benefits to the electronic route, including the fact that it’s free and you’ll have a faster refund turnaround time. But there are some disadvantages, as well, particularly for some taxpayers. It’s important to be aware of them before opting to go that route.

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Although filing electronically is usually easier, there are disadvantages, including a higher perceived risk of an audit, possible security risks and limitations for those with multiple forms.

Audit Risk Disadvantages of E-Filing

When you file a paper return, the IRS inputs the information and stores the paperwork for approximately six years before destroying it. Due to the extra work involved in transferring the information from a paper return to their own system, IRS agents usually only enter the most relevant information. With an electronic return, however, all the information on your return is saved indefinitely. This means if there are ever questions about your return, the IRS will have access to more historical data than they probably would have had if you’d filed a paper version.

There is a longstanding myth that if you file electronically you’re at a greater risk of an audit. The logic goes that auditing based on paper returns is more work and auditors take the easiest road. However, the IRS has never confirmed this and with the majority of returns now being filed electronically, if more electronic returns are being audited, that could be the reason. But in fact, the IRS has reported that handwritten returns are 20 times more likely to contain mistakes and since mistakes usually require a second look, you probably have more to worry about if you’re filing the old-fashioned way.

Security Disadvantages

Technology has shifted practically everything businesses and individuals do to the digital realm. Whether you’re checking your email or accessing work software, you’re likely relying on some type of firewall to keep your transactions safe. Unfortunately, one of the biggest disadvantages of electronic storage is the security risk it brings. When you’re using a third-party service, you’re forced to trust that the provider has done everything possible to keep your information safe. This is especially important when you’re inputting information that could lead to identity theft if it fell into the wrong hands, such as the Social Security number, employment and contact information that can easily be found in every tax return.

These concerns apply to tax returns more than other types of services since tax software programs have been found to be less secure than they should be. But you don’t have to file electronically for your information to be at risk. The 2017 IRS data breach involved stolen information from FAFSA applications. That stolen information was then used to file tax returns on behalf of people using their Social Security numbers and other identifying information. In general, taxpayers are encouraged to invest in identity theft protection and monitor their credit reports for signs that their information may have been compromised.

Limitations of E-Filing

E-filing is simple for those who can file one of the easier forms. Once you add on complications like running your own business or claiming interest on a home you own, things get a little more complicated. One of the disadvantages of e-filing tax returns is that the software you use may not be sufficient for inputting the information the way you need. The IRS maintains a list of known limitations for its e-filed forms that can help you determine ahead of time if you may need to skip the electronic version and go straight to paper.

Even if you can do everything you need to do electronically, though, you may simply find it’s easier to have everything in front of you. This is especially true if you have a complicated return that requires multiple worksheets where the information has to be transferred over. You may know enough about tax laws that you can do a more accurate job than any tax software could, making the decision to file a paper-based return easier.

Data Loss Issues

In theory, electronic filing is safer than paper-based tax filing because the information can be stored and backed up. However, one of the disadvantages of electronic storage is that it isn’t foolproof. Hard drives crash. Computers are replaced. It can be easy to forget about tax documents since so many months pass between the time you file them and start preparing them again. You may arrive at tax time, only to find that you don’t have the historical documents you need to move forward.

However, often there’s a paper trail with e-filed tax papers that you don’t have when you file the old-fashioned way. If you used tax preparation software, for instance, you may find that you can pull up past tax documents in full in your account settings. Even if that’s the case, though, you should take extra time to invest in a backup service that will save copies of all the documents on your computer on an automatic basis so you don’t have to think about it. As an extra precautionary step, you could make sure you check your backups regularly to verify that all is still working as it should be.

Your Own Technical Limitations

Not everyone is tech-savvy. In fact, it isn’t unusual for a taxpayer to feel overwhelmed by the many options there are for e-filing each year. Many of the software packages on the market advertise how easy it is to use their service to file taxes, but these solutions aren’t free. For those looking to save a little money, it can feel overwhelming, trying to untangle all the ways that a person can file electronically.

One easy way to break it down is to go over the three types of filing systems, based on the type of return you’re filing. The first is the individual return, which is the most common. Those filing personal income taxes have more options than other types of filers since many have a fairly straightforward return. This is especially true now that the standard deduction has been increased to $12,000 for individuals and $24,000 for married couples since you’ll be less likely to need to itemize.

The other two types of filings, business and organization returns, can be a bit more confusing. These include sole proprietors, who usually require forms in addition to the standard ones used by those who are on the payroll of a company. With these types of returns, you’ll either need software that can help you keep up with current tax laws or to pay a tax preparer to handle it all for you. Another option is to do them yourself, but businesses and organizations often have enough on their plate without adding tax law research.

Disadvantages for Those Who Owe

If you owe money, you may find another complication. In fact, one of the advantages of a manual filing system is that if you owe, you fill out the paperwork, see that you need to remit money and wait until close to the deadline to mail your paperwork with your payment. However, if you filed electronically, you’ll be given a slip that allows you to pay separately, which often requires a separate trip to the post office in mid-April.

The IRS has come up with some alternatives to mailing your payment via the postal system. You can now schedule the funds to come from your checking or savings account at a designated time. This requires inputting your bank account information, though, which means you must trust the software you’re using, as well as the server security of the IRS and any payment processing providers they use. You can also use a credit card to pay, which gives you the theft protection that comes with many credit cards today. However, you’ll pay 2.35 to 3.93 percent fee plus a $2 to $3.95 convenience fee. If you owe under $100, this likely won’t be a big deal, but if you owe thousands of dollars, you’ll likely opt for a different payment method. A $5,000 tax bill will cost an extra $150 if you pay with a credit card and have a 3-percent processing fee attached.

Margin of Error

Often if you file electronically, especially for complex returns, you rely heavily on software to manage the process for you. If you have a simple return, this is no big deal. Often software is sufficient to walk you through what you need to do to pay your taxes each year. However, as your returns become more elaborate, some software can be problematic. Consumers have complained about tax software being inaccurate. In fact, some tax preparers offer to check returns of taxpayers who have used software for free, often discovering deductions and other issues they didn’t have on their original return.

The problem with tax preparation software is that it’s only as accurate as the numbers you put in. You’re answering questions to the best of your knowledge and if you make a mistake or miss something, it’s to your detriment. Of course, you can also encounter errors when you rely on a professional tax preparer since they’re only human and some are better than others. But you may find a greater margin of error when relying on tax preparation services of any type. In theory, if you file a paper-based return, you’re responsible for making sure everything is accurate, so you may be at an advantage, assuming you know the tax laws well.

E-Filing Benefits the IRS

The IRS would prefer everyone e-file. It saves them money and effort since electronic returns don’t have to be manually inputted when they arrive. However, as with automation in every other business in the world, e-filing means that the IRS can spend less money paying people to manually enter taxes. In theory, this would lead to them cutting back on staff and saving taxpayer money. In practice, the IRS may do exactly what other companies do when they find that they have a team of people who no longer have to spend 40 hours a week on manual, time-intensive processes: the agency will focus its hiring efforts on people to review digital returns.

In other words, in the long term, some fear that the increase in electronic filing of taxes means that the IRS will have more money to spend on recruiting and managing auditors, who will then be able to recover more money from the errors people make on their returns. Even worse, over time, tax software may become so advanced that it can automatically detect errors and flag more returns for an audit. This may make it far more likely in the future you'll receive a letter for more information, which is the easiest type of audit. If this happens, you’ll simply need to go back into your return, find the error and provide an answer by mail. In many cases, this will satisfy the IRS’s questions and you won’t have to go through an in-person audit. But some believe that by continuing to file the old-fashioned way, taxpayers may be able to slow down progress and keep the risk of an audit at a minimum.

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About the Author

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.


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