Electronic Filing (E-Filing)

What is Electronic Filing? 

The process by which individuals, businesses, and tax professionals submit tax documents to the IRS or state revenue agency over the Internet is known as E-filing. The documents included here are income tax returns (like Form 1040 for individuals or Form 1120 for corporations), information returns (like Form 1099), employment tax returns (like Form 941), and extension requests (like Form 4868). This process has effectively replaced the physical paper forms, mailing, and manual processing with an efficient digital workflow.

Options for e-filing:

• Tax Preparation Software: Individuals and businesses prepare and e-file their returns with Modernized e-File (MeF) system (like Tax1099).

• Tax Professionals: Authorized e-file providers or Electronic Return Originators (EROs) can prepare and transmit returns on behalf of taxpayers.  

• Direct Filing Systems: IRS Direct File permits eligible taxpayers to file directly with the IRS without the need for third-party software.  

After electronically transmittal of the returns to the IRS, an acknowledgement receipt is generated (instantly or within hours), processing the returns successfully. 

History of E-Filing   

E-filing traces its origins back to the early 1980s when an electronic filing program was launched on a pilot basis by the IRS. It was intended to slow down the rate of paper usage and operational costs. Originally, it was opened to a limited audience of tax preparers in selected cities. Here’s other significant milestones determining the extended growth of this program:  

• 1987: Introduction of direct deposit for the purpose of refund payments being electronically deposited.  

• 1990: In this year, the IRS processed 4.2 million e-filed returns, thus marking a growing acceptance of this service.  

• 2003: The IRS moved to the Modernized e-File (MeF) system, a web-based application producing applications of Extensible Markup Language (XML) for more flexibility and efficiency.   

• 2020: IRS allows taxpayers to directly e-file via Free File Fillable Forms, thus, for some taxpayers, there was no need to involve third-party intermediaries.   

• 2024: The concept of Direct File pilot was introduced by the IRS to be free and IRS managed for taxpayer electronic filings, based on the 2022 Inflation Reduction Act provisions. 

By 2018, 89% of U.S. tax returns were filed electronically, reflecting a shift from paper-based filing to a near-universal digital standard. Today, e-filing is the preferred method for most taxpayers due to its speed and reliability. 

How Electronic Filing Works 

The e-filing process involves several steps, depending on the method chosen: 

1. Preparation: Taxpayers gather necessary documents (e.g., W-2s, 1099s) and input data into tax software or provide it to a tax professional.
2. Validation: The software checks for errors, such as incorrect Social Security numbers or missing forms, ensuring compliance with IRS requirements.
3. Transmission: The return is converted into a digital format (often XML) and transmitted securely to the IRS via the internet. For MeF, this involves authorized providers or direct submission to IRS servers.
4. Acknowledgment: The IRS processes the return and sends an electronic acknowledgment (typically within 24-48 hours) confirming acceptance or identifying rejection reasons (e.g., duplicate filings or data mismatches).

Taxpayers can pay dues/ balances electronically (e.g., via bank withdrawal or credit card) or receive refunds through direct deposit. 

For businesses, additional systems like the Information Returns Intake System (IRIS) or Filing Information Returns Electronically (FIRE) facilitate e-filing of forms.

Note: From TY 2023, the IRS mandates e-filing of 10 or more than 10 information tax returns (1099s).

Benefits of Electronic Filing

E-filing offers numerous advantages over traditional paper filing: 

Speed

Returns are processed faster, and receipts are received in hours instead of weeks. Refunds get transferred directly into a bank account within a span of ten days, instead of 6-8 weeks for paper returns.  

Precise & Accurate

Electronic filing is more accurate than paper filing due to several key factors. It is less prone to human errors, such as incorrect data entry or misinterpretation of tax codes. Some of the software contains built-in error-checks that tend to reduce mistakes such as missing or incorrect data.  

Convenience:

There could be an urgent need of filing taxes or tax forms at any hour, on any day. Therefore, they require the flexibility to file from anywhere in the world connected to the Internet. This eliminates the need to visit post office, and make sure deadlines are met without the risk of mail delivery delays.

Security

Data is encrypted for transmission, making it much easier to store sensitive information, and electronic records are much easier to access than paper files.

Reduced Costs:

The IRS saves costs in the process as savings in administrative costs because taxpayers can save costs from using free filing options or reduced late penalty by early submission.  

Ecological Impact:

It reduces waste in paper, complements the objectives of environmental sustainability.  

Electronic filing allows businesses to comply with the electronic submission requirements set by the partnerships with over 100 partners or requiring the filers of 10 or more information returns. 

Requirements and Eligibility

Access to e-filing is almost everywhere but still has some specific requirements and eligibility conditions such as: 

• Software: For taxpayers to e-file, the use of IRS-certified software or an e-file provider is necessary. For businesses, a Transmitter Control Code (TCC) may also be needed for systems like IRIS or FIRE. 

• Identity Verification: Individual social security number (SSN) or Individual Taxpayer Identification Number (ITIN), while in businesses, needs an Employer Identification Number (EIN).  

• Filing Thresholds: All businesses filing 10 information returns required to e-file, as of 2023, according to Treasury regulations, are those who file 10 or more information returns such as Forms W-2 and 1099. Big corporations, for instance, those with assets over $10 million, are also mandated to e-file their major returns. 

• Supported Forms: Most conventional forms such as 1040, 941, and 1099 can be e-filed; however, some niche forms such as certain trusts or international filings still need paper submission. 

Practical Applications and Options

E-filing caters to diverse taxpayer needs: 

• Individuals: Use IRS Free File, Direct File, or commercial software for Form 1040 and related schedules. Extensions can be requested via Form 4868 electronically. 

• Businesses: File employment taxes (Forms 940-945), corporate returns (Form 1120), or partnership returns (Form 1065) through MeF or third-party providers. IRIS supports free 1099 filing. 

• Tax Professionals: EROs use specialized software to file multiple clients returns, adhering to e-file mandates for preparers handling 11 or more returns annually. 

Special Cases- Exempt organizations (Form 990), excise tax filers, and international taxpayers have tailored e-file options, though some exceptions apply. 

Future of E-Filing

The IRS continues to enhance e-filing through initiatives like Direct File, which aims to expand eligibility and integrate state tax filing. Advances in artificial intelligence and cloud technology may further simplify preparation and submission. While stricter e-file mandates for businesses reflect a push toward full digitization. As of March 28, 2025, e-filing remains a dynamic tool, evolving to meet taxpayer needs and government efficiency goals.