The Electronic Tax Return

1. The Electronic TaxReturn How we got here and why we need it Presentation to Windsor Computer Users Group February 11, 2019 By David Harrison and Mike Berry

2. "In this world nothing can be said to be certain, except death and taxes." (Benjamin Franklin 1794) • Today, we will limit our scope to taxes and tax preparation and filing software. • The other subject takes care of itself in due time.

3. WHAT WE WILL COVER • A look back at relevant computer developments with a focus on e-Filing of tax returns. (e-Filing means electronic transmission of tax returns to the IRS and Franchise Tax Board via the “internet” or world wide web). • Free tax preparation and filing software available online. • IRS, FTB and private sources. • Commercial tax preparation and filing software. • Free Volunteer services: United Way and AARP Tax Aide. • Questions?

4. 1968 • Nine pages of instructions • Seven pages of tables • A simple reporting form: 1040 • Simple addition or subtraction to arrive at tax due or refund

5. 2017 • 292 pages • Complex text and dense math • Difficult to understand and apply

6. Roots of Tax Return Complexity • Who is a dependent or a qualified person? • What are many sources of taxable income? • Tax credits---refundable and nonrefundable • Affordable Care Act---your household? • Social Security and Retirement plan distributions • Complicated deductions • Proliferation of forms—which form, what to put in, what to keep out. Required transfer of information from one form to another.

7. The Computer Revolution • Digital Computers arose right after WWII in support of atomic energy research. • Semiconductor technology reduced size and heat generation of earlier tube based computers. • Invention of integrated circuits led to minicomputers like the DEC PDP-8, 11. • Software developed apace with hardware

8. Printers: Text to Graphics 1990s Laser Jet Printer 1960s Teletype

9. PC Software Evolution • Operating Systems: machine binary language, proprietary operating systems, CP/M, Apple OS, cartridge tape memory, disk operating system (DOS) (both floppy and hard disk. • Switch from BATCH PROCESSING to REAL TIME COMPUTING. • VisiCalc Spread Sheet program. • Complex math routines (floating point arithmetic). • Databases. • Graphics software. • Encryption and error correction software. • Modern graphical user interface and wireless printing. • “CLOUD” computing.

10. 1974+ The Personal Computer Arrives • Altair to Apple, IBM, Compaq, HP and Dell Based on INTEL 8080 microprocessor chip

11. GUI and MOUSE: ALTO to MacIntosh APPLE MAC 1984 Personal Computer XEROX ALTO 1973 Mini-Computer

12. PC Tax Prep Software Arrives • 1984 – MacInTax developed by Softview for the Apple Macintosh. • 1987 – MacInTax adapted to the IBM PC (user cost~$100). • Softview acquired by Chipsoft 199. • Chipsoft acquired by Intuit in 1993. • MacInTax transforms into TurboTax.

13. E-Filing Roots • 1986 five commercial tax preparers filed 25,000 returns in an initial e-Filing test by IRS • Tape reader on TTY used a modem to transfer return data to IRS Unisys mainframe • By 1988 Maryland and Wash DC had e-filed 60,000 returns

14. E-Filing Trends 2001-2018 In Thousands

15. GROWTH OF ONLINE FILINGS PERCENTAGE OF E-FILING TO TOTAL RETURNS PER YEAR (IRS DATA)

16. E-Filing Receipts by IRS • Total 123,634,000 (2017) 126,040,000 (2018) • Tax Professionals 71,463,000 (2017) 72,111,000 (2018) • Self-prepared 52,171,000 (2017) 53,929,000 (2018) • Volunteer-Assisted Self-Prepared 3,500,000 (2018)

17. Free Tax Return Software • Intuit Turbotax • H&R Block • eSmart Tax • TaxAct • TaxSlayer Free Federal Edition • Credit Karma Tax • IRS and Cal Franchise Tax Board Data from https://thesimpledollar.com/best-free-tax-software

18. May Not be Entirely Free • Some free versions are free to use, but require a fee or payment for e-Filing. • Check each provider’s conditions carefully. • Check to be sure the program will handle your own particular tax reporting situation.

19. Turbotax • Most mature software with step-by-step instructions. • Basic (Free) version limited to W-2 income, standard deduction, and earned income credit. • More complex tax situations cannot use the free software. • Intuit uses free version as a vehicle to steer users to more capable commercial versions.

20. TurboTax basic version

21. H&R Block • Supports more forms and deductions than other free to use tax return software. • Permits free filing of Federal and STATE. • Offers free face-to-face consultations at local H&R Block offices. • Not quite as streamlined as Turbotax. • Also used to promote more advanced commercial services at H&R Block sites.

22. eSmart Tax • Basic federal return filed for free, but STATE return costs $19.95 to file. • Free technical support via live chat. • Free audit support from a Liberty Tax CPA. • Like Turbo Tax and H&R Block Free, permits importing previous year tax data if you are a prior eSmart tax return user.

23. TaxAct • More lightweight than its competitors. • Offers free email support, tax guides, and other resources. • If it turns out your return needs to be more complex than the free version permits, TaxAct is said to be the cheapest full-service tax software.

24. TaxSlayer Free Federal Edition • Very similar features as its competition. • Lacks audit risk detection or assistance which e.g. Turbotax includes. • State return is not free. • Professional Version is used by volunteer tax return organizations like United Way and AARP Tax-Aide.

25. Credit Karma Tax • Newcomer but rapidly gaining acceptance. • Uses self-guided navigation. • Offers free Federal and State filing. • Not recommended for active traders or multi-unit real estate owners. • No upgrade path to paid-for software like Turbotax. • Has serious limitations and pitfalls: • Couldn’t handle Joint long term care insurance • Didn’t recognize a tax-free IRA account rollover. • Limited or non-existent on-line help and support

26. Tax Return Software: Direct Entry Versus Automated Interview • Most mature commercial programs like Turbotax offer user a choice between form entry or interview. • Unless you are an expert, best to follow the program Interview sequence. • Mistakes require amending the return. • Three year limitation on amendments.

27. IRS E-File

28. IRS E-File • Limited to less than $66K Gross Income • Use a matrix to select a private sector partner:

29. IRS E-File • For income greater than $66,000, no question and answer interview. • Fillable forms are available and can be e-filed. • But taxpayer must know how to derive the information needed for the form. • Many IRS forms require worksheets to derive correct entries.

30. IRS E-File (Hypo: $66K AGI, Calif.)

31. CalFile

32. California FTB Qualifications Many limitations and conditions. State Only Return. Uses information reported to state from payers. Minimal data entry,

33. Commercial Tax Filing SoftwareNews Media Survey Results • Turbotax: Best (most mature) • H&R Block: Best overall runnerup • TaxAct: Best bargain • TaxSlayer: Best simple data entry option • Liberty Tax: Best for savvy tax filers • Jackson-Hewitt Premium: Best wizard Data from https//www.thebalance.com/best-tax-software-programs

34. LOTS OF VENDOR PUFFERY

35. Volunteer Tax Prep Services —Sonoma County has two: • United Way of the Wine Country: Earn it, Keep it, Save it tax preparation program. • 14 sites in Sonoma County. • Mostly volunteers, some paid staff. • Limited to income below $60,000 with other scope limitations. • Tax preparers must be certified by IRS

36. AARP TAX-AIDE • 100% Volunteer: All district, state, regional coordinators, and training, technology and publicity positions. • Volunteers are trained and certified after passing the advanced annual IRS examination. • Training is lengthier than the United Way program. • Extensive research materials and software are provided to aid in preparing and filing (usually on-line) tax returns that are within the scope of the Tax-Aide program. .

37. United Way and AARP-TaxAide Are Subject to “Limited Scope” • Most frequent out-of-scope issues are income from rental properties, real estate investment trusts and/or oil and gas leases, (Forms K1 with depletion, depreciation, etc.). • Our client facilitator screens clients for “out-of-scope” issues and refers them to paid preparers if we cannot help them.

38. QUALITY REVIEW PROCESS • Every Return is reviewed for accuracy, completeness and quality by a separate certified counselor. • Tax Return Preparation begins with an INTAKE/INTERVIEW & QUALITY REVIEW SHEET prepared by the taxpayer

42. AARP Tax-Aide • Clients are mostly seniors. • No Income Limit. • Help provided for in-scope high income taxpayers but urge them to use paid tax preparers. • Volunteer Tax Counselors who act in good faith and stay “within scope” are protected against liability by a Federal Volunteer Immunity law.

43. AARP TAX-AIDE 2019 tax season • Windsor program is every Thursday starting at 9AM and running to 1PM here at the Windsor Senior Center. • Windsor has five certified tax counselors and a client facilitator. • Our service began February 7th and runs through April 11, 2019.

44. Volunteer for AARP Tax-Aide • Always seeking for volunteers from all backgrounds and walks of life. • Tax counselors and technical coordinators are needed. • Laptop loaner computers are provided by AARP and IRS, and must be configured each tax season. • Each site makes extensive use of wireless networks.

45. Please consider Volunteering • Please let us know if you are interested in becoming an AARP Tax-Aide volunteer for the next tax season.

46. QUESTIONS?