By FPA member Erika Safran, CFP®
Last Updated: March 8, 2010
According to the Internal Revenue Service (IRS), two of every three individual taxpayers filed electronic returns in 2009. A congressional policy, stated in the 1998 tax act, set a goal for the IRS to have 80 percent of all Federal Tax returns filed electronically by 2007.
Beginning January 1, 2011 that goal will be exceeded. The 2009 Worker Homeownership and Business Assistance Act of 2009 tax law mandates electronic tax return filing for all tax preparers who file more than 10 returns. Most states already require e-filing.
No more paper returns. Standing in line at the post office to mail a tax return will certainly represent a past era, with one less story to tell your kids. It soon will enter faded memories of standing in line for concert tickets, record players and rotary phones. But you will gain speed and accuracy, and free up your time to ask your parents about their good old days.
How do you file online?
Having your taxes filed electronically does not mean that you should prepare your own taxes. Electronic filing merely means that instead of printing and mailing your taxes you will submit them online. Filing your taxes online requires the same information as a manual submission, and the accuracy of that information will determine the likelihood of you having to refile your taxes.
The IRS gives the following suggestions on how to file your taxes online:
- Get all your tax information together. Here's what you'll need:
- Social Security numbers for yourself, your spouse and any dependents.
- Forms W-2 from all employers are required for yourself and your spouse.
- Forms 1099 for Dividends, Retirement or other income, or any Forms 1099 with Income Tax Withholding.
- Receipts for expenses for Itemized Deductions (Schedule A).
- Receipts and records for other income or expenses.
- Bank Account numbers (for a fast refund or to pay electronically).
- Prior year Adjusted Gross Income (AGI) amount or prior year Personal Identification Number (PIN) if using a Self-Select PIN as your signature.
- Complete information on what records you need and how long to keep your records.
- Choose the method of e-filing that works for you. You can either prepare your taxes yourself, or provide the information to your accountant. The IRS also offers Free File, a free online tax preparation and electronic filing for taxpayers with an AGI of $57,000 or less.
- Then e-file. It's that simple.
Why should you e-file?
Most tax professionals already file their client returns electronically. If you are preparing your own return, why should you e-file?
- Accuracy: 20 percent of paper tax return forms contain mistakes, with the majority of errors due to missing or inaccurate information. As per the IRS, e-file substantially reduces filing errors.
- Convenience: Save a trip to the post office. (Though you'll miss the stories.)
- Speed: If you are entitled to a refund, you'll get it faster. The average paper return refund is about 6-8 weeks. Your refund from an e-filed return should take less than 2 weeks.
When not to e-file
If your accountant advises you to include detailed reports to support information in your taxes, you will have to include a paper tax return with the documents. If you have to file an amended return to correct a prior year return, you can still make the correction online, but the amended return has to be mailed.
There are many quality tax software programs available for the consumer. Unless your situation is simple and you have a clear understanding of tax law changes, you will benefit from using a Certified Public Accountant (CPA) to prepare and file your taxes. Remember you are ultimately responsible for the information on your tax return.
FPA member Erika Safran, CFP®, is a principal at Safran Wealth Advisors, LLC in New York City. Erika has contributed her financial expertise to financial and investment case studies published in various financial and medical publications, as well as national news channels.