Beat the clock

PROJECT at a glance

What: IRS Modernized E-File.

Mission: To improve the timeliness and accuracy of corporate and nonprofit organizations' tax returns.

What was: The legacy E-File system used a mainframe system from IBM Corp. originally built in the 1960s. The software has been updated throughout the years, however.

What is: Modernized E-File is an online system that accepts 1120 and 990 forms and eventually will be expanded to include individual 1040 and other commonly used tax forms.

Users: More than 227,000 companies and nonprofit entities filed using the system in 2004. The total user population, according to IRS estimates, is about 7 million.

Impact: The new system cuts error rates to 1 percent from 24 percent to 36 percent using paper processing, and has saved or provided cost avoidance of more than $10 million.

Duration: The IRS began in January 2005 accepting returns through the new system. Modernized E-File is one of the original 25 Quicksilver E-Government projects highlighted by the Office of Management and Budget in 2001. In 1998, Congress mandated that the IRS must accept at least 80 percent of all tax returns electronically by 2007.

Cost: Congress allocated $72.3 million for the project in 2005, according to OMB budget documents. The IRS also received $59.4 million in 2004. It requested $66.2 million for 2006.

PROJECT at a glance II

What: IRS Electronic Tax Administration.

Mission: E-Services provide online products to encourage e-filing for authorized tax professionals. The services are designed to simplify or reduce the burden on tax professionals and payers.

What was: All of these processes were done on paper or over the phone through the IRS' customer service centers.

What is: There are seven e-services available for tax preparers, including online registration to use the services, e-file application and taxpayer identification number matching.

Users: More than 95,000 tax preparers who file any combination of five or more accepted individual and business tax returns electronically in a calendar year have taken advantage of the services.

Impact: The IRS estimates a savings of more than $7.9 million since 2003. E-services also have significantly reduced the amount of time it takes to perform all of these services. For example, the e-file application that used to take 28 days to be processed now takes 10 days; obtaining a Preparer Tax Identification Number, which used to take 15 days to 30 days, is now done instantaneously.

Duration: The office launched E-Services starting in August 2003 and rolled out the last one in the first iteration in August 2004.

Cost: Congress allocated $46 million for the project in 2005, according to OMB budget documents. The IRS also received $55.1 million in 2004. It requested $8.1 million for 2006.

What's an IRS E-Service?

Registration: The online process used to become an authorized user of the E-Services.

E-File Application: Lets firms apply via a secure online service to become a registered Electronic Return Originator to participate in the E-File program.

Preparer Tax Identification Number: Professional tax preparers can request a new or replacement ID number to use on returns that they prepare for clients.

Taxpayer Identification Number Matching: Lets authorized payers of income subject to backup withholding to match TIN and name combinations with IRS records.

Available to preparers who file five or more returns:

Disclosure Authorization: Authorized preparers can submit power of attorney and tax information authorization forms.

Transcript Delivery System: Lets preparer or IRS employee submit a request for a transcript and receive it online, by fax or mail.

Electronic Account Resolution: Lets preparers submit secure e-mail inquiries and receive responses within 72 hours on such account issues as payment tracers, complex refunds, installment agreements and account problems.

Darius Taylor helped expand the IRS' e-filing capabilities.

Zaid Hamid

We've had several attempts over the years that didn't work out but now have no choice but to finish this.'

' Bert DuMars, Director of the IRS' tax administration

IRS responds to a pressing need for services, online filing

The mounting pressure the IRS faces to modernize how corporations, nonprofits and, eventually, individuals file tax returns isn't coming from Congress or from impatient taxpayers. It's coming from Father Time.

Officials are racing against the clock, so to speak, to move to a modern electronic filing system from a 40-year-old mainframe system running Cobol before they lose the services of long-time programmers.

'We run 40-year-old code faster than anyone else,' said Bert DuMars, director of the IRS' tax administration. 'We have more than a few 70-year-old programmers, and our concern is that they will retire or die before we finish. We've had several attempts over the years that didn't work out but now have no choice but to finish this.'

Additionally, lawmakers became frustrated with the slow and sometimes nonexistent progress of the agency's modernization work and mandated in the 1998 Restructuring and Reform Act that the IRS receive at least 80 percent of all tax returns electronically by 2007.

These two mounting demands compelled officials to make online filing a reality once and for all.
So in January 2005, the IRS launched the first iteration of the Modernized E-File system to accept corporate 1120 forms and nonprofit 990 tax forms. The IRS eventually will expand the system to accept individual 1040, 1041 and 1065 tax forms, as well as employment tax filings.

'If we are to reach the congressional goal, the legacy environment could not meet our needs,' said Darius Taylor, director of the development services division that is in charge of the Modernized E-File system. 'We knew we needed a Web platform with the least costly solutions.'
In addition to the e-filing system, the IRS also launched seven online services for ac- countants and other tax preparers as incentives to file electronically.

'One of our strategic priorities has been to increase the number of electronic options for our customers,' said Rob Bedoya, the IRS' chief business strategist and architect. 'The goal is for easier access to the IRS and the ability for tax practitioners to do transactions online.'

Agency workers and tax preparers saw the impact of the Modernized E-File system and the new suite of e-services immediately. From a reduction in the number of errors to quicker processing times to decreased costs, officials believe they have moved into a new era and gotten past the problems of previous attempts.

The new e-file system has lowered the cost to process corporate tax returns by 79 percent, to 52 cents each from $2.45. It also has lowered the error rate to 1 percent from as high as 36 percent.

Saving money

Meanwhile, e-services have saved the IRS more than $7.9 million, including $7.3 million from the Taxpayer Identification Number matching system. There were 31 million TIN matches in the first eight months of 2005, up from 12 million in all of 2004. The services also reduced the cost of paper processing and diminished the time it takes to process requests and provide responses anywhere from instantaneously to a few days, instead of two days to 30 days.

'There has been a lot of pent-up demand outside the IRS,' Du-Mars said. 'Tax preparers and citizens want more from us, and other companies want access to the services as well.'
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The IRS had been offering a version of electronic filing since 1986 over a dedicated T1 line, usually for large tax preparers such as H&R Block of Kansas City, Mo., or Jackson Hewitt Tax Service Inc. of Parsippany, N.J.

But as the Internet grew and the federal budget remained flat, lawmakers and bureau officials saw an opportunity to offer electronic filing to many more people, and cut costs in the process.

The IRS hired IBM Corp. in 2001 to develop the Modernized E-File system through a $12 million task order under the Treasury Information Processing Support Services-2 contract. The IRS later increased the size of the contract to $26 million and awarded IBM a follow-on contract that could be worth $45 million if all the options are exercised, said Bob Matarozza, IBM's executive project manager for Modernized E-File.

The system has three components: the front-end acceptance of tax forms, the back-end storage and the middle validation of the information.

Tax preparers connect to the system either through an existing T1 line or through Registered User Application'one of the seven e-services. Most large firms continue to use T1, while small and midsize preparation companies use the RUP.

Preparers using the registered application submit data into the system using the real-time Internet Filing Application. The information is converted into Extensible Markup Language sent via a Simple Object Access Protocol Web Services messaging wrapper, Matarozza said.

Through the T1 line, preparers submit data to the legacy Electronic Management System, which is then converted to XML with the SOAP wrapper.

All the data is then put through an IBM-developed rules engine that runs on Java to make sure the preparer provided all the correct information. Those that are ac- cepted are stored on an IBM mainframe system running DB2.

The entire front and middle parts of the system run on Sun Solaris servers.

If the tax return is not validated, it is stored on an Oracle9i database. Preparers are notified if the tax forms are validated, or what errors must be fixed.

The final piece to the e-file system is an internal dashboard called the Return, Request and Display application. Matarozza said IRS employees such as help desk workers, examiners or auditors use it to review returns.

'Large companies have the most complicated tax forms and can attach spreadsheets or other files,' Taylor said. 'They used to send large three-ring binders.'

While the modernized e-file system is built to handle the more than 100 million returns, officials had to figure out how to make it easier for preparers to use the system. That's where the E-Services come in.

The E-Services run on a PeopleSoft platform with custom coding, including C++, Cobol, XML and Java to connect the applications. The IRS uses eTrust Siteminder security software from Computer Associates International Inc.

Computer Sciences Corp. is the prime contractor under the IRS' $5 billion modernization contract.

Bedoya said more E-Services are planned, including a status check on a citizen's refund, the ability to request a tax return and account transcript, and the ability to change your address online.

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