Michigan will require some to e-file income taxes

Michigan is joining two nearby states in requiring corporations and professional tax preparers with large numbers of customers to file income tax returns electronically.

Floyd Schmitzer, administrator of Michigan's return processing division, announced Wednesday at the spring meeting of the Council for Electronic Revenue Communication Advancement in Arlington, Va., that his state is notifying tax preparers of the change in policy, which is designed to save money for the cash-strapped state.

Although Michigan received more than 1.5 million state income tax returns electronically this year and enjoyed a 16 percent increase over 2002 filings, Schmitzer said that wasn't good enough. Because of personnel cutbacks in the division, some state tax administrators found themselves entering data into the state's computers instead of overseeing operations, he said.

The state will require preparers who filed more than 200 returns in 2003 to file electronically in 2004. It also will require that the state's corporate income tax, known as the single business tax, be filed electronically beginning in January if a company prepares its return using commercial software.

As a result, Schmitzer said he expects individual income tax returns filed online to increase by more than 1 million next year. 'E-file saves us 52 cents per return' in processing costs, he said, and there will be more savings ' for example, 9 cents per paper return to open an envelope and a larger amount to mail out forms. 'That's a big savings' for his relatively frugal government, he said.

Minnesota and Wisconsin also require large professional preparers to file electronically, and Ohio is considering legislation to do so, Schmitzer said.

Harley Duncan, executive director of the Federation of Tax Administrators, said he was not aware of any other states imposing similar requirements, although some other states require corporations to file certain tax documents and make sales tax payments electronically. He predicted that more states would consider requiring online filing because of widespread budget deficits.

Michigan will enforce its requirement by notifying taxpayers that their returns were unacceptable, Schmitzer said. He said he expected that few such notices would be needed to achieve compliance with the rule.

Michigan's decision follows the move by 17 major tax preparation software companies and tax preparers and the federal Internal Revenue Service to offer free electronic filing to substantial numbers of American households, most of them lower-income families, for the 2003 federal tax filing season.

That 'Free File' initiative cut into Michigan's online filing because families that received free filing for federal taxes did not want to pay for e-filing their Michigan returns, Schmitzer said. Only two tax preparation companies participated in Michigan's free-file program for this year, he said, and they were the source of most of the expansion of online filing.

The states and the companies participating in the federal Free File Alliance have been unable to reach agreements that would provide comparable free filing for state returns. In some cases, the states have insisted on providing free online services that compete with the for-profit preparers and software companies. In other cases, the companies have resisted supporting all the forms and types of returns that the state accepts.

Schmitzer described the current situation as a chance to get substantial numbers of Americans to file electronically. 'If we blow it now, we won't get this opportunity again,' he said.

'You know, we've got a fight going on here,' he added. He called for a partnership between the IRS and the states to increase e-filing and said he wanted to work with the industry as well. 'Michigan does not have its own software system' for state tax return
preparation, he said. 'We have no desire to build our own software system.'

Steve Ryan, a Washington lawyer who serves as general counsel to the Free File Alliance, said the IRS and the alliance had struck a mutually beneficial agreement that kept the IRS from competing with the companies. The states are welcome to propose similar deals, he said. Companies cannot give away their products and services without getting some benefit in return, said Ryan, who also is a GCN columnist. 'There's no free lunch,' he said.

About the Author

Nancy Ferris is senior editor of Government Health IT.


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