Filing Rate of Employment Forms Still Less Than 50%, Report Says

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By Keith Hill

Employment tax returns have the lowest electronic filing rate of all major tax return types and are the only significant returns that do not achieve a 50 percent filing rate, an IRS advisory committee report said.

The Electronic Tax Administration Advisory Committee’s “ Annual Report to Congress,” submitted in June, included reasons why 41.4 percent of Forms 940, 941, 943, 944, and 945, a series collectively known as Forms 94x, were filed electronically in 2017, compared with 87.7 percent of various Forms 1040, U.S. Individual Income Tax Return.

The report said the Internal Revenue Service fails to communicate clearly to overcome what the committee called “numerous misunderstandings in the filer communities about e-file risks and benefits, software capabilities, registration processes, etc.” Additionally, the process for enrollment and the e-signature requirement for electronically filing 94x payroll forms are complex and cumbersome to navigate, especially when Forms 94x “are relatively simple forms that can be completed by hand in minutes and dropped in the mail,” the report said.

While the 2017 level of 41.4 percent was an improvement from 2015, when an estimated 35.8 percent of Forms 94x were filed electronically, the current percentage was far below the IRS goal of 80 percent e-filing for all tax return forms, the report said. In 2018, employment tax returns are projected to have an e-filing rate of 43.6 percent, the report said. Overall, the e-filing rate for all major tax forms is expected to be 81.2 percent in 2018, it said.

These issues also were identified in the committee’s 2011 report to Congress, when the panel said the e-filing process would need to be “incredibly easy and convenient” because “it is in competition with a simple form, a pencil, an envelope and a stamp.”

The IRS needs to communicate more effectively with the Form 94x community of filers to overcome misunderstandings related to the process, the report said. The agency also must simplify the time-consuming registration process and seek comments from the community of 94x filers to determine why they were not e-filing the forms, and to “find the most appropriate, cost-effective approaches to increase Forms 94x electronic filing,” the report said.

The committee suggested that the IRS implement a two-phase approach to resolve the registration issue. The first phase “should focus on improving the IRS’ content and communications regarding Form 94x electronic filing,” the report said. More plain-language explanations are necessary, it said. The IRS needs to make use of its relationships with public and private partners so it can develop a “proactive strategic outreach effort using both IRS and third-party communications channels,” the report said.

In the second phase, the IRS should modify policies and procedures to reduce barriers to e-filing. ETAAC specifically cited a need to improve the e-signature requirement, noting the e-signing process for Forms 94x was more burdensome than signing paper forms. The report said the American Payroll Association, in response to an IRS request in 2015 for ways to raise the e-file rate of employment returns, said the agency “should focus on streamlining its administrative processes.”

Overall Approach, Cutting Costs

“Increasing the electronic filing of Forms 94x requires that the entire end-to-end e-file registration, filing and payment process be incredibly easy and convenient,” the report said, adding that the IRS could save $10 million to $15 million a year if the Form 94x series of returns were e-filed at the same rate as Form 1040, which is projected to be 88.8 percent in 2018.

The other areas highlighted by the committee were understanding the needs of the highly fragmented Forms 94x filer segments; and engaging with key stakeholders to find the most appropriate, cost-effective approaches to increase Forms 94x electronic filing.

“To be successful, all stakeholders need to think out of the box and actively question why any particular process or policy that causes such low e-file rates should be acceptable,” the report said.

The report did not recommend that the federal government require employers, particularly small businesses, to electronically file Forms 94x “unless and until the IRS significantly simplifies” its registration and enrollment process.

“Increasing Form 94x e-file rates is not a new topic for ETAAC,” the report said. “Unfortunately, there is no silver bullet, and the IRS must overcome policy, process and systems barriers.”

Targeting Identity Theft, Tax Fraud

The Electronic Tax Administration Advisory Committee also recommended ways to fight identity theft tax-refund fraud and how to enhance the electronic tax infrastructure security.

Employers, payroll professionals, and human resources departments are at increased risk from phishing email scams that request employees’ personal information, the report said. Identity theft and tax fraud are increasing, with some scams seeking to obtain refunds of allegedly overpaid payroll tax deposits made by legitimate filers, the report said.

The committee recommended that the payroll community be integrated more broadly into the Security Summit and the Identify Theft Tax Refund Fraud Information Sharing Analysis Center. The Security Summit combines the IRS with representatives of the software industry, tax-preparation firms, payroll and tax financial product processors and state tax administrators to combat identity theft refund fraud. The Information Sharing Analysis Center helps facilitate information exchange for tax administration purposes related to identity theft and tax fraud and promotes strategies to detect, reduce, and prevent such fraud.

Congress should extend the applicability of the Federal Trade Commission’s Safeguards Rule to those serving business, employment, and information-return filers, the committee said. The rule now covers only those serving individual return filers.

Congress also should give the IRS authority to implement and enforce an expansion of the rule, the report said. The rule sets a standard for financial institutions to have written security plans and designate information-security employees to protect the security and confidentiality of nonpublic personal information, the report said.

To contact the reporter on this story: Keith Hill in Washington at khill@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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