The popularity of federal electronic
tax filing hasn't escaped the notice of those involved
with state taxes.
Software companies quickly saw a
business advantage to adding another layer of tax help
in their products. And state officials, as they began
to more fully use the Internet to distribute tax information
and forms to the public, soon jumped on the e-filing
Now, the District of Columbia and
these 37 states have combined their electronic tax filing
efforts with the Internal Revenue Service:
The unified program, available
to taxpayers who use professional preparers, allows
taxpayers to file their federal and state returns electronically
at the same time. The software places federal and state
return data in separate packets that are sent to the
IRS in one taxpayer "envelope." The IRS then
serves as an electronic post office, forwarding the
state information to the taxpayer's state tax department
More than 22.8 million taxpayers
opted for the combined e-filing method in 2003, the
latest complete numbers from the IRS.
Advantages of combined e-filing
State and IRS officials say the combined filing process
has several benefits:
- Improved accuracy: Tax preparation
software at both filing levels generally eliminates
most errors. Though there are no statistics for state
computer returns nationwide, tax observers agree that
electronic state returns tend to be more accurate
compared to paper filed returns.
- Proof of filing: Taxpayers can meet
federal and state tax obligations at the same time.
The IRS and state agency (except Illinois) will let
you know that your return has been received and accepted,
usually within 48 hours of e-filing.
- Fast processing: Tax returns are in
officials' hands sooner, meaning the forms are processed
more quickly than those that are filed on paper.
- Fast refund: Because the returns are
processed faster, any refunds go out to taxpayers
sooner. On the federal level, e-filing generally cuts
the wait for a refund check in half, especially early
in the tax season.
Taxpayers in California, Maine,
Massachusetts and Minnesota don't have to go to tax
pros to use the federal/state e-file program. These
states allow taxpayers direct access to e-file from
their home computers.
Some states even required tax professionals
to file clients' returns electronically. Since 2004,
that's been the case California, Michigan, Minnesota,
Oklahoma, Rhode Island and Wisconsin. Similar mandates
went into effect last year for Alabama, Massachusetts,
New Jersey and Virginia.
And in 2006, Connecticut, New York
and Utah will require e-filing by tax professionals.
Not for everyone
While the combined e-filing program is welcomed by many
state taxpayers, it's not for everyone.
Say you don't want to file both
returns at the same time. That could be the case if
you're getting a refund from Uncle Sam but owe your
state tax collector. You might want to file with the
IRS first and get the federal cash to pay your state
However, in states participating
in the combined program you must file both returns simultaneously.
Internet filing by states growing
Tax experts expect the number of state taxpayers going
electronic to mushroom as states and and filers alike
become more accustomed to online transactions. In the
tax area, as more people file their federal returns
online, a major goal of the IRS, they will likely decide
to do the same with their state filings.
What's in it for states? Primarily,
Internet filing is cost-effective. Collecting tax returns
in cyberspace costs about 50 cents per filing, compared
to an estimated $3.50 per paper return. That's why more
states are expected to entice taxpayers by making the
Internet filing process free.
To see what electronic filing options
are available in your state, check out Bankrate.com's
state tax profiles for links to individual state
Updated: Feb. 16, 2006