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To Interested Parties:
In 1991 the FTA established a Business Taxes Electronic Filing Task Group (BTTG) to explore technical, legal, and administrative issues relating to the implementation of electronic filing of business taxes, leading to the issuance of a 1995 Report and Recommendations that were adopted by the FTA Board of Trustees.
An update of that report was initiated at the Federation of Tax Administrators' annual Technology Conference in August, 1999. The intent was to create a document that updates the 1995 Report, but that is broader in scope, given the exploding growth of electronic commerce.
Prepared by the "TIGERS" (Tax Information Group for EC Requirements Standardization) working group, which includes state tax administration and industry representation, work sessions took place bi-monthly. In late June 2000 a draft document was published on the FTA web site soliciting comment by the states and industry. The input received has now been incorporated into this final document.
FTA believes that it will be of assistance to you in your continued implementation of tax administration EC processes.
Harley T. Duncan
Executive Director
This report was prepared by the "TIGERS" working group. The effort was initiated at the Federation of Tax Administrators’ annual Technology Conference in August, 1999, and concluded a year later with an open discussion session at the FTA Technology Conference in August, 2000. Special mention is made of the following contributors, who drafted material for the various sections of the document:
Terry Garber, South Carolina Department of Revenue, who also served as Editor of the document
Jonathan Lyon, Federation of Tax Administrators
Stan Farmer, Missouri Department of Revenue
Deb Wise, Pennsylvania Department of Revenue
Kit Lueder, Mitre Corporation
Tim Blevins, Kansas Department of Revenue
Jim Wassin, Internal Revenue Service
Bill Shanko, Tennessee Department of Revenue
Debbie Johnson, Oklahoma Tax Commission.
Appreciation is also expressed both to the TIGERS "regulars" and to those who participated at only one or two working sessions, for their commentary, critique, and contributions. Thanks to all!
CONTENTS
Part I - INTRODUCTION AND BACKGROUND
Part II - THE TAX ELECTRONIC COMMERCE UNIVERSE OF 2000
Section 1 - InternetSection 2 - E-file, Especially Fed/State Programs
Section 3 - Interactive Voice Response (IVR)
Section 4 - Electronic Data Interchange (EDI)
Part III - NEW ISSUES FACING TAXING AUTHORITIES
Section 1 - Marketing of Electronic Commerce ProgramsSection 2 - Who Provides the Program
Section 3 - Customer Relationship Management
Part IV - ELECTRONIC COMMERCE ISSUES REVISITED
INTRODUCTION
You have been tasked with implementing Electronic Commerce in your tax and revenue agency. How do you begin to get your hands around the constantly evolving world of Electronic Commerce? How many of your current programs fit under this umbrella? What have you missed? What else should you be doing? How do you fit it all together?
This report can help you. It represents a snapshot of the world of "tax Electronic Commerce" or "tax EC" - Electronic Commerce as it pertains to tax and revenue agencies - in the year 2000. It highlights the major programs in place in many tax agencies, and many of the "best practices" that those agencies have discovered through experience. This is not the "bleeding edge" of technology; many new and exciting innovations are still to come. This report contains a working consensus of those "best practices" that can be implemented today.
The scope of this report includes the various paperless technologies used for the transmission of information needed for tax administration or tax return filing purposes. It does not include paper-based technologies, such as scanning, image capture, or 2-D barcode, within the current definition of Electronic Commerce. It does include both the "tried and true" technologies, such as e-file, and emerging technologies such as XML.
Current Objectives
The intent of this current report is to create a document that updates the 1995 Federation of Tax Administrators Business Taxes Task Group Report and Recommendations but is broader in scope. Its objectives, based on the experience of a variety of reporting participants, are:
Use of Electronic Tax Processing Technologies
There are a number of methods employed today by tax agencies to capture tax return and payment data electronically. Additionally, electronic methods are increasingly being used for administrative functions, such as business tax registration, and name and address changes for both businesses and individuals.
In order to clearly address the distinctions among various electronic channel alternatives, it must be clarified that there is a difference between the communications vehicle, or mode of transmission of the data from the sender to the receiver, and the form that the data takes (although in each case data is electronically captured). The choices made by a tax agency among transmission method and data format can greatly affect a state’s implementation strategy, in no small part due to the varying capabilities of their targeted filer demographic.
These choices may determine the timeliness with which the agency can implement the application, the degree of necessity of a commitment to working with other tax authorities jointly, the responsiveness of the tax filing community to agency efforts to promote electronic reporting, the need for additional data security measures, and a host of other considerations.
Today’s Solutions
The one main lesson that has been learned by taxing authorities who have made the investment in tax EC is that one size doesn’t fit all. Tax EC programs vary widely in scope and complexity. Taxpayers vary widely in their readiness to accept and utilize new technologies. For these reasons, "best practices" today recognize that there is no one single technology solution for taxing authorities. Each of the major areas of current and emerging EC technology used in the tax filing and payment and tax administration processes will be covered in Part II, with recommendations for targeting each technology to the most appropriate segment of the taxpayer community. These include:
Part III will cover key business issues that have arisen in connection with Electronic Commerce, including:
Part IV revisits nineteen business issues examined in 1995 by the Business Taxes Task Group. Here they are broadened to include individual as well as business taxes, and to include newer technologies. However, these issues are surprisingly relevant in 2000, and are still worthy of consideration.
Background
A background history of the Federation of Tax Administrators’ activities in Electronic Commerce, beginning long before the term came into popular use, chronicles the adoption of EC technologies in the tax and revenue community.
The phenomenon of electronic filing of tax returns and electronic payment of tax liability has been well documented since the Internal Revenue Service implemented its proprietary Individual Income Tax electronic filing system in 1985 and the state of Indiana enacted legislation mandating certain electronic funds transfer (EFT) payments in 1987.
The Federation of Tax Administrators was organized in 1937 as a nonprofit corporation to improve the techniques of tax administrators and the work of their profession, and to advance the standards of tax administration. The tax departments of the 50 states, the District of Columbia, and New York City are the members of the Federation of Tax Administrators. The Commissioner of the Internal Revenue is an ex-officio board member.
For well over a decade, the Federation of Tax Administrators (FTA) has been extensively involved in developing and coordinating projects which facilitate the application of emerging technologies for use in tax administration:
The mission of the BTTG was to serve as a focal point for input to the FTA Board of Trustees in working with the business community regarding the filing of tax returns and information by other than paper means. In addition, it assisted the education efforts which increased FTA member awareness of initiatives in the area of EDI-based electronic tax filing. The resulting Report and Recommendations therefore addressed only business taxes, and EDI was the only electronic filing technology discussed. Clearly a new report was needed to cover the new universe of tax EC.
Today
Over the past five years, a variety of other "Electronic Commerce" (EC) methods, technologies, and communications channels designed to enable electronic processing have been applied to the filing and payment of taxes, including Telefile, the Internet, and others. These have expanded the opportunities available to states to do business with individuals and businesses electronically.
At the same time, the use of these modes has motivated states to introduce similarly innovative approaches to the business issues raised by the use of electronics, for example in the areas of authentication, acknowledgment of filings, and the treatment of filing intermediaries/transmitters.
These developments present the opportunity to craft new guidance for tax administrators that takes into account both the wide range of new utility available to them, and the need to employ it in each instance with some consideration to consistency across tax jurisdictions.
Where is the Internet Best Used?
Today, in 2000, the world is in love with the Internet. In theory, it seems that the types of applications that can be deployed using the Internet are limitless. In fact, the Internet may be used in two distinct ways. First, the Internet is a communications network connecting many different locations. It may be used simply as a network, that is, to transport data files and messages between point A and point B. In this way, the Internet provides a low-cost alternative to commercial networks; this will be discussed in greater length in Section 6.
The incredible flexibility of the Internet, however, lies in the second ability to create interactive applications combining text, data, and graphics, connecting to background data bases as needed, and presenting an intuitive, "user friendly" interface to the taxpayer. This ability enables a taxing authority to build interactive filing programs for fairly complex tax filings, as well as for administrative functions such as taxpayer registration, account maintenance, and refund status tracking.
Internet Readiness
The Internet is the fastest growing vehicle for electronic transactions of any kind. Much has been written on the phenomenal growth of Internet usage over the past decade. However, in most states, the number of households with Internet access hovers in the range of 30% - 50%. It is clear that use of the Internet at this time should be one of multiple options for service provided to individuals and businesses. At the same time, the use of the Internet is becoming the method of choice for those who have access to it, and that choice should be leveraged wherever possible.
At minimum, all tax authorities should provide general information to the public via a website. The website should also include downloadable tax forms, generally in PDF format, plus tax law, rulings, and regulations in a searchable format.
Internet Tax Filing
There are two basic approaches to tax filing over the Internet: interactive filing and batch filing. In interactive filing, the taxpayer interacts directly with a web-based application to complete the tax filing online. Focus groups have shown that taxpayers in general prefer a conversational question-and-answer format, customized to the taxpayer’s filing history, with pull-down selections where appropriate, to fill-in-the-blanks applications where a paper tax form is simply reproduced on the web display. When the information is complete, the taxpayer submits the filing for processing. Payment information, such as bank accounts for direct debit payments or direct deposit of refunds, or credit card information, may be combined with the tax filing application.
Within the interactive method of Internet filing, there are two alternative technologies. In one, the taxpayer interacts directly with the web server hosted by the tax authority or a third party, with only a web browser on the taxpayer’s machine. Advantages of this approach include the ability to support a variety of taxpayer hardware and software configurations with the single host application, as well as the ability to update the host application at will without concern for what version is on the taxpayer’s machine. Disadvantages include the need for the taxpayer to remain connected to the host website throughout the entire transaction. Taxing authorities must also take care to support multiple releases of the most common Internet browsers. The second alternative has the taxpayer download tax preparation software from the website to the taxpayer’s machine. The taxpayer completes the filing offline, then reconnects to the host website to upload the completed filing. Advantages of this method include the ability of the taxpayer to store the filing on the taxpayer’s machine for future reference, as well as the ability to interrupt the filing for other activities, and return to it at a later time. Disadvantages include the need to accommodate various versions of the software to match taxpayer hardware and software configurations, and the need for customer assistance staff to support the download and installation processes. At this time, both approaches are being offered, both by tax authorities and third-party service providers; neither has gained dominance in the marketplace.
In Internet batch filing, the Internet is simply utilized as the network over which a tax filing is transmitted. The tax filing has been created offline as a data file by some form of software program, either a generalized program such as a spreadsheet, or a specialized tax preparation package. For very large data files, such as those created by a large filing such as Motor Fuel or some Motor Carrier Fuel Use (International Fuel Tax Agreement - IFTA) programs, or multiple filings from a payroll processor, the file transfer protocol (FTP) is recommended. Since FTP requires special software and some knowledge of computer transmissions, it may not be the best method for smaller returns and smaller businesses or individuals. In those cases, it may be possible to transmit the tax filing simply as an attachment to an electronic mail message. However, there are concerns with both the security and the reliability of such an approach.
Internet-Based Tax Administration
The use of the Internet for tax administrative functions other than tax filing is steadily growing. Most taxing authorities now provide copies of their forms, in downloadable format, on their websites. Many offer online inquiry into the status of individual income tax refunds. The more advanced administrative uses of the Internet, however, center on the areas of account maintenance and customer service.
Account maintenance includes taxpayer registration, name and address changes, the ability to check account balances and outstanding liabilities, and the ability to pay outstanding balances online. The movement is toward self-maintenance, that is, the taxpayer actively maintains the information in his own account, rather than having to provide the information to tax authority personnel. Self-maintenance increases accuracy, by eliminating third-party keying of data. It can be made available at the taxpayer’s convenience, seven days a week, 24 hours a day.
Customer service refers to the response to inquiries and requests from various customers, including taxpayers, tax practitioners, and other third parties. In addition to general information, taxing authorities are beginning to maintain Frequently Asked Questions (FAQs) on a variety of tax topics in a format that is simple for the customer to navigate. Best practices also include linking the website to the taxing authority’s electronic mail system, so that the customer can enter e-mail directly from the website, targeted to the specific area capable of responding to a particular subject area. Taxing authorities should set a strict time limit for responding to e-mail inquiries, preferably within 24 hours of receipt. Automated systems can route and distribute e-mail, track responses, and escalate if the e-mail is not answered within a specified time limit. Care must be taken to ensure that the information provided over the Internet to the taxpayer is the same as that provided by other means, such as Interactive Voice Response (IVR) or direct taxpayer service phone line.
Internet-enabled tax administrative functions may be provided by a taxing authority on a stand-alone basis, or they may be part of a state-wide "portal" for citizen access. The move to state portals is discussed in more detail in part III, section 4.
Internet Security
Because it is a public medium, the Internet is only as secure as each application provider, including the taxing authority, chooses to make it. Newspapers report incidents of "hackers" compromising the credit card numbers of electronic commerce customers. In any Internet-based tax filing program, care must be taken to protect confidential tax data, and to build the taxpayer’s confidence in the security of the filing program.
De facto standards for the security of interactive web-based applications at the time of this report include the use of PINs or passwords, and the use of secured socket layer (SSL) so that the transmission can only be read by the sender and the intended receiver. PINs are issued to taxpayers by an independent method (usually paper mail) and are verified against a database by the Internet application. Secured socket layer requires the host website (tax authority or third party) to have obtained a "digital certificate" from a "certificate authority." This digital certificate provides the host with a pair of encryption keys, related by a complex mathematical formula. One key, the "public key," is published by the certificate authority, who certifies that this is the public key for the host party. The other key, the "private key," is kept confidential by the host. When the taxpayer interacts with the website, the web application initiates an SSL session. The host provides its public key, which is verified by the certificate authority. The taxpayer’s web browser then uses that public key to encrypt all data that it sends to the host. In this way, only the host, using its private key, can decrypt the data.
Although SSL provides some measure of security for Internet transmissions, it does not authenticate the sender. PINs can be stolen from the mail or lost or compromised by the taxpayer. In order for electronic commerce over the Internet to mature, there must be some readily available and reliable means of authentication for all parties. Many believe that a network of certificate authorities, known as a "public key infrastructure" or PKI, will make public/private key encryption inexpensive and universally utilized. Some tax authorities are considering becoming certificate authorities themselves, and assigning key pairs to taxpayers at no charge. These keys may reside on a server or personal computer, or they may reside on a card or some form of token, which must be read at every transaction to "sign" it. Others believe that biometric forms of security and authentication, which utilize a unique biological identification such as a fingerprint or retinal scan, will become inexpensive and widely used. At the time of this report, however, there is no universally accepted means of Internet authentication. The IRS and several states have piloted PKI applications with some success, but have reported concerns regarding the public’s ability to correctly install and maintain digital certificates, and regarding the identification of each certificate with a server (machine) rather than an individual.
In the case of batch Internet transmissions, whether FTP or e-mail, encryption is also encouraged. Software such as "Pretty Good Privacy" (PGP) and "Norton Secret Stuff" can provide encryption capabilities at low cost. However, the issue of encryption key management - the exchange of keys so that they are known to both parties - can be cumbersome, especially when a tax authority must maintain the keys of multiple trading partners.
Tax authorities must also provide protection for the databases used in Internet transactions, since they contain confidential taxpayer information. Specialized servers with software known as "firewalls" are used to provide a logical barrier between the tax authority’s data and the outside world. A firewall is used to protect a user community, or enclave, from threats originating from an external network, typically the Internet. A firewall is placed between two networks, and is essential for an interconnection between a private network and the Internet. A firewall acts to filter out undesirable network activity based upon a security policy instituted by the organization controlling the firewall. The filtering is not symmetric, in that traffic entering the enclave is filtered, while traffic going out to the Internet is typically not filtered (or not as stringently).
Finally, it should be noted that the Internet is not reliable, that is, there is no guarantee that any particular message will reach its destination. For that reason, it is imperative that tax authorities build some form of acknowledgement mechanism into all Internet filing programs. For interactive programs, that often takes the form of a confirmation number provided to the taxpayer. For EDI over the Internet, it may take the form of a traditional EDI acknowledgment transaction set. The taxpayer should be educated to understand that the tax filing has not been completed until the confirmation number or acknowledgment is received in return.
Role of the Webmaster
Due to the rapid evolution of the Internet, it has not been unusual for a Web enthusiast to take on the role of Webmaster, without training or preparation. Best practices call for a taxing authority to support the training, skills, knowledge, and proper tools of its Webmaster. It must be recognized that there are three distinct roles that must be filled in the Internet environment:
Generally the Webmaster provides the technical support, and serves as coordinator to ensure that the Web content and applications work together to provide a coherent Web site. Best practices place the responsibility for Web content with the content "owners" within the taxing authority, and provide the means and onus for keeping the content current and accurate. Webmasters should try to keep aware of current technology trends, and to promote open standards wherever possible.
Technical Considerations for Batch Internet Filing
File Transfer Protocol (FTP)
File Transfer Protocol (FTP) is an Internet protocol that allows a trading partner to copy files from one computer node to another. FTP is very cost effective for large, voluminous filings such as Motor Fuel tax. Care must be taken to size the FTP server to accommodate anticipated numbers of tax filers.
E-mail is a method for performing push-based message transfer to the recipient. Utilizing the Internet, there is concern with quality of service and confirmed delivery, unless measures are taken by the tax authority. E-mail security capabilities can be handled in two ways. Option One: The entire e-mail message, including the attached reporting file, can be encrypted. Using encryption, the state entity holds a private key and distributes their public key to interested trading partners. This allows for an exchange of files that are secure to pass from one trading partner to the next. To do this both the state entity and the trading partner must have compatible e-mail systems. Information on encryption can be obtained from any encryption capability provider. Option Two: Only the reporting file is encrypted, and attached to a non-encrypted e-mail message.
There are two common models for the communication infrastructure for e-mail applications. These models are a) direct receipt of the file, and b) utilizing a VAN to receive the file. The file can be e-mailed directly to the state agency. Depending on whether the file is encrypted or not, the agency may be required to maintain a separate server to receive, decode, translate, reformat and upload the file into the regular processing system. Alternatively, the file can be e-mailed to a VAN or other service provider for translating, reformatting and forwarding to the state agency.
Section 2 - E-file, Especially Fed/State Programs
Where is E-file Best Used?
The term "e-file" is used here to include IRS electronic filing programs, and state electronic filing programs that leverage the facilities and capabilities of those IRS initiatives, particularly for Individual Income tax returns. E-file is the EC technology of choice in three environments:
ELF and OLF
In sharp contrast to the sense of "newness" that surrounds the Internet, the process now referred to as "e-file" has existed since its introduction by the IRS in 1987. In the original form of e-file, also called simply "electronic filing" or "ELF," a tax preparer enters tax return data into a software program, which converts the data into a specific proprietary format created by the IRS. The formatted return file is then transmitted to the IRS, often over a dial-up modem connection. In Fed/State e-file, which was introduced in 1991, a state tax return is concatenated onto the federal return, again in a proprietary IRS format. The state tax authority then downloads the state returns, via phone line and modem, from the IRS into its own computer systems. Once the preparer has entered all of the data for the federal tax return, the software can easily add the calculation of the state return. The state, then, has only a relatively small investment to participate, needing only to download the returns and translate them into its internal format for further processing.
ELF cannot be ignored in a discussion of tax EC, because for most states it is still the single largest source of electronic tax returns. In recent years the IRS has noticeably stepped up its marketing of ELF, and tax preparers have reduced the cost of electronic filing. For these reasons, and its reputation for rapid refunds, ELF continues to grow.
The fastest growing form of e-file is referred to as "online filing" or "OLF." In one form of OLF, a taxpayer purchases a tax preparation software package from a major commercial vendor. The taxpayer uses the software on his or her home PC, and sends the tax return data, via phone line and modem, to the software vendor’s own facility. In the newest form of OLF, the taxpayer simply logs onto the software vendor’s website over the Internet, and either completes the tax filing interactively, or else downloads the software package onto the home PC from the Website. The completed return is then uploaded to the vendor’s website. In either case, the vendor then converts the tax return data into the proprietary IRS format and transmits it to the IRS, where it is handled the same as any other ELF return. Many vendors support the Fed/State filing program, and include state filing in their software.
Software vendors competing in the marketplace can provide online assistance with tax filing, and other ease-of-use features which may not be cost justifiable for a state to develop in its own programs. They support the filing of both federal and state returns in a single transaction. They also have brand recognition. States should leverage these capabilities to encourage OLF as a low-cost EC technology.
Direct Filing
Some states have chosen to implement direct non-Internet individual income tax filing programs, rather than to support the Fed-State program. The advantages of direct filing are primarily those of control; the taxing authority can control the sources of the returns, the manner of filing, and whether the returns are accepted or rejected. Direct filing programs make it possible for a tax return to be refiled directly with the state, even if it is rejected by the IRS. Direct filing programs generally use proprietary data formats, so that they can be tailored to the taxing authority’s specific needs.
The disadvantages of direct filing are those of participation. Except in the largest states, software vendors hesitate to support proprietary formats unique to a single taxing authority. For this reason, taxing authorities offering direct filing programs often develop and provide their own software to taxpayers. Tax practitioners are also less likely to support direct filing programs, since it requires separate transmissions for the federal and state returns.
Business E-file
To date, e-file programs have addressed primarily individual income tax. It should be noted, however, that there have been several initiatives to address business e-file, particularly of federal and state employer withholding taxes. The Simplified Tax And Wage Reporting System (STAWRS), a multi-agency initiative, promotes the combined filing of federal and state withholding and unemployment insurance reporting requirements, meeting the needs of the IRS, Department of Labor, Social Security Administration, state tax authority, and state employment security authority. These programs are still in the development stages, but should be noted as future opportunities.
Section 3 - Interactive Voice Response (IVR)
Where is IVR Best Used?
Many taxpayers do not have the technological equipment or experience to use computers to interact with tax authorities. In these instances the tax authority must decide between processing paper and offering other alternatives. One popular alternative is the use of interactive voice response (IVR) technology.
IVR uses a touch-tone telephone as an input/output device. The taxpayer uses the keypad to enter information when prompted by the script being played through the telephone. Based on the data entered, the system confirms data entered and returns answers to questions. So essentially, IVR is a form of electronic filing and inquiry. There are numerous applications that can be employed using the IVR. The following discussion outlines some of the more prevalent uses.
A basic application is using the telephone to inquire about the status of a return or refund. The taxpayer enters basic information such as a tax identification number and amount of expected refund. The tax authority uses that information to inquire its database and return the status of the refund claim. For example, if the refund claim has been processed and the refund check is due to be mailed, the taxpayer would be given the refund mailing date.
IVR for Tax Filing
Another popular use is for filing returns, commonly referred to as "Telefile." The most popular returns filed are income tax returns expecting a refund. However, zero due sales and withholding returns are also commonly filed using the IVR. Additionally, when coupled with some form of payment reconciliation, the IVR can accept balance due returns of many types quite efficiently. The IVR can accept financial account information for direct debit payments or for deposit of refunds. It is also possible to interface real-time credit card authorization to an IVR application, to allow the system to accept credit card tax payments. IVR is also being used for some specialized tax applications, such as authorizations for shipment diversions for Motor Fuel tax.
Tax authorities have targeted Telefile programs to specific audiences, such as college students, military, the retired community, and, for business IVR filings, seasonal businesses. In general, these target audiences file simple returns, without many deductions, credits, and other tax detail, and would use "EZ" type forms if filing on paper. In order to encourage the use of the IVR system, tax authorities often send special Telefile booklets to the target audience, based on patterns of previous years’ filings. These booklets contain personal identification numbers (PINs) for use with the IVR, and worksheets designed to guide the taxpayer through the simple Telefile process. As an incentive, tax authorities are now omitting the paper filing forms from the Telefile booklet, so that the taxpayer must go through an additional effort to obtain the forms in order to file on paper.
Other IVR Applications
IVR is a convenient, comparatively low-cost platform for a variety of applications which require a small amount of data entry by the taxpayer. Various account status inquiries may be made via IVR. If business tax filing is offered via IVR, such as zero due sales and withholding returns, then the processes of registration and PIN selection for these programs may also be offered in the same way. IVR is currently being utilized by state taxing authorities for applications ranging from payment of outstanding liabilities by ACH debit or credit card, to the creation of installment payment agreements, to authorizing motor fuel diversions. Faxback is another class of IVR applications; the taxpayer enters a fax number and selects information requested, such as a particular tax form. The requested form or information is then sent by return fax to the telephone number that was entered.
A related technology is that of the Automated Call Distribution system, or ACD. The ACD works with the IVR to route incoming calls. Those calls that can be handled by automated response remain with the IVR system, while calls requiring more detailed response are routed to call center staff. The ACD tracks calls, provides queuing and wait time management, and provides reporting information on such factors as wait time, duration of calls, and staff loading.
Considerations for IVR Implementation
One guiding principle to keep in mind is the length of the telephone call. If a tax authority and a taxpayer are willing to have a call long enough, almost anything can be done using this technology. However, neither party is willing to use this application for tax returns that contain a significant amount of data. For example, few taxpayers or tax authorities would be willing to pay for a telephone call long enough in duration to capture a sales tax return with hundreds of locations and data elements. A common "rule of thumb" is that an IVR transaction should be completed in ten minutes or less. Likewise, entering letters using a telephone keypad is possible, but is tedious at best. Therefore, applications that require a significant use of letters will likely be time consuming and error prone which again means neither the taxpayer nor tax authority will be pleased with the result of this type of implementation. Therefore, the size and complexity of a return often dictates whether it is practical to use IVR to file that return.
Many states and the Internal Revenue Service have implemented IVR systems to file simple income tax returns. Likewise, many states have employed IVR for both employer withholding and sales tax returns. As stated earlier, the time it takes to file the return is a significant factor.
Most tax authorities now use IVR technology to provide general tax information to callers. It is tempting to the tax authority to utilize the "branching" capability of IVR menus to allow the caller to specify the exact information requested. However, experience has shown that the IVR inquiry system should be limited to three options at a time, and only three layers deep, with options to move back up the "tree." Otherwise, callers will abandon the inquiry before obtaining the desired information. It is also recommended that in an inquiry/response application, the system provide the caller with the option to "opt out" of the system to a live person for individual assistance, although this option is not recommended for Telefile applications.
There is no clear consensus over who should pay for the calls. At this time, some tax authorities utilize toll free telephone calls for taxpayers outside of the immediate area where the IVR system is located, and some do not. A toll free number reduces the cost of the taxpayer’s compliance with the law, but costs the state more. However, some applications are so convenient, the taxpayer is willing to pay to use it. As with many electronic programs, if it is optional, the lower the cost the more likely taxpayers are to use it.
Business Models
An additional consideration is how to install an IVR. There are two basic models. One model has the tax authority owning and maintaining the hardware and software, the other is the purchase of a service only. Each model has its own pros and cons. Under the ownership model the tax authority invests in the purchase and development of the system either in house or from a vendor. The only ongoing costs are maintenance and upgrades of the system. In the service option, the vendor develops and maintains the system with limited up front cost to the tax authority. The tax authority then pays for usage of the system either by transaction or by the minute. Which is the best approach depends on the needs and desires of the tax authority. A complete financial and business analysis should be completed prior to committing to either approach.
There are several models for implementing technology that usually involves a third party technology provider that is focused on IVR implementations.
Business Model One: This model outsources all components of the application including development, testing, and management of the application. This business model has all areas of the operation outsourced and simply returns the ongoing data from the application to the customer or tax agency in the electronic format of their choice. This return of electronic data can be transmitted using several transmission service techniques including virtual private network (VPN), Value Added network (VAN), File Transfer Protocol (FTP) over the Internet, FTP over dedicated line to a dial up modem bank or communication server, etc.
Business Model Two: This business model only outsources the software development and testing component of the application. This development is traditionally done off site at the IVR vendor development center of choice and either has software installed on site or through remote telecommunications connectivity. This development could be done at the customer site if there is concern about off site development. Using this model the customer uses this as a knowledge transfer tool in order to train in-house staff in IVR software development. This model develops the software development skills to create these applications with only internal information technology staff. The technology architecture used to platform this application (includes software, server hardware, telecommunications infrastructure equipment ) is implemented, managed, and maintained by the end user internal support staff or outsourced for on site maintenance.
Business Model Three: This business model does not outsource any software development and testing components of the application. Traditionally, the internal information technology staff completes the work without vendor assistance. The development project for one tax filing application is used as a knowledge transfer tool in order to position internal staff in IVR software development.
Technical Considerations
Taxing authorities must size the incoming phone line environment to have sufficient capacity to handle the volume of calls and not become overwhelmed with incoming tax filers. For specific sizing issues, the IVR service provider or local Telephone Company from whom the communication lines are leased can generally provide capacity planning assistance.
There are two common models for the communications infrastructure for TeleFile applications. These models are:
The on premise based system provides for sole source consistency, controlled processing, service value to the customers, and confidence through ownership. The ability to have a sole source of consistency makes support and maintenance justifiable to the vendor. Having the system on premise also gives the agency the ability to control the processing, giving the ability to facilitate frequent and sudden changes to the daily operations of the system. Supplying taxpayers with prompt solutions utilizing a single point of contact also adds value to the service. With only one phone call, taxpayer information can be checked and inaccuracies corrected. The taxing authority gains knowledge and confidence from the ownership of the system while also reducing the cost of ownership to the agency through fewer maintenance and support calls to the vendor.
The off premise based system provides for an initial low cost of implementation and an increased availability of the system. The initial low cost of implementation is due to hardware and leased line installation, paid for by the vendor. The total cost of implementing a system off premise is higher due to cost of support and leasing of equipment. Secondly, the system availability is increased because of constant, knowledgeable monitoring. When an off premise system does have a problem the response time is short and the system is repaired quickly.
The important aspect of creating an IVR system is planning for peak usage. An IVR has limited resources and therefore these resources must be allocated to maintain availability of the system at peak loads. The IVR is not a high volume system for receiving a lot of data quickly, the limited number of phone lines and slow transmission speed of the information creates a bottleneck that can only be fixed by adding more costly lines. Determining the number of lines that you need will be based on the total number of possible filers and the estimated number of filers calling at peak.
The emerging voice recognition technology is likely to change or eliminate some of the constraints seen in many of today’s applications. For example, if a person can verbally spell a word instead of entering it on the keypad, the use of the IVR can be expanded somewhat. The voice recognition could also speed the use of the system because it may be quicker for someone to speak the numbers than use the keypad. As with most technologies at the time of this report, this one is changing rapidly.
Section 4 - Electronic Data Interchange (EDI)
Where is EDI Best Used?
EDI is the computer application to computer application transmission of information in a standardized format. EDI standards are set by consensus bodies such as the ANSI Accredited Standards Committee X12. EDI is best used in the following situations:
Prior to the recent emergence of new electronic technologies to transact business, EDI was the best way for a business to reduce its paper processing cost, as well as the costs, errors and time delays associated with data entry. As large corporations and their smaller customers and suppliers implemented EDI in the mid-1980’s and 1990’s, it seemed that the use of EDI for tax filing was a natural extension of a major business trend.
With the rapid increase in the use of other electronic commerce technologies for business transactions, such as Interactive Voice Response (IVR) and particularly the Internet, EDI is now seen as only one out of a number of valid alternatives. The emergence of these electronic technologies has forced tax authorities to face the reality of providing and supporting multiple electronic filing options to its tax filing population. In addition, multiple electronic filing options are now necessary in order to reach the level of electronic activity that tax authorities need to realize the cost savings and other advantages associated with electronic filing.
Because specialized computer software is needed to translate business information into EDI format before transmission, small to mid-size businesses are intimidated by the investment of time, effort and costs that seem necessary to implement and maintain EDI for tax filings. Electronic filing software developed by a software vendor or tax authority can make EDI a viable option for small to mid-size businesses. With these electronic filing options, businesses do not need to invest their own time, effort and costs in implementing EDI, because the EDI technology is embedded in the tax filing software. They do not need to know anything about the technical specifications involved in creating an EDI-formatted data file. This group of filers, however, would also lend itself to Internet and IVR filing applications.
Overcoming Perceived Barriers
EDI is generally seen as complex and costly to implement. As noted above, specialized software is needed to translate data into EDI format, and programmer time is needed to configure the translation. A number of tax software vendors are developing tax filing software which produces an EDI-formatted output file, ready for transmission. This software reduces the perceived complexity of EDI by making the translation transparent to the user. However, smaller taxpayers protest the need to spend money on software to replace paper processes which can be completed for the cost of a first-class postage stamp. In particular, neither tax authorities nor taxpayers feel that an EDI program can be mandated when costs are incurred by the taxpayer.
Taxing authorities have addressed the cost of EDI software in two ways. Some have partnered with software vendors to provide the tax filing software at no cost to the taxpayer. Others have undertaken the development of EDI tax filing software themselves, and provided the in-house written software to the taxpayers. In either case, the tax authority must weigh the cost of such a program with the benefits in reduced paper handling and reduced error rate that are achieved through the use of EDI.
The second area of cost and complexity in EDI is the transmission of the tax data from the taxpayer to the tax authority. EDI has traditionally made use of the "value added network" (VAN) for data transmission. Both tax authority and taxpayers maintain "mailboxes" provided by the VAN. The taxpayer transmits EDI tax filings to the tax authority’s mailbox, and receives acknowledgements in the taxpayer’s mailbox. The advantages of the VAN is that the tax authority need only maintain the one communications interface, that of the mailbox. It does not have to maintain communications lines to support a large volume of taxpayer calls, nor does it have to support a variety of communications speeds and protocols. The VAN also enforces the security of the transmissions. However, VAN costs generally include not only the monthly mailbox fee, but also the costs of the toll calls and a per-character transmission charge. Many taxing authorities have justified paying the toll and transmission charges for all taxpayers in its EDI program. Some even pay the taxpayers’ mailbox fees.
Tax authorities need to undertake the obligation to see that participating businesses are equipped to handle EDI with minimal effort and expense. When working with tax filers to overcome these barriers, an effort must be made to create a "win-win" situation. Understanding the concerns of tax filers such as readiness and cost will allow tax authorities to tailor the program to minimize concerns and attract program participants.
The number of parties involved in the process, the possibility of tax filer needs to alter their computer systems, and the need for taxpayer education and assistance programs are other factors that need to be considered when addressing taxpayer capabilities and costs.
EDI Over the Internet
The Internet is now being seen as a low-cost alternative to the value added network. However, as was discussed more fully in Section 1, the Internet is not a single technology, but a medium for a variety of approaches. These can range from interactive solutions which enable the taxpayer to interact directly with the tax authority’s website, creating EDI-formatted data on the back end, to solutions in which a traditional EDI file is generated and then simply attached to an electronic mail message to the tax authority. The only consensus at this time is that use of the Internet may make EDI programs more attractive by eliminating many of the traditional VAN costs.
At the time of this report, however, the Internet is not as secure or reliable as a VAN, unless additional steps are taken. Internet EDI programs must utilize additional procedures to insure that the EDI data reaches its intended destination, without delay, corruption, or interception. Many commercial VANs are reinventing themselves as Internet Service Providers, utilizing the cost savings of the Internet for EDI transmission, but utilizing the functionality of EDI to provide the resources to ensure security and reliability of customers’ transactions.
Where Can You Get Help in Implementing EDI?
A convention is a set of rules created by an industry-related organization. Conventions supplement EDI standards by providing specific implementation parameters in specific settings (e.g., conventions related specifically to sales tax or employer withholding tax). Conventions are enforced through peer pressure and mutual agreement on the business advantages of consensus. Conventions are important to tax filers, tax authorities, software vendors and value added networks. Conventions decrease taxpayer burden, exception handling, and difficulty to software vendors and value added networks. All parties are economically dependent on consistency of implementation across multiple taxing authorities. Because the EDI standards themselves are so generic, the lack of consensus conventions can make the implementation of EDI across multiple taxing authorities as diverse as proprietary data formats.
One of the industry-related organizations that develop conventions for tax-related applications is the Tax Implementation Group for EC Requirements Standardization (TIGERS). TIGERS is a working group of states, IRS, and business and service provider representatives to promote and review opportunities for consistency and uniformity between state and federal EDI conventions. The work group has accomplished to date:
For further information on EDI, taxing authorities can look to the X12 website at www.disa.org. The model mappings developed by TIGERS are available at www.taxadmin.org.
EFT via ACH
It has been over ten years since the FTA, in association with the states, developed uniform conventions for Electronic Funds Transfer (EFT) for the payment of taxes and associated fees. By 2000, most states are utilizing EFT for many different business tax types. The form of EFT most widely utilized refers to debit or credit transactions through the Automated Clearing House (ACH) network. The ACH network, with its regional sub-branches, governed by the National Automated Clearing House Association (NACHA), is the network through which banks exchange funds electronically for customer transactions. ACH transaction data is exchanged in strictly formatted, multi-record transmissions.
ACH Debit
In an ACH debit transaction, the payee’s financial institution (in this case the tax authority’s financial institution) originates the transaction by sending a request for funds to the payer’s financial institution (in this case the taxpayer’s financial institution). The payer’s financial institution then transfers the funds in order to settle the transaction. The tax authority must receive prior authorization to request the funds. When a tax authority’s EFT program is not tied to an electronic return filing program, the tax authority may use a commercial service for debit origination. A taxpayer generally calls the debit originator by telephone, and either speaks to a representative or else utilizes IVR technology to enter the amount of funds transfer authorized. The originating service then formats the authorized transaction information into the required ACH format and transmits it to the taxpayer’s financial institution.
By 1995, states were interested in combining an electronic payment with an electronically filed return, into a single electronic transaction. The EDI standard for the Electronic Filing of Tax Return Data, transaction set 813, was modified to include information necessary for ACH debit origination. Several states have since implemented EDI programs combining the filing and payment in the 813 transaction. Additionally, provision for authorization of ACH debit has been added to IVR filing programs and, recently, to the Fed/State program for Individual Income Tax return filing. When the ACH debit authorization reaches the tax authority as part of an electronic tax return transmission, it may be the responsibility of the tax authority to create the proper ACH formatted records and transmit them to its financial institution. If the state is utilizing a Value Added Network (VAN), Internet Service Provider (ISP), or other third party to process the incoming transactions, that third party may also perform the ACH debit origination. In this way, the ACH debit payment is no longer a separate transaction for the taxpayer, but is folded into the EDI, IVR, or Internet filing program.
ACH Credit
ACH credit transactions, by contrast, are originated by the payer’s financial institution (in this case, the taxpayer’s financial institution), and move funds directly to the payee’s financial institution (in this case, the tax authority’s financial institution). Credit transactions are preferred by many large businesses, who wish to retain control over the movement of funds from their accounts. Since the taxpayer is originating the payment, it occurs separately from any electronic return filing. The EDI 813, or other electronic filing, may contain notification to the tax authority of the intent to pay by ACH credit, but the tax authority must wait to receive notification from its financial institution that the credit payment has indeed taken place. A third form of ACH payment, the Fedwire, also moved funds directly from the payer to the payee. A Fedwire moves the funds immediately, but its data format contains little information about the transaction. For this reason, most state programs accept Fedwires on an exception basis only, particularly in the event that a credit transaction cannot be successfully completed. Current "best practices" are for a taxing authority to accept both debit and credit payments within their EFT programs.
EFT Considerations
The most common format for ACH transactions, both debit and credit, is the "cash concentration and disbursement," or CCD. A variation of this format, the CCD+, includes an optional 80-character record which may be used to carry information concerning the transaction. In the case of simple tax reporting, such as the coupon accompanying an employer withholding tax payment, it may be possible to include all necessary information in the CCD+. A standardized format for tax information, known as the TXP, was developed by the FTA in 1988 and is widely used for this purpose, eliminating in many cases the need for a separate data filing. It should be noted that the EDI transaction set 820, often used by banks for payment transactions, may also include the TXP record.
One issue that must be noted with ACH debit and credit transactions is the issue of settlement. The ACH transaction "settles" when the funds are made available to the tax authority’s account. Most EFT programs require the funds to be available to the tax authority on the due date of the associated return. Because ACH debit and credit transactions generally settle the next day after they are originated, this requires the taxpayer to file his return one day early. A paper return and paper check are considered timely if postmarked on the due date, even though the funds are not yet available. This discrepancy must be considered by tax authorities looking for incentives to encourage filing and payment by electronic means. One such incentive is the ability to "warehouse" payments until the due date. In this case, the taxpayer is able to transmit a tax return, including payment information, at any time, with instructions to warehouse the payment until a specified later date on or before the due date. This practice encourages early filing, and may help the tax authority by smoothing peak filing dates, as well as insuring timely payment. It also eliminates the advantage of paper to the taxpayer, by allowing the taxpayer to control the "float" created by the timing of the movement of funds.
There is another format for ACH transactions, the "corporate trade exchange" or CTX, which is worth noting. The CTX allows multiple 80-character records, and is large enough to carry a complex tax return. Only the larger financial institutions, however, are able to process the CTX, and it is not widely used for tax purposes.
Credit Card
As of the year 2000, much debate and legislative activity has centered around the acceptance of credit cards for tax payment. The use of credit cards is attractive to both taxpayer and tax authority. The taxpayer generally gains the option of utilizing the credit card’s revolving payment plan options to stretch the payment of the tax liability over a longer time period, while still meeting timely payment obligations. The tax authority receives the payment in a timely fashion, and may receive payments from taxpayers who could not otherwise meet their full obligation at that time. Furthermore, the credit card number and expiration date can easily be included within an electronic return filing.
Each credit card payment must be authorized and settled by the card processor. If credit card payments are submitted in conjunction with paper returns, then the tax authority must provide staff to authorize the payments, generally by touch-tone phone into an IVR system. If the payment is denied, the transaction is generally handled by the tax authority in a similar fashion to a bad check. In an IVR or Internet tax filing system, the transaction may be routed directly to the card processor for authorization. If the payment is denied, the tax authority may accept the return only, or reject the entire transaction.
The controversial issue surrounding the acceptance of credit cards for tax payments is the issue of the fees charged by most credit card processors for handling the transaction. These fees, commonly called "merchant fees" since they are generally paid by the merchant accepting the credit card in payment, help to defray the operating costs of the card processor and some of the risk of non-payment. The fees are negotiated between the merchant and the card processor, depending on volume of transactions, and generally range from 1.5% to 4%. A tax authority which chooses to accept credit cards is acting in the role of a merchant. The tax authority has three options for handling the merchant fees or any third-party processing fees:
Option 1 is daunting to any tax authority, since the merchant fee on millions of dollars in tax payments could be considerable. Option 2 generally requires special enabling legislation, because the tax authority is, in effect, collecting less revenue than is legally due from the taxpayer. The IRS, in particular, is bound by legislation that requires it to deposit the full amount due from each taxpayer. Several states, however, have enacted legislation allowing the merchant fee to be paid from the revenue stream, justifying the fees on the basis of increased collections. Option 3, which is being utilized by the IRS and some state taxing authorities due to legislative requirements, may be a deterrent to the taxpayer to the use of credit cards.
Tax authorities are also considering the acceptance of bank debit cards for electronic payment. Like a check, these payments are deducted directly from the taxpayer’s financial institution account. Like a credit card, the funds are authorized by a card processor, and the tax authority knows immediately if the payment is good. However, there is a small fixed fee charged by the card processor.
In summary, there are still issues to be resolved in the acceptance of debit and credit cards for tax payments, but they should be investigated by the tax authorities due to rising customer demand.
Direct Deposit
It should be noted that electronic refund payments to the taxpayer also benefit both parties; the taxpayer generally receives the payment more quickly, and the tax authority is relieved of the need to process and secure paper checks. The most common form of electronic refund capability is direct bank deposit. This is generally done as an ACH credit transaction, in which the tax authority provides refund deposit information to the tax authority’s financial institution, which in turn passes the payments to the various taxpayer financial institutions.
Future Payment Options
At the time of this writing, ACH debit and credit, and the use of debit and credit cards are the commonly accepted forms of electronic payment. New options, such as the use of stored-value smart cards, electronic purse options, and "e-cash" stored with an online processor, are still in the early stages of acceptance in the community, and are not yet actively considered for tax payments. It should be noted that in most states, payment options such as ACH debit and credit, as well as credit card, are controlled through the State Treasurer’s Office or other central agency. Both the selection of supported payment options and the selection of vendors and vendor interfaces is best done on a statewide level, providing consistency for the taxpayer and advantages of scale to the individual state agencies.
In any tax filing which requires payment, there is the issue of reconciling the data filing to the payment received. In electronic commerce programs where the filing information is received through one electronic channel and the payment is received through a different channel, some mechanism for reconciliation is necessary. For this reason, programs which integrate the transmission of filing and payment data in a single transaction provide the best benefit for the tax authority.
Section 6 - Electronic Commerce Communications
Two major business issues introduced by the BTTG Report and Recommendations in 1995 are still relevant in 2000:
Communications Options
The 1995 report, concerned exclusively with EDI, discussed the two primary communications options available to tax authorities and their trading partners: point-to-point or direct communications, and the use of Value Added Networks (VANs). Point-to-point communications requires the tax authority to invest in sufficient communications hardware, modems, and phone lines to allow tax filers to dial in directly to transmit their data, even during peak periods. It also requires the level of technical support necessary to deal with taxpayer variations in hardware, software, and technical competence. VANs greatly reduce the need for upfront investment, by providing communications hardware, phone lines, and software, generally supporting a variety of protocols and speeds, as a service. The tax authority needs only to provide the single connection to the VAN. In 1995, many business taxpayers distrusted VANs, concerned that a commercial service provider might choose to misuse its access to confidential business information transmitted through its systems. Survey results showed that they wanted tax authorities to offer direct point-to-point communications options. This was a cause for concern for most smaller tax authorities, who could not easily afford the investment required for direct communications, and wished to build their EDI program solely based on VAN usage.
In 2000, the selection of a communications option for EDI or other "batch" filing program has been significantly altered by the availability of the Internet. As businesses "go online" for other purposes, their Internet connections become available for tax filing use at essentially no cost, and VANs become the more expensive option. In many cases, taxpayers are demanding that tax authorities provide Internet tax filing facilities. Ironically, however, VANs now are considered "trusted" third-parties, compared to the risk and uncertainty still present in Internet communications. VANs, who control their private networks, typically guarantee a certain level of availability, and often a level of service delivery. They can be held liable for data that is misdirected, or fails to reach its destination in a timely fashion. Internet Service Providers, or ISPs, do not control the Internet communications channels. For this reason, while the best ISPs guarantee the availability of their own facilities for connection to the Internet, they do not guarantee any level of Internet availability or certainty of message delivery. They cannot be held liable for failed or misdirected transmissions. Moreover, there is no guarantee that the Internet transmission will not be accessed by unauthorized parties. The Internet risk can be considerably reduced through the use of measures such as message confirmations, firewalls, and encryption. While the responsibility for these measures generally lies with the tax authority, some ISPs are beginning to provide them for their customers, becoming in effect Internet VANs.
At this time, the use of point-to-point transmission appears to be declining, although there is still considerable investment in leased lines and dial-up modem banks. Tax authorities must still decide whether to offer commercial VANs, the Internet, or both for batch filing initiatives such as EDI for large Motor Fuel reports. The decision must be based on the relative concerns for cost versus security and reliability, both on the part of the tax authority and on the part of the taxpayer.
The tax authority must also determine whether to offer interactive Internet filing, either through its own website or through a commercial host, for any tax type. As tax authorities offer information, forms, and policy documents on the web, tax filing seems to be a logical progression. Moreover, many states are now developing web "portals," which allow citizens to access a variety of personal and business governmental functions in a simple and user-friendly format. Pressure is then felt by the tax authority to provide Internet tax filing as a component of the portal services. It is clear that interactive Internet filing is rapidly becoming a requirement, as taxpayers demand it, and as security measures become more widespread. It is recommended that the tax authority survey its taxpayer base, or hold focus groups, to determine such decision factors as the level of Internet capability and the degree of concern for Internet security. Where the customer set is known and limited, such as the set of registered tax practitioners or a small taxpayer set such as Motor Fuel taxpayers, the use of "Virtual Private Networks" (VPNs) is a potential option. The VPN uses encryption and addressing techniques to create a secure network within the Internet. The IRS has piloted VPN technology with some success, and it may well become a "best practice" in the near future.
Another option discussed previously is the use of IVR systems for tax information and filing applications. Tax authorities are finding that IVR is a comparatively inexpensive way to handle simple, low-end returns. In 1995, the question was which communications options to support for EDI. In 2000, it would appear that the "best practice" for a service-oriented tax authority is to offer EDI, either through a VAN or over the Internet, plus interactive web-based Internet filing, plus IVR. Each of these channels is suited for a different segment of the taxpayer base, and work together to cover a full spectrum of filers. However, there are considerable costs involved with developing and maintaining such a diversity of programs. Additionally, there are issues related to the integration of the data from all of these channels into back-end processing, storage, and retrieval.
Cost Factors
Tax authorities have grappled for some time with the issue of whether they can require taxpayers to pay fees or charges in order to file taxes. Since a taxpayer can file by paper for the cost of postage, filing by electronic commerce must either be similarly inexpensive, or else provide convenience benefits that justify any additional cost. Experience has shown that taxpayers may be willing to purchase tax software to assist in tax preparation and calculation, but are generally unwilling to pay communications charges. The tax authority must determine whether the benefits of the electronic commerce program are sufficient to justify absorbing communications costs for the taxpayer.
VAN usage generally incurs significant ongoing operational costs. This is because while both point-to-point and VAN connections incur phone charges for all but local calls, VANs generally charge transmission fees based on the volume of data transmitted, in addition to monthly mailbox fees. Surveys have shown that of the tax authorities offering VAN-based tax filing programs, and especially where these programs are mandated, the tax authorities are paying all transmission charges, and many are also paying for the taxpayers’ mailboxes.
In the IVR area, the cost decision takes the form of whether to offer toll-free service to taxpayers. While many states do make IVR applications toll-free, others do not. Some compromise by making IVR general information access toll-free, but providing the Telefile application on a toll call basis. Others provide "satellite" IVR systems in major metropolitan areas, in order to provide local call access, and then use internal networking to merge the data in the central location.
Cost, then, becomes a large part of the attractiveness of Internet filing. Internet service providers generally charge a flat fee for a certain amount of access time per month. Given that an individual or business generally obtains Internet access for many more activities than tax filing, that monthly fee is not associated with the cost of tax filing, which is considered "free." In particular, cost is a major factor in the decision whether to utilize the Internet or a commercial VAN for batch filing, due to the relatively high cost of the VAN.
"Best practice," then, is to make each of the communications channels which a taxing authority chooses to make available to the taxpayer as low-cost to the taxpayer as the tax authority can arrange.
Section 7 - Extensible Markup Language (XML)
In the 1980s, it was thought that EDI would become a truly universal language for exchange of business data. Every business would implement an EDI translator, and therefore would be able to exchange business document transactions easily and unambiguously with multiple trading partners. In reality, small businesses have been reluctant to acquire and install translators. Moreover, experience has shown that EDI transactions must be carefully customized between each set of trading partners; for example, no two states’ sales tax returns require quite the same information.
XML Capabilities
A newer technology, Extensible Markup Language (XML), shows promise of coming closer to the goal of a universal language for Electronic Commerce. In XML, a "tag" is attached to each data element within a transaction, giving information concerning both the semantic meaning of the data element, and also its structure within the business document. The tags are transmitted along with the data. Tags are not specified by any generic XML standard; XML is "extensible" - meaning that the user may extend the language through the definition of any business document. The Document Type Definition (DTD), or a similar document definition called a "schema," may be transmitted along with the data, or stored in a database accessible by both trading partners.
XML capability is being built into the leading Internet browsers, eliminating the need for separate language translators. Any taxpayer with Internet access and a browser can then interpret the XML by linking to the database server containing the document definition. Additionally, an XML transmission can be associated with a "style sheet" indicating how the data is to be displayed and manipulated by the browser. In this way XML allows the taxing authority to create an Internet filing application, control how the taxpayer interacts with the application through the browser, and specify unambiguously the meaning and structure of the data within the tax return
Current Status
XML is an emerging technology, which is not yet mature. A number of competing business consortiums are proposing formats for the document type definition or schema, and are vying to be the primary repository for common business document definitions. Only the latest browser releases support XML, and performance may be an issue with smaller hardware. In mid-2000, only one or two actual implementations of XML for tax filing can report experience. However, the level of resources being invested in XML development promises that XML will become a best practice in the near future. XML is already in use in commercial online catalog applications, and is also being used in back-end systems integration to communicate between unlike enterprise applications.
Several different organizations are working to develop a prototype DTD or schema for a tax return. The TIGERS workgroup has begun this effort, in liaison with vendors and other interested organizations. The goal is to develop XML definitions that can be provided to software developers, whether within the taxing authority or outside third parties, for use in constructing dynamic EC applications.
PART III - NEW ISSUES FACING TAXING AUTHORITIES
Section 1 - Marketing of EC programs
Marketing is not a traditional strength of tax authorities. Accustomed to issuing regulations based on legislative mandate, tax authorities often falter when faced with the task of encouraging participation in voluntary programs. To compound the problem, tax authorities in the early to mid-1990’s believed that the benefits of electronic commerce solutions, such as electronic filing and EDI, were so clear and compelling that taxpayers would naturally adopt them. The results of this "field of dreams" approach - "build it and they will come" - were universally disappointing. It has become painfully obvious that a Tax Authority must aggressively market its electronic commerce capabilities in order to maximize the benefits inherent in migration to a paperless processing environment. Presentation of e-commerce benefits must repeatedly be made available to a variety of specific market segments. Only after customers are made aware of the benefits to themselves will they begin to investigate the possibility of participating in a voluntary (non-mandated) electronic commerce program with Tax Authorities. Awareness messages must be concise, complete, repeated, and specific to an area of the customer base.
A variety of approaches must be investigated to maximize resources devoted to marketing activities. What works best for one market segment (individual tax filers) may have no impact or bearing on another (large corporations). A Tax Authority must first inventory its own electronic capabilities and identify and prioritize segments which offer the best potential for growth. Identification of the Authority's suite of capabilities should aid in determining appropriate target segment areas for marketing in order to achieve maximum impact. Identification and prioritization of market segments can serve to show areas which offer the best potential for maximizing government resources to expand existing or introduce new e-commerce applications.
Marketing Approaches
Commercial advertising is growing beyond the financial reach of most tax authorities. Because of this limitation, creativity must be used to develop effective marketing programs. Specifically, the following activities, derived from a variety of existing and potential tax authority marketing programs can be considered the Best Practices which may be implemented and/or adapted to the individual Authority's situation.
Marketing to Service Providers
In addition to the taxpayer customer, tax authorities need also market to service providers, such as the tax preparers and software vendors whose products are needed to support state filing programs. While a state may choose to outsource an EC program to a selected service provider, on a fee basis, this is rarely an exclusive arrangement. Tax authorities need the support of the big-name players in the tax compliance field, both in the individual and the business marketplace.
Section 2 - Who Provides the Program?
One of many new issues facing Tax administrators in the Electronic Commerce arena concerns who provides the products and/or services, generally computer software, that comprise the EC program. For taxpayers to adopt an EC program, it must be inexpensive, efficient, effective, and available. For the tax authority, those criteria must guide its choices among three alternatives:
Based on tax type, vendor availability, and taxpayer base, the "best practice" for a taxing authority may be a combination of all three approaches.
In-house vs Market Development
The piece that actually interfaces with the taxpayer is the front end software or Internet application used to enter the return information and transmit it to the taxing authority. Issues about who and how to develop this component of the program lead to an interesting dilemma for tax agencies. Should the agency develop this software or Internet application themselves, or should they leave this up to the free-enterprise market and certify vendors of software and/or Internet products? Is there enough of a market for a software or Internet product to justify private vendors offering solutions for this component? The actual size of the taxpayer base for specific taxes may be the determining factor for this question. In the individual income tax arena, the free market competition model has served the taxpayer well. Taxpayers can choose from a variety of programs, both practitioner-assisted and those for the home computer, as well as Internet-based offerings. Competition has steadily driven down the cost of programs and services, to the point where vendors offer free online filing to taxpayers below a certain income threshold. In a state sales tax program, where the taxpayer base is in the thousands of taxpayers, vendors of software and/or Internet products will probably be interested in developing solutions for the program. On the other hand, for taxes with significantly smaller numbers of taxpayers, there may not be a large enough market to justify a private vendor’s decision to develop a product. In the latter case, a taxing authority must determine the most cost effective means to develop an appropriate program and make it available to the taxpayers.
Other factors which may come into play include:
This issue has become particularly sensitive in light of the pressure on tax authorities to offer interactive Internet filing applications. Where there is an established market, such as the individual income tax practitioner networks, in-house development of these applications is seen as a threat to that market’s very existence. At the same time, the tax authority must face citizen demand for low- or no-cost solutions. While tax authorities must decide on a case-by-case basis whether in-house development is justified, they should be aware that their actions may generate strong reactions from the service provider market.
Outsourcing
As taxpayers demand multiple electronic commerce channels, such as IVR, EDI, and both batch and interactive Internet access, it becomes less and less likely that the tax authority will have sufficient resources in-house to support all of these programs. For each new program, the tax authority must ask itself, does the tax authority have sufficient training and resources to develop and administer all aspects of the program in-house, or should certain components (or maybe all components) of the program be outsourced to the private sector? Considerations for making the outsource decision include the following:
These decisions should be made as part of an overall implementation strategy, rather than as piece-meal reactions to each EC program.
Section 3 - Customer Relationship Management
Although Electronic Commerce, in all its forms, has continued to grow from the 1990’s into the year 2000, an additional focus for the new century is Customer Relationship Management (CRM). CRM systems tie together all of the various electronic channels for communicating with the customer &emdash; in the case of a taxing authority, this is generally the taxpayer &emdash; into a consistent, complete, electronically based taxpayer relationship. While the full implementation of CRM is not yet widespread, it is recognized as a "best practice" in those agencies which have been able to implement the new technologies.
On the front end, CRM ensures that the taxpayer receives accurate, consistent account information whether by Internet, IVR, paper mail, or telephone call to a taxpayer assistance specialist. Careful channel management is needed to keep multiple sources of information in synch at all times. Current CRM practice works hand in hand with tax EC to emphasize taxpayer self service and account self-maintenance. However, CRM best practices recommend that a taxing authority provide information, account maintenance, and tax filing in the manner that each taxpayer finds most comfortable &emdash; a restatement of the "one size doesn’t fit all" determination encountered through EC experience. CRM best practices also ensure that a taxpayer always has a means to communicate a specific message or request to a live person, from any self-service application. Examples of this option include a "transfer-out" key within IVR programs to allow a taxpayer to transfer out of the interactive voice application to a telephone extension of a taxpayer assistance unit. A similar example is the ability to send active e-mail to the tax authority during an interactive Internet filing session, or from the taxing authority’s website. The taxpayer assistant may respond via e-mail as well, or by another channel if appropriate; although there are a growing number of means for creating secure e-mail, taxing authorities as yet do not allow the disclosure of confidential taxpayer information over Internet e-mail.
On the back end, CRM systems track the history of the taxpayer’s relationship with the tax authority. A comprehensive CRM system provides access to taxpayer e-mails, images of paper correspondence, summaries of telephone contacts, as well as filling history and account status. Such systems are designed to support the customer "contact center," an outgrowth and enhancement of the customer call centers of the 1990’s. Where a call center centralized the telephone-based taxpayer assistance function, the contact center provides a centralized facility for handling telephone, e-mail, and paper-based requests for assistance. A contact center specialist having the complete history of a taxpayer’s interaction with the agency, in electronic format at his or her fingertips, is much better prepared to resolve the taxpayer’s need quickly and correctly, without need for additional follow-up. CRM systems are also useful to auditors and revenue officers in working with taxpayers to resolve compliance issues. CRM system may also allow a taxing authority to distinguish between contact types, and to set up specialized services for tax practitioners and other third-party intermediaries.
CRM systems represent a considerable investment on the part of the taxing authority. The most sophisticated systems require the integration of telephone and data infrastructure, in order to provide the contact center staff with the complete computerized taxpayer history as soon as the taxpayer’s call is received. It should be noted that the creation of a true contact center may also have significant organizational impact on a taxing authority. Contact center staff must acquire new skills in telephone call handling and writing skills for both paper and electronic correspondence, as well as CRM applications knowledge.
Section 4 &emdash; Enterprise Initiatives
This report is primarily concerned with Electronic Commerce between a taxpayer and a taxing authority, with special emphasis on electronic filing of tax returns. However, tax EC is one part of the larger picture of governmental EC. Each taxpayer, whether individual or business, must interact with a variety of governmental agencies at the federal, state, and local levels. A number of initiatives have been undertaken to allow the taxpayer to conduct Electronic Commerce with multiple governmental entities in a simplified transaction. These initiatives fall under the general categories of portal applications and combined filing programs.
Portal Applications
A "portal" is an Internet application which serves as a gateway to a number of other Internet applications, arranged in an intuitive fashion for easy customer access. Portal initiatives are underway in a number of states, to provide citizen access to state and local agency functions over the Internet. These initiatives are based on the premise that a citizen does not generally know, or care, exactly which agency provides which function within an often bewildering array of licensing, filing, and reporting requirements. Portals are generally arranged from the citizen’s point of view, into desired actions such as "license my car" or "start a new business." The citizen enters information online, and that information is transmitted by back-end applications to the correct governmental agency or agencies. Attempts are generally made to have the same "look and feel" across all portal applications, and to incorporate various ease of use features.
Taxing authorities who have invested time and resources in building informative websites and interactive filing applications may be faced with the challenge of incorporating these applications into a state portal. The most common approach is for the portal simply to link to the taxing authority’s website and filing applications from its selection screens, without actually taking over these applications. The taxing authority may be encouraged to adopt the look and feel of the portal; best practices recommend that the tax authority embrace the portal concept and identity for the overall ease and convenience of the taxpayer citizen. On the other hand, a tax authority which has not had the resources to build sophisticated information and filing Internet applications may receive significant assistance from a well-supported portal initiative.
Combined Filings
It is often necessary for the citizen to provide essentially the same information to multiple governmental entities, often at multiple levels of government. A number of initiatives have been undertaken to allow the citizen to provide the information electronically one time, and let back-end systems distribute that information to meet all filing requirements. One combined EC application which is growing in popularity is that of business registration. This "one-stop shop" application allows a business to enter all of the information needed for registration and licensing one time, generally through an Internet portal. That information is then forwarded to the taxing authority to register the new business for all applicable tax types; it is also forwarded to the Secretary of State, local licensing boards, and all other appropriate authorities.
Another application which lends itself to an enterprise approach is that of business wage and tax reporting. A business must report essentially the same information for federal and state tax withholding, for unemployment insurance, and to the Social Security Administration and Department of Labor. An initiative known as the Simplified Tax and Wage Reporting System (STAWRS), sponsored by the Internal Revenue Service, has begun to encourage pilot projects to combine these multiple filings. The business files all required information with one agency, which in turn distributes the information as required. It is the intent of the STAWRS program to accomplish this combined filing through Electronic Commerce. A number of state taxing authorities are working with the STAWRS pilot programs.
Section 5 - Legal and Compliance Issues
Record Keeping
A taxpayer is responsible for maintaining all records that are necessary to determine the taxpayer’s correct tax liability. The tax authority is responsible for maintaining records of tax returns filed, according to a statute of limitations. Electronic Commerce does not change any of these basic requirements. It merely changes the form of many of those records, from paper to electronic.
Electronic record-keeping requires conscious planning, especially for the individual or small business taxpayer. Care must be taken not to lose years of tax records when a personal computer is traded in on a newer model. Additionally, records must be converted periodically to newer technologies in order to maintain their accessibility &emdash; for example, how many tax records still reside on 5 inch floppy disks?
Record-keeping becomes critical in questions of "due diligence," where the taxpayer contends that everything necessary was done to complete the electronic transaction, but the tax authority contends that it did not receive the electronic return or payment. Tax authorities must make clear to both individuals and businesses what information - such as confirmation numbers and transmission logs - must be maintained to meet standards for due diligence in the electronic world. The FTA EDI Audit and Legal Issues Task Force has drafted a "Model Recordkeeping and Retention Regulation," which has been adopted by a number of states.
Signatures
Signatures serve multiple purposes in the paper world, including authentication that a taxpayer is who he says he is, and assurance that a tax return as filed is a true and accurate representation (non-repudiation). These same purposes must be served in Electronic Commerce. By far the most common form of signature in use in tax EC is the Personal Identification Number, or PIN. PINs may be issued easily to large populations, either by mail or, in the case of interactive programs such as Telefile and Internet applications, by allowing the taxpayer to choose a PIN. The taxpayer then enters the PIN to log onto a tax filing program, to gain access to his or her account status, or to "sign" a completed return. For most tax EC purposes, PINs appear to suffice. However, PIN notices may be stolen from the mail, and PINs may be forgotten or lost. Tax authorities should take care not to require a taxpayer to maintain and remember multiple PINs for multiple filing requirements.
Digital signatures offer an added degree of protection, particularly for Internet transactions. In addition to identification of the taxpayer, a digital signature ensures that the EC transaction has not been tampered with or altered. However, a digital signature is in essence a software program and an encryption key file, known collectively as a digital certificate, which must be successfully installed on the taxpayer’s computer. Digital certificates may be obtained for a fee, from commercial certificate authorities. Tax authorities are just now beginning to consider becoming certificate authorities themselves, and issuing digital certificates to business taxpayers upon registration. Clearly digital signatures are not appropriate for use with simple programs such as Telefile. At this time, it is not practical to require individual taxpayers to acquire and install digital certificates. However, future applications may provide some form of electronic identification for individual taxpayers, possibly in conjunction with the ubiquitous state drivers license.
Enabling Legislation
The majority of states have now passed some form of Electronic Commerce Act, which ensures that records and signatures cannot be denied force of law merely because they exist in electronic form. Best practices are for these laws to be technology neutral, that is, not to prescribe that any specific technology be used for either electronic records or electronic signatures. Model legislation for this purpose has been drafted by the National Conference of Commissioners on Uniform State Law, and is known as the Uniform Electronic Transactions Act (UETA). Senate bill S.761, recently signed into law, provides that state law conforming substantially to UETA will not be overridden by federal legislation. As of the writing of this report, the federal legislation is too new to fully assess its impact on the states, or on the use of digital signature technology.
Enabling legislation may also be needed in the area of tax payments. As discussed previously, some states are enacting legislation to permit them to accept credit cards in payment of taxes, paying the required credit card fees from the revenues received. Tax authorities accepting credit cards must become aware of the laws and regulations surrounding credit card use, such as "Reg E" which limits an individual’s liability if a credit card is lost or stolen.
The most controversial area of legislation in tax EC is the issue of mandates. The majority of states have mandated that certain classes of taxpayers, generally those with high recurring tax liability, must pay that liability using electronic funds transfer (EFT). Only a few states, however, are mandating that those taxpayers must also file by electronic means. States should consider mandates carefully, to ensure that those taxpayers mandated to electronic commerce have the means to comply without suffering undue economic or other burden.
Supporting Documentation
The original IRS e-file program required the taxpayer to send a paper signature document, plus supporting documents such as W-2s, by mail to the IRS, The paper documents were then manually keyed into computer systems, and the paper stored. The requirement to data enter and store paper supporting documentation negates much of the benefit of electronic filing. It is burdensome to the taxpayer, the tax preparer, and the tax authority. Today, PINs replace paper signatures, and the responsibility for maintaining W-2’s rests with the taxpayer or tax preparer in many EC programs. Tax authorities should choose manageable alternatives to ensure that an Electronic Commerce program is in fact paperless.
This section revisits each of the issues raised in the 1995 BTTG Report and Recommendations, updating the recommendation to reflect the status of 2000. Where the issue may have addressed EDI exclusively in 1995, it has been updated in 2000 to address multiple electronic commerce (EC) channels. Additionally, the issues have been expanded to cover individual as well as business tax applications.
1. What are tax filers’ EC capabilities?
Most businesses have touch-tone telephones, and are therefore capable of Telefile if appropriate. While most individual filers also have touch-tone telephones, there are still rural areas that only have rotary service. A growing number of businesses have Internet access, although there is still a great deal of concern for security and reliability of the Internet for tax filing. Recent surveys indicate that household penetration of Internet connection is roughly 30% - 50%. In general, most businesses do not have EDI capability for tax filing - even if the business uses EDI for bottom-line functions, the tax department may not have access to this functionality. EDI capability must be supplied by the tax authority except for the largest taxpayers. In general, individuals have no need for EDI capability.
2. Should electronic tax filing programs be implemented through administrative rules and regulations or through statutory legislation?
Electronic filing programs should be implemented through administrative rules, to provide flexibility for the tax authority. The one exception is in the case of a mandated program, which must be implemented through legislation. In that case, the legislation should be as flexible as possible, such as reference to a liability threshold to be prescribed by the agency Director. Adoption of uniform or model statutes, such as the Uniform Electronic Transactions Act, are encouraged.
3. Should tax authorities employ the use of Trading Partner Agreements or administer electronic filing programs for business taxes through the use of administrative rules?
As a rule, tax filing programs are one-way directed, so that the tax authority has the ability to specify the parameters of the program. For this reason, traditional trading partner agreements are generally not necessary. In most cases, business taxpayers are required to register for electronic filing programs. The signed registration document, with acknowledgment of the program rules, can serve the function of the trading partner agreement.
4. Should tax authorities provide taxpayers with incentives to file electronically?
As a rule, tax authorities are not offering incentives for their electronic filing programs, on the theory that the efficiencies of the program provide benefits to the filer as well as to the agency. For example, the "rapid refund" has long been the primary incentive for Individual Income Tax e-file. The most common incentives that are offered affect filing and payment due dates, such as a delayed due date for electronic filing, or the ability to file at any time but have the payment "warehoused" until the due date. Any monetary incentives, such as a discount for electronic filing, will probably require legislative approval, but they may be effective for larger business filers. It has not been conclusively proven whether or not such incentives are effective.
5. What should be the records retention requirements for EC-based tax related documents and associated data?
The retention for electronic documents should be the same as for the equivalent paper document. The FTA Business Task Group has developed a model records retention regulation which has been adopted by many states. Current "best practices" are for taxpayers and tax preparers to maintain signature documents, W-2s, and other supporting paper documents, rather than submitting them to the tax authority, in order to maintain a completely electronic filing process. The majority of states have now passed Electronic Commerce Acts which ensure the legal status of electronic records and signatures. Note that both tax authority and taxpayer must maintain the hardware and software necessary to access the electronic records, until the statute of limitations has expired for those records.
6. Should EC-based electronic tax filing be mandatory or voluntary?
Experience has shown that mandating may be necessary to reach the desired level of participation. As a rule, only the taxpayers above a specified threshold should be mandated to use electronic means. However, smaller taxpayers could be mandated to use a simple and widely available technology such as Telefile.
7. What education and EC tax filing support should the tax authority provide?
The support for electronic commerce programs should be at least equal to the support provided for the equivalent paper programs. A "help desk" or "contact center" for taxpayer support is a best practice, and staffing for evenings and weekends during peak filing seasons should be considered. Where the tax authority is supplying software to the taxpayer base, then additional technical support should be made available. The tax authority’s website should be used to provide Frequently Asked Questions and to allow e-mail inquiry. The tax authority should set target goals for turnaround of taxpayer questions.
8. How much lead time would be necessary for the taxpayer to implement an EC-based electronic tax filing program?
The lead time for the taxpayer to implement an electronic tax program depends on the channel used. A taxpayer with a touch-tone phone or Internet access can participate in a Telefile or interactive Internet application immediately, with no additional implementation required. If the tax authority supplies EDI-based PC software, installation of the program could take one to two weeks. If a taxpayer is implementing native EDI with multi-purpose EDI software, or utilizing a tax compliance package with an EDI facility, the implementation could take up to six months.
9. Should multiple EC transmission filing options (original: point-to-point, use of a VAN, magnetic media, FTP) be offered by the tax authority for batch filing programs such as EDI?
Point-to-point capability is expensive to develop and to maintain, and is probably to be avoided in light of the alternatives available today. The costs of VAN use have been cited as the greatest obstacle to EDI. Tax authorities should decide, based on economics as well as taxpayer demand, whether to support a VAN connection, use of the Internet, or both. Tax authorities should seriously consider the use of IVR and interactive Internet technologies.
10. How should weekend and holiday due dates be handled?
Weekend and holiday due dates should be handled in accordance with Federal Reserve requirements, that is, the transaction must be initiated to settle the next business day after the weekend or holiday. It should be noted that IVR and Internet transactions, which are generally available 24 hours per day, seven days per week, could be initiated even on a weekend or holiday. The transactions would then be processed by the tax authority on the next business day.
11. What constitutes due diligence, timely filing, and proof of filing for the electronic filing of tax return data?
All electronic filings should be acknowledged in such a way as to provide a proof of filing for the submitter, whether the actual taxpayer or an electronic return originator (ERO). This may take the form of a traditional EDI acknowledgement, or may be a confirmation number in the case of Telefile or interactive Internet filing. While the tax authority should attempt to minimize potential failure points in the technology infrastructure of the electronic filing program, breakdowns will occur. Generally, if an outage occurs which is not the taxpayer’s fault, a grace period should be offered for penalty or interest for late filing.
12. Will an original signature be required for each electronic tax return filed?
Note that many paper filings, such as most monthly sales tax returns, do not require a signature on each filing. In general, a single signature on file should be sufficient for repeated regular filings. Some form of PIN or identification code may be required for security and authentication purposes, and may be repeated as a form of signature, especially on infrequent filings. Although public key encryption-based digital signatures are currently the most reliable form of electronic authentication, it must be noted that in a business environment, they generally identify a computer server, rather than an individual.
13. How should tax authorities deal with confidentiality regarding EC-based electronically filed tax returns?
Where third-party service providers are utilized, the tax authority should contractually bind them to liability for deliberate or accidental disclosure of confidential data. In the case of an interactive Internet application, the tax authority should make reasonable effort to secure the return data against hackers, by such measures as firewalls, encryption, and removal of the data at regular intervals to an offline process. Note that the electronic return, like the paper return, is not legally the responsibility of the tax authority until it is received.
14. What uniform methodology will tax authorities employ to ensure that what the tax filer sent was what the tax authority received (integrity) and that the tax data sent actually came from the tax filer (non-repudiation)?
At this time, PINs and confirmation messages are the most pervasive methodologies in use. While public key encryption and the use of digital signatures provides superior proof of integrity, its use is still somewhat limited.
15. Should electronic payments and electronic return data be transmitted in the same transaction?
While there are definite advantages to the tax authority in transmission of both payment and return together, in the elimination of reconciliation, multiple options should be offered to the taxpayer. In a large corporation, the tax filing may come from one department, while the payment may come from another, limiting the corporation to filing a return with a remittance advice, rather than actual payment. Additionally, separation of filing date and payment date ("file now, pay later") may serve as an incentive for electronic filing.
16. Should tax authorities develop registration and software testing criteria for tax filing intermediaries who wish to transmit tax filing information on behalf of their clients?
All software vendors should be required to pass some form of certification testing, such as the correct transmission of a number of test returns, before that software is accepted for filing. It is also useful for tax preparers using that software to send a test transaction, but is not as critical. Business taxpayers are generally encouraged to send a single test return, generally the previous month’s filing, as part of the registration process. If the taxpayer is also paying by EFT, a prenote transaction is generally required. It is not practical, however, to require test transactions from individual filers.
17. Should standard geographic, industry, and other identifying codes recognized as standard approaches be used by tax authorities in their electronic filing programs?
If standards are established in a given technology, then they should be utilized. For example, EDI programs should be designed to comply with mapping conventions established for various tax types, such as Motor Fuel. Where standards are just being developed, such as in XML for Internet use, effort should be made to coordinate with others attempting to use the technology. The TIGERS group serves as a focal point for data standards development. The use of standards is of particular value to software developers and service providers, who may not be able to justify widely differing versions for different jurisdictions.
18. Should tax authorities allow for electronic corrections of previously transmitted electronic return data?
Although this is a desirable goal, at this time few states allow corrected or amended electronic filings.
19. Should tax authorities provide notification of tax rate changes in electronic form?
Yes, with the recommended methodology being a downloadable format on the tax authority’s website. In the EDI environment, transaction set 150 is designed for this purpose, but currently is little used.