In the States, it is tax-filing week. But as the Internal Revenue Service (IRS) prepares to deal with 60 million electronic tax forms (out of a total of 130 million), behind the scenes tax offices are sporting the equivalent of big quiffs, luminous gloves and shoulder-slung keyboards.
A senior IRS official told us that the agency continues to use 1980s technology to keep taxpayers' sensitive tax information safe from malicious hackers and online criminals. It still relies on legacy systems, leased or dial-up connections and a network of closely screened "practitioners" to submit returns, even as banks and brokerage firms have moved aggressively to Internet-based consumer services in recent years, said Terry Lutes, associate chief information officer of the IRS.
"We've got some systems in here that qualify for AARP membership," Lutes said, referring to the American Association of Retired Persons, a lobbying group representing the interests of people over 50. Much of the electronic filing, or "e-filing," system is the same today as in 1986 when it began as a program to create a bridge between early tax preparation software used by professionals and the IRS' back-end systems, many of which date to the early 1960s, he said.
Initially piloted in the Cincinnati area, the program was deployed nationwide soon after, and allowed tax professionals - who prepare around 55 percent of all individual tax returns and 90 percent of all business returns - to submit those forms electronically to the IRS using dial-up connections. Beginning in 1996, the IRS extended the e-filing system, working through personal tax preparation software companies like Intuit, maker of TurboTax, to give non-professionals the ability to file online.
Approximately 166,000 individuals filed electronically in 1996. This year, more than 12 million US taxpayers are expected to do so, an increase of 25 percent over the previous year. However, behind the scenes, little has changed.
"The software companies have put a more glamorous face on e-filing, but most of it works according to the 1986 system," Lutes said. Electronically submitted tax forms do not pass directly into IRS' back-end systems. Instead, they are submitted to the IRS by so-called "transmitters", like Intuit, who sell tax preparation products or services. IRS employees then separately import the returns to back-end servers, Lutes said. "They bring them up to the doors of the facility, and we hook them into our internal systems," he said.
That physical separation, coupled with careful screening of tax professionals who prepare returns and the transmitters that sell electronic filing products, has kept the system secure over the years, Lutes said. "Most of the e-file traffic today is not on the Internet. In order to get access, you have to be approved," he said.
The IRS screens principals in companies who prepare tax forms, assigning e-file user names and passwords only after conducting criminal history and tax compliance checks and verifying the preparer's address, phone number and other identifying information. "You would have to undertake a series of criminal actions to have even a remote chance of getting access to e-file," Lutes said.
While the IRS has so-far kept most of the e-filing system off the public Internet, it is beginning to introduce a secure Internet-based Web portal that will use XML and SOAP envelopes to build bring tax returns directly into the IRS' systems, Lutes said.
The IRS can already accept some corporate tax forms as well as forms for tax exempt organizations through a secure Web infrastructure, and is moving the final 53 corporate tax forms online by the end of the year, he said. In coming years, it will move employment tax returns and common forms like the 1040 to the Web based system, he said.
The modern e-file system was designed to fix some of the failings of the original system and should serve the IRS for another 12 to 20 years, Lutes said. IRS is also working with private companies and representatives from European nations and Canada through the Organization for the Advancement of Structured Information Standards (OASIS) to design XML standards for submitting tax information, he said.
The agency is well aware of the security dangers that accompany opening e-filing to the Internet and is making security a top priority, Lutes said. The IRS is also looking to phase out aged mainframe systems and upgrade around 140,000 workstations from Windows NT to newer versions of Microsoft operating system, he said.
The British tax agency, the Inland Revenue, could certainly learn a few things from the American system. Ever since it decided to introduce a new system in November 1999 with IT supplier EDS, the system has been beset with failures and broken budgets.
The programme was started in January 2000 and given three years until it went live. A year into it and it still hadn't been decided has to implement various elements of the tax system. EDS finally started in April 2001. A year later, it was a year behind. But when the system actually went live in April 2003, 1.1 million claimaints had to be contacted because of problems. Helplines were swamped and it became clear the whole system was unstable.
Internet filings failed, were stopped, reinstated and stopped again when people found they could see other people's tax details online. A third version went live in November 2003, the backlog in tax credits and penion payments was finally dealt with and finally a fourth system is due to go live imminently.
If only it had stuck with 1980s technology, we may never had had the same difficulties.