March 13, 2006 -- (WEB HOST INDUSTRY REVIEW) -- When the US Congress restructured the Internal Revenue Service in 1997, 20 million of the country's income tax returns filed electronically during that tax season. Lawmakers urged the collection agency to cooperate with the private sector to get electronic filings up to 80 percent by 2007.
Whether that target will be hit remains to be seen, but an important milestone was passed in the 2004 tax season when 51.7 percent of all income tax returns were filed electronically. Of the 132.4 million income tax returns received by the IRS last year, 68.5 million were filed electronically, an 11.3 percent increase over the previous year.
The fastest growing segment of electronic filings was in the self-prepared category, where taxpayers turned to Web-based programs to file their own returns. The total do-it-yourself returns for last year numbered 17.1 million, a 17.3 percent yearly increase, and was second only to the volume produced by tax professionals.
The increase in electronic filings is due in large part to the work of service providers such as FileYourTaxes.com (fileyourtaxes.com) and CCH CompleteTax (completetax.com), both based in California. Each of the companies offers its software to consumers online, and each has an affiliate program where resellers can offer tax-filing services to their customers.
FileYourTaxes is the granddaddy of electronic filing sites and traces its beginning to participation in the first online pilot project run by the Internal Revenue Service in 1996. The company is the only one that remains from a handful of participants in that program.
Owner Atilla Taluy says back then he considered investing in switchboard technology to take advantage of business opportunities with the phone-based TeleFile tax filing system. Instead, he made the decision to go with a newer technology just emerging as a business tool - the Internet.
"We thought that at the rate the Internet was growing," says Taluy, "it would potentially be a very prominent business area, and time has proved that we were correct." Indeed he was. The TeleFile market accounted for 3.3 million returns last year, and that was a decline of 12.6 percent from the previous year.
Today, Taluy counts his customers in the hundreds of thousands, and he remains active in efforts to advance his online filing business through involvement in the National Association of Computerized Tax Processors, the Federation of Tax Administrators, and other trade-related efforts.
As a long-time participant and one of the leaders in the field, Taluy offers insight into how the online tax business works and how it is evolving.
Until last year, the public switched telephone lines were the method for transmission of federal tax returns. But for security reasons, the government has since adopted a Web-based SSL telnet system.
Some of the larger states accept direct filing of taxes, but, for the most part, state agencies piggyback on the federal returns. Once the IRS receives a return, it runs a general check for accuracy of name, date of birth and social security number, then strips off the state return and forwards that portion electronically to the appropriate state.
The trend among governmental agencies has been to adopt XML-based formats for their tax reporting forms, and the schemas for those forms are made available to the tax preparation companies.
After company programmers write their own software for gathering data from the taxpayer, those programs face a tough approval process by the agencies.
"We have to go through very stringent testing," says Taluy, "and upon acceptance of our software's capability by the government, we are allowed to file to those agencies. We not only get tested by the federal government, but we also get tested by each state that we file returns to."
The busiest time for tax preparers is between October and mid-January, when they write their software and go through technical testing. After that, it's all about customer service as people file their returns.
The federal and state governments dictate the minimum level of security to which electronic tax preparation firms must adhere.
Among the federal laws affecting preparers is the Gramm-Leach-Bliley Act, which defines the tax industry as a financial institution and requires preparers to provide security and protect non-public information. They must also be aware of the Sarbanes Oxley Act that governs activities of publicly traded corporations, since their clients may fall into that category.
The online tax business is always changing because governments are always writing new rules. On December 21, 2005, for instance, the Gulf Opportunity Zone Act became law to provide tax relief following the devastation from hurricanes along the Gulf Coast. Among the numerous tax breaks and incentives allowed under the law are larger limits for corporate charitable contributions to aid hurricane victims.
And such changes must be programmed into tax software for use during the new tax filing season.
Debra Gray, consumer product manager of do-it-yourself filing software company CCH CompleteTax, offers some idea of the painstaking care that goes into managing the company's Torrance, California data center and supporting a consumer tax filing system.
A 24-hour guard patrols the data center and access to the server room is restricted. Entry can be gained only with a company badge and matching fingerprints through a biometrics system.
The data center employs via dual-homed Internet connections through separate routers from two different ISPs. Traffic shapers in the paths to the Internet control bandwidth, which can be increased or decreased depending on processing needs, Gray says.
The company employs T1 point-to-point circuits to connect to the IRS and all state filing sites. The connections to the IRS were built for the beginning of this year's filing season, January 13. The method of connection to state sites varies depending on individual state requirements, and may include dial-up, Web pages and secure FTP and SSH.
CompleteTax uses off-site backup and disaster recovery storage. Gray would not say specifically where the services were located, but said they were outside California.
"CCH takes several steps to ensure current backups are maintained for client data files," she says. "Servers are clustered allowing us to sustain both hardware and software failures and still provide customer access without data loss."
A Storage Area Network provides SQL storage with mirroring at the hardware level. And SQL transaction log copies of all critical databases are copied to disk several times daily for roll-forward recovery. Data is replicated to an alternate disaster recovery storage site and tapes are rotated to an off-site secure facility to provide geographic protection of data.
Both SAN and Network Attached Storage devices are used for data storage. And the company says it has added significant new space to meet projections for the 2005 and 2006 filing seasons. Space is monitored year-round and additional storage is readily available when needed.
The company uses a multi-tier secure architecture - employing firewalls, encryption, password authentication, anti-virus software, network monitoring, and intrusion detection software - to separate data from unauthorized external sources.
"As a standard security policy, we do not disclose specific product information, versions or configuration information that is deployed in our data center to ensure security safeguards are maintained," Gray says.
Excluding data center IT operations, there are approximately 20 full-time developers, testers and support staff dedicated to CompleteTax. During peak filing season, part-time employees are hired for QA testing and support.
Although CCH CompleteTax is a private company and isn't directly governed by the Sarbanes Oxley Act, says Gray, the company recognizes that many of its customers are publicly traded and works to accommodate their needs.
To businesses that want to resell the service under a revenue sharing plan, the CompleteTax Affiliate Program offers two versions, standard and private label. The standard version is co-branded and carries the reseller's logo along with the CompleteTax logo. CCH continues to host the site with a unique tracking url.
The private label version can be customized with any of six color schemes for a Web site and carries the reseller's logo. The CompleteTax logo is not visible, except in the user agreement and the privacy policy.
An administrative toolkit provides direct links and html information so affiliates can upload that data themselves. But Web analysts are available to help customers with any problems.
Each product is sold under a yearly licensing fee arrangement, with the basic pricing being $195 for the standard version and $995 for the private label. The revenue share for the reseller can range from 25 to 50 percent of the taxpayer's fee.
In addition to marketing CompleteTax to consumers, Gray works with the business development manager to sell strategic relationships to affiliates. The affiliate program uses the ProSystem fx suite of products that is designed for tax and accounting professionals.
"We market to some of our professional customers saying if they'd like to get access to the Internet and draw more customers in that way, then this would be a perfect business opportunity," says Gray. "They can market to customers who may not want to pay an accountant, or they may just want to create a different revenue source."
The company offers e-mail support for the end user and also has customer support for its affiliates.
FileYourTaxes offers two levels of marketing for those companies wanting to grab a piece of the tax filing business.
It operates an affiliate program through which any company with a large amount of traffic, such as a financial institution, can place a link on its Web page offering visitors the opportunity to have their taxes done.
The link can either refer the customer to FileYourTaxes.com or a private label site with the customer's logo. In the latter case, FileYourTaxes does the collection and payment transactions, and affiliates are paid a percentage of the fee.
FileYourTaxes controls the payment and pricing, with a basic 1040 starting at $19.95.
In its other level of reseller service, FileYourTaxes licenses its back end system, the tax and payment engines, to an affiliate who can do whatever they want with it. The price starts at $50,000.
"If they are going to do 100,000 to 200,000 returns and they want to sell some ancillary products, this becomes a very inexpensive way to go with it," Taluy says.
The FileYourTaxes system is fully automated, and a customer who files a return through the site get notifications via e-mail within 24 hours whether it was accepted or rejected. If the IRS rejects the return, the notification e-mail will include instructions on why the return was rejected and what needs to be done to resubmit it with the proper information.
The attraction of filing online is the speed with which refunds are paid. For a customer requesting direct deposit, today's IRS rules say the money will be in the taxpayer's bank account at 12:01 a.m. the second Friday after the Thursday on which the return was accepted – or less than two weeks.
That's one of the things that makes the future of online filing bright. And the prospects for the future, along with the progress to date, also validate the vision that Taluy had during that pilot project in 1996.
"The trend is that we are going to have more and more returns," says Tulay, "not only on the IRS side, but probably on the Social Security side and from other parts of the government that are receiving data and monies from the public electronically."
