Does Paperless Mean Painless?
Electronic Tax Return Filing in the New Millenium

Bonnie M. Wongtrakool

On July 22, 1998, President Clinton signed the Internal Revenue Service Restructuring and Reform Act of 1998 ("RRA") into law. 1 RRA addresses a wide range of issues, including executive branch governance and management of the IRS, personnel staffing, customer service and compliance, technology modernization, tax law simplification, and taxpayer rights, with the goal of modernizing and improving taxpayer services. 2 These ideas originated from a report entitled "A Vision for a New IRS," which had been released by the National Commission on Restructuring the Internal Revenue Service (the "Commission") on June 25, 1997, one year prior to RRA’s enactment. 3 The Commission’s recommendations became the basis for H.R. 2676, RRA’s predecessor, which the House passed by a vote of 426 to 4 on November 5, 1997. 4 As in the House, the bill enjoyed strong bipartisan support in the Senate, which passed the currently enacted version by a vote of 96 to 2 on July 9, 1998. 5

One of the major objectives of RRA is to promote electronic filing. The RRA sets a long term goal for the IRS to increase the percentage of returns filed electronically from its current level of 20% to 80% by the year 2007. 6 The IRS, which has been offering an electronic filing option to a growing number of taxpayers since 1986, supports this goal largely because of its demonstrated potential to reduce errors, decrease costs, and expedite the tax filing process. 7 The initial error rate in processing tax returns is less than 1% for electronic filing, compared to approximately 20% for paper filing; refunds on electronic returns are returned in two weeks, rather than six weeks for paper returns; and service center costs to process electronic returns are five to 40% lower than costs to process paper returns. 8

While its past success with electronic filing is encouraging, the IRS must accomplish three major tasks as it continues to move towards a paperless tax system. First, the IRS must remove the last pieces of paper from the electronic filing process. 9 Previous to amendment by RRA, Internal Revenue Code Section 6061 stated that tax forms be signed as required by the Secretary of the Treasury. 10 Thus, a taxpayer who elected to file electronically still had to file a paper Form 8453, which contained her signature information. 11 Under Section 2003(a) of RRA, the IRS must develop procedures for the acceptance of digital or electronic signatures, thereby eliminating by the year 2007 the need to file any paper form, and in the interim, may provide for alternative methods of signing or may waive the signature requirement. 12 Second, RRA requires the IRS to develop procedures that allow an electronic filer to review her account electronically, without compromising taxpayer privacy, by the year 2006. 13 Third, the IRS must install a return-free tax system under which individuals may pay taxes without filing a return for taxable years beginning after 2007. 14

This paper will examine plans for a paperless tax system from the perspectives of privacy, implementation, and fairness. 15 Part I will discuss privacy concerns raised by RRA. 16 Part II will explore fairness issues, including possible discrimination between those with Internet access and those without, and unintended adverse market effects that may occur during the disintermediation of the tax filing industry. Part III will address the issues related to implementation, namely, the challenge of spreading Internet access and the possibility that digitizing could lead to a more complex Internal Revenue Code. Finally, Part IV will conclude that a paperless tax system, if implemented intelligently, has the potential to reduce cost and increase efficiency, without unduly compromising values of privacy, administrability, and equity.

I. Technology and Taxpayer Privacy

As a result of RRA, in a future world, opportunities to correspond with the IRS electronically will be greatly expanded. Along with this growth in opportunity comes added concern about the government’s ability to protect the privacy of individuals by maintaining information in a secure way. RRA Sections 2003 and 2005 set two mandates that in particular may impact taxpayer privacy. The latter provision requires the IRS to make taxpayer records accessible electronically. 17 The former provision requires the IRS to accept a taxpayer’s digital signature in lieu of a handwritten signature when filing a return or when requesting or remitting taxpayer information. 18

A. Privacy-Related Fears

Because of the possibility of network attack and the impossibility of designing a foolproof encryption process, placing taxpayer information online, as required by RRA Section 2005, poses a legitimate risk to privacy. Computer networks cannot guarantee absolute security. There are numerous examples of system assault by both insiders, persons that work for legitimate entities, and outsiders, persons that break into the computer system operated by legitimate entities. 19 Indeed, the security of IRS operations, both its networks carrying electronic information and warehouses storing tangible information, has been criticized in the past. 20

The adoption of digital signature technology may further compromise taxpayer privacy. From one viewpoint, digital signatures "represent one of the most explosive clusters of privacy-threatening technologies, motivations, and processes that has yet been invented." ;21 In simplified terms, a digital signature is an encrypted version of a message, to which a digest containing a "hash" resulting from encryption, or a fingerprint of the message, is attached. 22 The encryption is performed with the signer’s private key, so that the hash result is derived from and unique to both the signed message and the private key. 23 The digital signature and identity of the owner is verified by a digital certificate, which is an electronic format of a physical certificate such as a passport. 24 This digital signature and certification process creates a repository of vital information and a library of aliases for wrongdoers to discover. Because taxpayer records provide a concise summary of personal and financial information, an electronic tax system may merit heightened concern. 25

The debate surrounding the Access Certificates for Electronic Services ("ACES") initiative reflects these privacy concerns. The goal of the ACES project is to create a certificate authority that verifies the identities of computer users so that they might access private information or transact business with government agencies electronically, including checking their tax records. 26 Critics initially resisted ACES as a "national identification card" because they were concerned about the government amassing a centralized bank of information, "escalating the collection and centralization of data about an individual’s identity and activities, potentially increasing government intervention in our daily lives." 27 ACES representatives responded that the certificates would be managed by several vendors and that citizens would be able to use different certificates for different purposes, so that there would not be only one warehouse for record keeping. 28 Still, the fear remains that any government involvement in the digital certification process is undesirable because it centralizes personal information, and independent contracting has been strongly urged by privacy advocates. 29

B. An Assessment of Privacy Concerns

In evaluating the risks posed by the RRA provisions, one must consider the risks posed by the current hybrid system of tax information management. It is important to realize that a great deal of taxpayer information is already accessible through computer networks. Although only 16% of returns filed for the tax year 1997 and received by the end of April 1997 were submitted electronically (excluding the 5% which were telefiled), 67% of these returns were prepared on a computer. 30 Thus, the risk of placing taxpayer information online already exists; conceivably, a hacker could target the computer systems of an online electronic tax filing service today, just as she could target the IRS network of the future.

The reasonableness of RRA’s perceived threat to taxpayer privacy also depends on how technology is used, rather than the mere existence of its use. For example, the Social Security Administration’s ("SSA") past experience operating an Internet site provides models of both poorly designed and well designed access systems. The SSA’s initial attempt in March 1997 to provide personal earnings and benefit estimate statements ("PEBES") on the Web was curtailed after privacy experts criticized its security as inadequate. In order to access the original site, users had to supply five items of personal information: name, address, telephone number, place of birth, Social Security number and mother’s maiden name. Because many of these items were easily obtainable from public databases, it could not effectively prevent people from obtaining confidential information about others, including salary record by year, Social Security taxes paid, and estimated retirement and disability benefits. 31 After holding public forums and consulting with technology and policy analysts, SSA reopened the PEBES Web site in September 1997, earning the approval of privacy advocates. Its new system minimized threats to privacy by revising the content of information provided on the site and by requiring a password (previously delivered via email) in addition to the original five items for access to personal information at the site. 32

Moreover, some privacy advocates argue that the access mandated by Section 2005 is actually necessary to protect taxpayer privacy. 33 Taxpayers are entitled to know exactly what quantity and quality of personal information government files contain. At the same time, RRA requires the IRS to make taxpayer information available for review "only if all necessary safeguards to ensure the privacy of such account information are in place." 34 Thus, RRA recognizes that taxpayers cannot be given access without providing a secure environment for that access. 35 The IRS itself has launched a massive upgrade of its facilities in conjunction with the private sector, with the goal of "creating new IRS technology systems that will improve taxpayer service, add new security features and carry the agency into the new century." 36 If systems are well designed and well maintained, the IRS will have advanced RRA’s promise to protect taxpayer privacy.

In addition, the IRS is not limited to any particular technology by RRA, which provides that "The Secretary shall develop procedures for the acceptance of signatures in digital or other electronic form." 37 The IRS is thus exploring a range of alternatives to handwritten signatures. For example, it is now testing the use of passwords to replace paper Form 8453, which contains a taxpayer’s signature information. 38 In 1999, the IRS will conduct two signature pilot tests, the "On-Line Pilot with Taxpayers" and the "Practitioner Pilot with Tax Preparers." The former program will mail an e-file Customer Number ("ECN") to any person who files her own taxes using IRS-approved PC software and whose taxable income is comprised only of wages, dividends, and interest. Similarly, the latter program provides a Personal Identification Number ("PIN") to any person with similar income components but who files taxes using certain paid preparers. 39

Although using a password may seem radically different from signing on the dotted line, it should pose minimal additional risk, because there is little danger that someone hostile to a taxpayer would file a fraudulent return using her ECN or PIN. 40 As additional reassurance, in the event that a vengeful divorcee or embezzling accountant does abuse the alternative signature, RRA places the burden on the government to prove that the signature truly represents the identified taxpayer. 41

Beyond password-based systems, the IRS is exploring the role that technologies such as digital certificates and biometric signatures will play in the authentication of returns. Although it has not determined whether it will ultimately operate the PKI or outsource it to third party providers, the IRS considers development of a public key infrastructure ("PKI"), which is a system to manage the signatures, to be an essential step in the development of the procedures required by RRA. 42 Designing those procedures presents a more challenging set of issues than the password systems, for example, what levels of security and authentication should be required and how to apportion liability when the authentication process is adulterated. 43

Because there are no models for this system, some caution may be justified. However, since the risks of the process are known, it should be possible to design a system that maintains taxpayer privacy. 44 This can be accomplished by upholding operating standards for the Certification Authority ("CA"), which is, in basic terms, the entity responsible for the verification of the taxpayer’s identity. 45 The CA maintains a directory of all of its subscribers and guarantees the accuracy of these listings. 46 The CA thereby plays a vital role in the prevention of "spoofing," the creation of a bogus public key that allows a wrongdoer to assume another’s identity." 47 Typical problems that Certification Authorities encounter include loss of records, inaccurate or fraudulent records, and insecure encryption software. 48 As long as the CA adheres to a suitable verification process and invests resources in the integrity and protection of its databases, it can minimize the risk of identity fraud and credit fraud. 49

Although the preceding suggestions refer to the Certification Authority in the singular, the IRS could further protect privacy by giving taxpayers the option to choose among different Certificate Authorities and certification technologies to the extent practicable. In addition, the IRS could involve multiple entities in the storage and backup of taxpayers’ private keys. By decentralizing the certification process, these actions can decrease the risk of unauthorized access. 50

The use of digital signatures in tax administration, when considered discretely, is not central to any privacy concerns. Rather, it is the interaction of the electronic tax system with other online systems that could compromise taxpayer privacy. Different levels of security and disclosure are appropriate for different purposes. Taxpayer privacy will be more secure if the IRS does not sign on to a "one size-fits-all" project such as ACES. 51 Unfortunately, there will be efficiency-driven reasons to use a single certification authority. Not only would a single-CA system simplify the management of multiple government agencies’ correspondence with citizens, it would also be less costly. 52 However, the IRS should recognize the value of decentralization for both privacy and competitive reasons (discussed below). 53

II. Fairness Issues

RRA states that "paperless filing should be the preferred and most convenient means of filing Federal tax and information returns" for American taxpayers. 54 This goal applies to all return filers, regardless of income or form of return filed. On the one hand, RRA seems to aspire towards horizontal equity, because it seeks to benefit taxpayers across all groups. On the other hand, it does not address the principles of vertical equity and distributive justice on which current tax law is predicated. 55

RRA also mandates the IRS to "cooperate with and encourage the private sector by encouraging competition to increase electronic filing of such returns." 56 Partnerships with industry could not only help the IRS to reach RRA’s goals but also help achieve them more quickly. Conversely, government intervention could hinder rather than help market progress. These statements and their implications invite consideration from a fairness perspective.

A. Widening the Gap Between the Haves and the Have-Nots

At least in the short term, the benefits of the online tax system may not reach the entire population. Although there is no stereotypical user, factors such as income, education, race, and gender currently divide Internet users from non-users. According to a Business Week survey, out of the 40 million people who used the Internet in 1997, over 42% of them had household incomes over $50,000. 57 In comparison, 78% of returns were filed in 1996 by people with adjusted gross incomes under $50,000. 58 The Business Week survey also found that 73% of Internet users in 1997 have at least a college degree, only 6% were Hispanic or African-American, and 41% were women. 59 Meanwhile, the Census Bureau reports that less than 25% of adults age 25 and older have completed college, 23% of the total population is black or Hispanic, and women constitute 51% of the population. 60 These disparities between user and non-user profiles suggest that certain socioeconomic groups will benefit more directly from RRA than other groups.

In addition, RRA makes specific instructions that may create a discriminatory structure, with an impact that can be measured in time value rather than current dollars. For example, taxpayers who file electronically receive their refunds in two weeks rather than six. 61 Also, RRA Section 2002 extends the due date for electronic filers of information returns from February 28 to March 31 of the year following the calendar year to which the return relates. 62

Provisions considered during drafting but not ultimately included in RRA provide other illustrations of potential discrimination. One idea that was proposed was to give electronic filers a 30-day extension as an incentive for taxpayers to file electronically. 63 Another idea was to increase electronic filing was to decrease the audit exposure period for electronic filers from 36 to 24 months. Opponents argued that although such provisions might appeal to high-income, balance-due taxpayers, they would do so at the cost of middle and lower-income refund taxpayers, whose taxes might be increased to compensate for the resulting loss of tax revenue. 64

RRA also sanctions a two-tiered tax system that discriminates between those who file electronically and those who file conventionally. RRA Section 2001(f)(2) specifically authorizes the Secretary to implement procedures to provide for the payment of appropriate incentives for electronically filed returns. 65 Essentially, this would be equivalent to giving a tax credit to those who file electronically, at the expense of those who file tangible tax returns.

Furthermore, if and when the IRS launches a digital certification system, funding that system presents another veiled threat to the progressivity of the Internal Revenue Code. To illustrate, under the ACES model, digital certificates would be free to electronic filers, and a vendor would be paid each time a certificate was used in a transaction with the IRS Web site. 66 Presumably, certificate users would be those with access to technology, but fees for their use of the certificates would be spread across the entire tax base, including those without access to technology. If the certificate user tends to be higher-income like the online user, this would result in a regressive effect, with the lower-income taxpayers subsidizing the higher-income electronic filers.

There are several counterarguments to these fairness-related concerns. First, policymakers to date have demonstrated awareness of these issues. For example, in 1997, the IRS issued a Request for a Proposal (RFP) to pay electronic tax return transmitters $3 for every return they filed electronically. Tax software developers and tax practitioners argued that this strategy was assured neither to increase electronic filing nor to route the subsidy to the intended recipient - the taxpayer – and the proposal was never enacted. Second, even though many taxpayers do not yet have Internet access, they still can take advantage of the option to electronically file by filing through a tax preparer. Indeed, the typical electronic filer historically has been a lower-income, refund due taxpayer attracted by the prospect of a quick return. 67 Third, as tax software developers offer incentives to taxpayers in order to secure market share, competition in the private sector should push down the costs of electronic filing. 68 Fourth, community service programs such as Volunteer Income Tax Assistance ("VITA") and Tax Counseling for the Elderly ("TCE") can assist in providing electronic filing to taxpayers who would not otherwise take advantage of the option. 69

Still, the tension between encouraging electronic filing and maintaining neutrality between online and offline taxpayers remains. Incentive programs offered by software developers will not reach the taxpayers who do not have Internet access and who will have to use tax preparers in order to file electronically. Some tax preparers absorb the costs of transmitting returns electronically, compensating for these costs by providing and charging for additional services, while other tax preparers charge the taxpayer for the cost directly. 70 If a lower-income taxpayer who seeks an expedient refund electronically files through the latter group of preparers, her refund is decreased and her tax rate effectively increased.

B. Unintended Market Effects

The rise of the Internet has already transformed the way that business is transacted in industries such as securities, retail, and banking. 71 Some refer to this trend - revision of the role of the middleman - as disintermediation. 72 If the IRS is truly to succeed in its quest to make the tax system paperless, the structure of the tax filing industry is due to experience similar change. The parties at stake include tax practitioners, tax preparers, and computerized tax software manufacturers. As has occurred in other industries, disintermediation is likely to affect one or more of these parties. The issue, then, is not whether disintermediation will occur, but whether the IRS’s involvement will interfere in the progress of technology.

There is little danger that government collaboration with tax practitioners and preparers will impede the progress of technology. As the users, rather than the creators, of technology, practitioners epitomize the middleman referred to in disintermediation. Should their role evolve, this would be a neutral and unsurprising development 73.

Rather, the IRS should be concerned with the effects of endorsing particular products or technologies. The IRS has already begun to work with the private sector to increase electronic filing. For example, it recently announced several partnerships with private firms beginning in 1999, including two agreements that allow taxpayers who file electronically to pay federal income taxes by credit card. 74 Ironically, government programs such as these run the danger of inadvertently stifling commercial development, by interfering with the market forces that RRA encourages it to foster. 75 A fine line separates advocating the use of technology, on the one hand, and on the other, unfairly favoring particular technologies, industries, or certificate providers at the expense of further development. Tax preparation software manufacturers, for example, have complained that the provision of electronic forms by the IRS puts the agency in direct competition with commercial electronic tax products. 76 Also, skeptics of the government’s plan to develop digital signature technology fear that the result will be "a single government approved identity verification system undermining both individual privacy and the healthy development of the Web." 77

The government should remain aware of the possibility that its involvement could adversely affect the tax filing industry. Specifically, it should appraise its choices in the context of three factors: technical interrelatedness, economies of scale, and quasi-irreversibility of investment. The first refers to the need for system compatibility between hardware and software, the second to the decrease in user costs as a system gains acceptance, and the third to the lock-in effect that results from high software costs. These factors must be considered because their presence indicates the potential for entrenchment of inefficient technology. 78

With respect to the tax software market, these factors are not alarmingly present. Software developers can design software that is compatible with IRS infrastructure at a reasonable cost, as demonstrated by the wide variety of developers involved in the IRS’s 1999 "On-line Pilot with Taxpayers." 79 Similarly, neither economies of scale nor the lock-in effect are of great concern because consumers enjoy an unrestricted option to switch between software. In general, the government appears to be on the right track with software developers. As long as the government continues along this path, it has little risk of upsetting the competitive balance.

A similar analysis suggests more caution when dealing with digital signature technology. The second and third factors of the analysis – economies of scale and the lock-in effect – cannot be ignored. Digital certification systems are generally expensive to implement, since the Certification Authority must not only handle the verification process but must maintain a current database of private-public key pairs and corresponding subscriber identity information. 80 Thus, efficiency and administrability considerations favor a structure with fewer rather than a greater number of certification authorities. Because the fixed costs of providing large-scale services are high and the additional cost per user is low, there may be a natural tendency towards a market with only a few large Certification Authorities.81 In addition, as more federal agencies begin to offer services online, the government may find it cheaper and less confusing to make all transactions through one Certification Authority. Despite the privacy concerns of some groups, Internet users themselves may even prefer to use a single CA not only for all correspondence with the government but also with private third parties, including electronic commerce, because of the convenience and simplicity.82

Nevertheless, while the government is trying to develop a certification model, the IRS should resist these forces. It should not at this stage limit taxpayers to one digital signature standard or provider.83 One could argue that allowing consumers to choose their own certificate providers faces interoperability problems, a hurdle that programmers are currently trying to surmount.84 One could also argue that even if the IRS uses multiple contractors, the public key infrastructure requires that there still be some degree of centralization.85 However, by doing what it can to maintain competition, which at a minimum would be using multiple contractors, the government can minimize the danger of entrenching the "wrong" technology. In the context of an online tax system, where sensitive personal data is required to be collected and verified, the need for accuracy and security is particularly important.

III. Administrability of the Conversion

RRA sets as a goal for the IRS to file at least 80% of all returns electronically by the year 2007, and to the extent practicable, to file electronically 100% of all computer-prepared returns after the year 2001. 86 Proponents of RRA have emphasized that electronic tax filing may significantly reduce costs and errors. 87 The initial error rate in processing tax returns is less than 1% for electronic filing, compared to approximately 20% for paper filing. 88 And service center-related costs to process an electronically filed Form 1040 return are $1.90, compared to $3.25 for a paper Form 1040 tax return. 89 Yet these appealing statistics may be offset by factors that complicate rather than simplify the tax system.

A. Increasing Internet Access

First, RRA does not address how to increase the number of electronic filings when not all taxpayers have access to the Internet. Originally, 80% had been drafted as a mandate rather than a goal. 90 Parties such as the Treasury successfully argued that the 80% goal should be flexible rather than mandated, because meeting the goal could unduly strain fiscal resources if it proved to be unreasonable. 91 One who peruses statistics on today’s Internet user could well doubt the feasibility of this goal. 92 Presently, only 37% of Americans have Internet access. 93 Of those with access, only 25% of them have access at home, and almost half of those without home Internet access have no plans to add it. 94

At the same time, a variety of consultants have issued optimistic prognostications on the growth of Internet use, which may naturally be followed by a growth in electronic tax filing. 95 Furthermore, a significant portion of returns are already being filed electronically – almost 20% of returns filed in 1998, up from 16% in 1997. 96 In addition, increasing individual Internet access may not be wholly relevant to increasing electronic filing, since half of taxpayers do not file their own taxes but instead use tax preparers. Tax preparers, over 85% of whom used computers to prepare returns in 1997, have expressed enthusiasm for electronic filing and would be responsive to a campaign to promote a paperless system. 97 Another five percent of taxpayers choose to Telefile. 98 The 80% goal thus appears quite attainable, considering that an electronic filing campaign can effectively target a large percentage of taxpayers. 99

Regardless, RRA’s 80% benchmark does at least bear on the issue of how to spread Internet use, and the corresponding question of how to fund it. 100 These issues will no doubt be fueled by much debate and discussion, as they are pertinent to many groups, aside from the IRS and drafters of RRA. Although the answers to these questions are beyond the scope of this paper, one potential solution is to place terminals in public locations such as libraries and postal offices. 101

B. Increasing the Complexity of the Internal Revenue Code

Second, RRA could lead to an increase in the administrability and complexity of the Internal Revenue Code. At a minimum, the IRS will be burdened with the additional work of processing electronic claims separately from paper claims during the transition from paper to electronic tax filing. 102 Beyond this, there is still a possibility that the Code itself could become more complex. Taxpayers who perceive the tax system as being complex already may be surprised to learn that the IRS uses only 40% of the data that the Code requires taxpayers to submit. This low utilization rate is largely a result of the limited capability of the IRS computers, which were designed in the 1960’s, and the difficulty of transcribing paper tax returns into electronic format. If taxpayer information is transmitted electronically, it increases the potential for increasingly opaque tax administration. 103

Technology already exists allowing taxpayers to file taxes without leaving their desktops; for example, taxpayers who use Intuit TurboTax for MacInTax software can file electronically and then pay electronically using any NOVUS credit card. 104 As software like TurboTax, which can perform calculations quickly and effortlessly, becomes more available, Congress could create more Byzantine regulations without having to worry that tax preparers would be unable to interpret them, while taxpayers would have less incentive to question calculations that are done by a machine. 105

The return-free system that RRA requires the IRS to create could lead to an even more extreme scenario. 106 In this situation, taxpayers may be able to elect a return-free system whereby they do not have to file taxes at all because the IRS will automatically compute them. These taxpayers, who presumably chose the return-free system for reasons of convenience, could be presented with a tax bill or refund which was the output of an incomprehensible formula. Should they later need to contest their taxes, these taxpayers would be faced with the severe inconvenience of untangling the complex machinations of the system.

There are two safeguards against an increase in tax complexity. First, RRA requires development of a return-free tax system "for appropriate individuals" only. 107 Currently, this group would be limited to taxpayers who receive only wages, interest, and dividends, because the corresponding W-2, 1099-INT, and 1099-DIV forms may be remitted electronically. Even if more obscure information returns become electronically fileable, the group eligible for the return-free system will remain selective. Beginning in the year 2000, the Secretary of the Treasury must report annually to the House Ways and Means Committee on the types of taxpayers for whom a return-free option would be "appropriate" and the related costs. 108 Therefore, expansion of the scope of the RRA provision beyond simple tax returns, which was not the intention of the drafters, is an unlikely possibility. 109

Second, RRA takes the unprecedented step of giving the IRS a formal role in minimizing the complexity of the Code. Each year after 1998, the Commissioner will present to the House Ways and Means and Senate Finance Committees an analysis of the sources of complexity in the Code and recommendations to reduce its complexity, including repeal or modification of Code provisions. 110 This dialogue between Congress and IRS should provide resistance to the adoption of more complex tax law.

Moreover, electronic filing itself provides little potential for increased complexity. Taxes have become more complicated in past years because of the myriad of tax credits and accompanying phaseouts peppered throughout the Code. 111 The availability of software that can easily and accurately make these computations, rather than the implementation of electronic filing, has facilitated the implementation of these provisions. As noted earlier, tax preparation software has already gained wide acceptance by today’s taxpayers and tax preparers; over 65% of tax returns filed are electronically prepared. 112 Because the process of electronic filing is decoupled from the process of computing tax liability, shifting to a paperless tax system is unlikely to result in radical change.

IV. Conclusion: Progress, Not Merely a Change in Process

A paperless tax system holds the promise of convenience, efficiency, and accuracy unparalleled by the current system. At the same time, the IRS’s goal should be not just to increase electronic tax filing but to develop an online tax system that maintains taxpayer confidentiality while upholding principles of neutrality and progressivity. These issues are pertinent whether or not the IRS is successful in getting the majority of taxpayers to file online. 113

In terms of administrability, RRA’s 80% goal does appear realistically attainable. Over half of the returns filed every year are prepared by tax professionals, and nearly all in this subset are prepared using a computer, providing a well-defined market for the IRS to channel towards electronic filing. Tax preparers, who have expressed frustration over limitations on their ability to file electronically in the pre-RRA system, are eager to cooperate with the IRS, and software developers, who see taxpayers as consumers with the lucrative potential, will provide additional assistance by creating innovative, user-friendly programs and offering consumers cost-based incentives.

Once achieved, a paperless tax system should not facilitate an increase in the complexity of tax law. Complexity results from the legislative process of drafting tax law, which is independent of the process of administering tax law. If complexity is attributable to any aspect of the digitization process, it is attributable to the use of tax preparation software, which is capable of computing tax pursuant to complicated provisions.

Nor should a paperless tax system pose added threat to taxpayer privacy. Taxpayers are already vulnerable to invasion of privacy in today’s system, in which all taxpayer data is eventually placed on the IRS’s network, even if only a fraction travels there via modem. Given secure technology and well designed procedures, tomorrow’s taxpayers should be able to submit and request information without increased anxiety. Likewise, the IRS’s acceptance of alternative signatures should not make taxpayers any more susceptible to fraudulent returns than the present handwritten system. The law will also treat an electronic signature just as it would a handwritten one, placing the burden on the government to prove its validity.

However, RRA does place fairness values in some jeopardy. Because not all taxpayers have Internet access, not all taxpayers will bear the same costs or reap the same benefits from a paperless system. Also, the government’s efforts to work with the private sector to encourage electronic filing may misintentionally stifle competition.

To avoid these problems, the system should draw on the resources of the private sector by opening all markets to competition as fully as possible, particularly when dealing with electronic signature technology. Innovations in technology and competitive promotions by the private sector can spread the advantages of electronic filing across a more diverse group of taxpayers. Open competition will also avoid privacy problems that would stem from not the electronic tax system itself but the temptation for the federal administration to centralize its digital operations.

In summary, the benefits of moving to an electronic tax system outweigh the costs. Although the conversion to the system will not be carefree, it is administrable and maintains privacy, in addition to being less costly and more accurate. The resolution of these issues raised by plans for an electronic tax system are particularly important because of the general trend for government agencies to move activities online. For example, the Department of Treasury is now piloting the use of PKI tools to interact securely with Treasury contractors over the Internet. The Lawrence Livermore National Laboratory of the Department of Energy ("DOE") is building a PKI for its which can interface with other DOE laboratories, facilities, and vendors. And the Department of Defense ("DOD") is creating a Defense Travel Management System in which DOD travelers will utilize digital signatures issued by the DOD’s PKI to make travel and reimbursement arrangements. 114 As it breaks ground in the world of digital operations, the IRS can and should serve as a model for other federal agencies seeking to transform government bureaucracies into cyberservice providers.





(a) IN GENERAL.--It is the policy of Congress that--

    1. paperless filing should be the preferred and most convenient means of filing Federal tax and information returns;
    2. it should be the goal of the Internal Revenue Service to have at least 80 percent of all such returns filed electronically by the year 2007; and
    3. the Internal Revenue Service should cooperate with and encourage the private sector by encouraging competition to increase electronic filing of such returns.


  1. IN GENERAL.--Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury or the Secretary's delegate (hereafter in this section referred to as the "Secretary') shall establish a plan to eliminate barriers, provide incentives, and use competitive market forces to increase electronic filing gradually over the next 10 years while maintaining processing times for paper returns at 40 days. To the extent practicable, such plan shall provide that all returns prepared electronically for taxable years beginning after 2001 shall be filed electronically.
  2. ELECTRONIC COMMERCE ADVISORY GROUP.--To ensure that the Secretary receives input from the private sector in the development and implementation of the plan required by paragraph (1), the Secretary shall convene an electronic commerce advisory group to include representatives from the small business community and from the tax practitioner, preparer, and computerized tax processor communities and other representatives from the electronic filing industry.

(c) PROMOTION OF ELECTRONIC FILING AND INCENTIVES.--Section 6011 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:


"(1) IN GENERAL.--The Secretary is authorized to promote the benefits of and encourage the use of electronic tax administration programs, as they become available, through the use of mass communications and other means.

"(2) INCENTIVES.--The Secretary may implement procedures to provide for the payment of appropriate incentives for electronically filed returns.".

(d) ANNUAL REPORTS.--Not later than June 30 of each calendar year after 1998, the Chairperson of the Internal Revenue Service Oversight Board, the Secretary of the Treasury, and the Chairperson of the electronic commerce advisory group established under subsection (b)(2) shall report to the Committees on Ways and Means, Appropriations, Government Reform and Oversight, and Small Business of the House of Representatives and the Committees on Finance, Appropriations, Governmental Affairs, and Small Business of the Senate on--

(1) the progress of the Internal Revenue Service in meeting the goal of receiving electronically 80 percent of tax and information returns by 2007;

(2) the status of the plan required by subsection (b);

(3) the legislative changes necessary to assist the Internal Revenue Service in meeting such goal; and

(4) the effects on small businesses and the self-employed of electronically filing tax and information returns.


(a) INFORMATION RETURNS FILED ELECTRONICALLY.--Section 6071 (relating to time for filing returns and other documents) is amended by redesignating subsection (b) as subsection (c) and by inserting after subsection (a) the following new subsection:

"(b) ELECTRONICALLY FILED INFORMATION RETURNS.--Returns made under subparts B and C of part III of this subchapter which are filed electronically shall be filed on or before March 31 of the year following the calendar year to which such returns relate.".


(1) IN GENERAL.--The Secretary of the Treasury shall conduct a study evaluating the effect of extending the deadline for providing statements to persons with respect to whom information is required to be furnished under subparts B and C of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 (other than section 6051 of such Code) from January 31 to February 15 of the year in which the return to which the statement relates is required to be filed.

(2) REPORT.--Not later than June 30, 1999, the Secretary of the Treasury shall submit a report on the study under paragraph (1) to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.

(c) EFFECTIVE DATE.--The amendment made by subsection (a) shall apply to returns required to be filed after December 31, 1999.



(a) IN GENERAL.--Section 6061 (relating to signing of returns and other documents) is amended--

(1) by striking "Except as otherwise provided by" and inserting the following:

"(a) GENERAL RULE.--Except as otherwise provided by subsection (b) and"; and

(2) by adding at the end the following new subsection:


"(1) IN GENERAL.--The Secretary shall develop procedures for the acceptance of signatures in digital or other electronic form. Until such time as such procedures are in place, the Secretary may--

"(A) waive the requirement of a signature for; or

"(B) provide for alternative methods of signing or subscribing, a particular type or class of return, declaration, statement, or other document required or permitted to be made or written under internal revenue laws and regulations.

"(2) TREATMENT OF ALTERNATIVE METHODS.--Notwithstanding any other provision of law, any return, declaration, statement, or other document filed and verified, signed, or subscribed under any method adopted under paragraph (1)(B) shall be treated for all purposes (both civil and criminal, including penalties for perjury) in the same manner as though signed or subscribed.

"(3) PUBLISHED GUIDANCE.--The Secretary shall publish guidance as appropriate to define and implement any waiver of the signature requirements or any method adopted under paragraph (1).".

(b) ACKNOWLEDGMENT OF ELECTRONIC FILING.--Section 7502(c) is amended to read as follows:


"(1) REGISTERED MAIL.--For purposes of this section, if any return, claim, statement, or other document, or payment, is sent by United States registered mail--

"(A) such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

"(B) the date of registration shall be deemed the postmark date.

"(2) CERTIFIED MAIL; ELECTRONIC FILING.--The Secretary is authorized to provide by regulations the extent to which the provisions of paragraph (1) with respect to prima facie evidence of delivery and the postmark date shall apply to certified mail and electronic filing.".


(c) ESTABLISHMENT OF PROCEDURES FOR OTHER INFORMATION.--In the case of taxable periods beginning after December 31, 1999, the Secretary of the Treasury or the Secretary's delegate shall, to the extent practicable, establish procedures to accept, in electronic form, any other information, statements, elections, or schedules, from taxpayers filing returns electronically, so that such taxpayers will not be required to file any paper.

(d) INTERNET AVAILABILITY.--In the case of taxable periods beginning after December 31, 1998, the Secretary of the Treasury or the Secretary's delegate shall establish procedures for all tax forms, instructions, and publications created in the most recent 5-year period to be made available electronically on the Internet in a searchable database at approximately the same time such records are available to the public in paper form. In addition, in the case of taxable periods beginning after December 31, 1998, the Secretary of the Treasury or the Secretary's delegate shall, to the extent practicable, establish procedures for other taxpayer guidance to be made available electronically on the Internet in a searchable database at approximately the same time such guidance is available to the public in paper form.

(e) PROCEDURES FOR AUTHORIZING DISCLOSURE ELECTRONICALLY.--The Secretary shall establish procedures for any taxpayer to authorize, on an electronically filed return, the Secretary to disclose information under section 6103(c) of the Internal Revenue Code of 1986 to the preparer of the return.

(f) EFFECTIVE DATE.--The amendments made by this section shall take effect on the date of the enactment of this Act.


(a) IN GENERAL.--The Secretary of the Treasury or the Secretary's delegate shall develop procedures for the implementation of a return-free tax system under which appropriate individuals would be permitted to comply with the Internal Revenue Code of 1986 without making the return required under section 6012 of such Code for taxable years beginning after 2007.

(b) REPORT.--Not later than June 30 of each calendar year after 1999, the Secretary shall report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate on--

(1) what additional resources the Internal Revenue Service would need to implement such a system;

(2) the changes to the Internal Revenue Code of 1986 that could enhance the use of such a system;

(3) the procedures developed pursuant to subsection (a); and

(4) the number and classes of taxpayers that would be permitted to use the procedures developed pursuant to subsection (a).


(a) IN GENERAL.--Not later than December 31, 2006, the Secretary of the Treasury or the Secretary's delegate shall develop procedures under which a taxpayer filing returns electronically (and their designees under section 6103(c) of the Internal Revenue Code of 1986) would be able to review the taxpayer's account electronically, but only if all necessary safeguards to ensure the privacy of such account information are in place.

(b) REPORT.--Not later than December 31, 2003, the Secretary of the Treasury shall report on the progress the Secretary is making on the development of procedures under subsection (a) to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.



1. Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206 (1998).

2. See Robert Manning and David F. Windish, “The IRS Restructuring and Reform Act: An Explanation,” 98 Tax Notes Today 128-104, July 6, 1998.

3. See Albert B. Crenshaw, “Hill Panel Urges Big Changes at IRS,” Wash. Post, June 26, 1997, at A17.

4. 144 Cong. Rec. S4401 (daily ed. Nov. 5, 1997). H.R. 2676 was co-sponsored by Representatives Rob Portman (R-OH), who had helped to lead the Commission along with Senator Bob Kerrey, and Benjamin Cardin (D-MD). Id.

5. The House Committee on Ways and Means reported H.R. 2676 on October 31, 1997. H.R. Rep. No. 105-364 (1997) . H.R. 2676 was amended by the House to include (as new Title VI) the provisions of H.R. 2645 ("Tax Technical Corrections Act of 1997") as reported by the House Committee on Ways and Means on October 29, 1997. H.R. Rep. No. 105-356 (1997). On April 22, 1998, the Senate Committee on Finance filed a report suggesting amendment in the nature of a substitute, which the Senate agreed to on May 7, 1998. 144 Cong. Rec. S3428 (daily ed. April 22, 1998); 144 Cong. Rec. S4519 (daily ed. May 7, 1998). The House, disagreeing with this amendment, went to conference with the Senate 144 Cong. Rec. H3936 (daily ed. May 22, 1998). The conference report was then approved by the House, 402-8, and the Senate, 96-2. 144 Cong. Rec H5368 (daily ed. June 24, 1998); 144 Cong. Rec. S7723 (daily ed. July 9, 1998).

6. RRA 2001(a)(2). See Appendix, IRS Restructuring and Reform Act: Part II, “Electronic Filing,” for full text of RRA provisions cited herein. Out of a total of 113.1 million returns filed for tax year 1997 and received by April 30, 1998, 18.4 million (16.3%) were filed electronically, and 5.9 (5.3%) were telefiled, for a total of 24.4 million (21.6%). See Taxpayer Statistics, “Table 1 - Taxpayer Usage Study: Number of Returns Received by the End of April for Tax Years 1996 and 1997, with Selected Filing Characteristics” [hereinafter Taxpayer Statistics] (visited Dec. 17, 1998) <>.

7. At a September 9, 1997 hearing to review the Commission’s recommendations, Acting IRS Commissioner Michael Dolan told the Oversight Committee of the House Ways and Means Committee, “Electronic tax filing needs to be promoted by the IRS. The public needs to understand the advantages of filing error-free electronic returns directly with the IRS… I am pleased that there is strong bipartisan support for legislation to enhance tax return electronic filing… [T]he whole ability to leverage the advance of technology on the Web is one that we think is a considerable and important part of our future.” Expansion of Electronic Filing of Tax Returns: Hearings on Recommendations of the National Commission on Restructuring the IRS Before the Oversight Subcommittee of the House Ways and Means Committee, 105th Cong. (1997) [hereinafter Hearings] (testimony of Michael Dolan, Acting IRS Commissioner). The IRS first tested electronic filing in 1986 for selected tax year 1985 returns. See H.R. Rep. No. 105-364 at 33 (citing Rev. Proc. 86-4, 1986-1 C.B. 423).

8. The initial errors result mainly from inaccuracies in the input and calculation of data. The use of computer software in electronic filing minimizes the incidence of such mechanical errors. After the first stage of corrections, some residual error still remains, primarily relating to matching of credits to the appropriate taxpayers. The IRS then goes through a second stage of corrections, in which it works with the filer to clarify any additional errors. Telephone Interview with Stephen H. Holden, national director of the Electronic Program Enhancement for the IRS and Steering Committee Member, Federal Public Key Infrastructure (December 18, 1998). In tax year 1997, the processing accuracy rate, which measures the errors after this second stage, was 99% for returns filed electronically, as opposed to 95% for paper returns. Telephone Interview with Robin Marusin, Electronic Tax Administration, Internal Revenue Service (December 16, 1998). In tax year 1997, refunds on electronic returns were returned in an average of 14.5 days, versus 38 days for refunds due on returns sent by mail. Id. Service center costs are comprised of direct labor, indirect labor, and information system and service support expenses. In 1996, service center costs to process Forms 1040, 1040A, and 1040EZ filed electronically were $1.90, $1.87, and $1.87, respectively, per return. Service center costs to process their paper counterparts were $3.25, $2.67, and $1.93, respectively, per return. FY 1996 Cost of Submission Processing in the Service Centers, IRS/Treasury Publication No. 10806 (3/98).

9. See RRA 2003.

10. I.R.C. 6061 (1976), amended by RRA 2003(a) (1998).

11. See Manning and Windish, supra note 2, at 101.

12. See RRA 2003(a).

13. RRA 2005(a) requires the IRS to “develop procedures under which a taxpayer filing returns electronically…would be able to review the taxpayer’s account electronically, but only if all necessary safeguards are in place.” The IRS must make an interim report to the taxwriting committees by December 31, 2003. RRA 2005.

14. See RRA 2004. The IRS must make an interim report on the development of the return-free tax system to the taxwriting committees by June 30, 2000. RRA 2004(b).

15. Many of the effects will straddle several categories, but this paper will place each effect in a separate category for convenience.

16. This paper does not suggest an optimal procedure for implementing these technologies, but merely examines their potential effects on privacy.

17. RRA 2005.

18. RRA 2003(a).

19. For instance, for four years, almost 1,000 outsiders circulated credit card numbers and other credit information obtained by hacking into Equifax, one of the major American credit reporting agencies. See Rob Johnson and Bill Husted, “Computer Criminals Delight in Hacking Away at Privacy,” Atlanta Journal and Constitution, May 24, 1992, at A1. Low-tech methods have also demonstrated surprising efficacy. In 1997, internal audits of the IRS revealed that investigators posed as other taxpayers were able to obtain confidential tax information in 96 out of 109 telephone calls. See Ralph Vartabedian and Alan Miller, “IRS' telephone tax help puts privacy at risk,” Chicago Sun-Times, Nov. 3, 1997.

20. See, e.g., General Accounting Office (GAO), Letter Report, IRS Systems Security: Tax Processing Operations and Data Still at Risk Due to Serious Weaknesses, GAO/AIMD No. 97-49 (1997), (visited Nov. 10, 1998) <>. Among other observations, GAO noted that the IRS continued to have serious weaknesses in the areas of physical security, logical security, data communications management, risk analysis, quality assurance, internal audit and security, security awareness, and contingency planning. It discovered that the five of the IRS’s ten facilities examined by the GAO could not account for approximately 6,400 missing units of magnetic storage media, such as tapes and cartridges, which could contain taxpayer data and that printouts containing taxpayer data were left unprotected and unattended in open areas of two facilities where they could be compromised. In particular, the report focused on electronic browsing of taxpayer data by IRS employees and the IRS’s lack of a coherent monitoring and disciplinary program.

21. Graham Greenleaf and Roger Clarke, “Privacy Implications of Digital Signatures,” Abstract (March 10, 1997) <>.

22. See Mtrust, “Frequently Asked Questions” (visited Nov. 9, 1998) <>.

23. See Abanet, “Digital Signature Guidelines Press Release” (visited Nov. 9, 1998) <>.

24. See Mtrust, supra note 22.

25. Jerome Svigals, a smart card consultant in California, states that taxpayer dealings with the Internal Revenue Service present greater potential for serious fraud and identity theft than previous applications of certificate technology, such as intragovernment payments. Jennifer Kingson Bloom, “Government’s Plan Would Prime the Pump in Digital Certification,” The American Banker, April 8, 1998, at 16.

26. See Tim Wilson, “Feds Push Secure Links to Citizens,” InternetWeek, July 13, 1998.

27. See Daniel Weitzner, “Response to letter from General Services Administration (GSA) addressing CDT’s concerns on the Access Certificates for Electronic Services (ACES) Initiative”(dated June 29, 1998) <>. See also Center for Democracy and Technology and U.S. Public Interest Group, “CDT’s concerns about the privacy and consumer issues raised by pending legislation on digital signatures and electronic authentication” (dated May 1, 1998) <> (letter to Senator Robert Bennett regarding S. 1594).

28. See G. Martin Wagner, “Letter from General Services Administration (GSA) Addressing CDT’s Concerns on the Access Certificates for Electronic Services (ACES) Initiative” (dated June 4, 1998) <>.

29. See Weitzner, supra note 27 (“[W]e believe that GSA should play a central role in the future development of the certification of government-to-public interaction online by encouraging and facilitating the creation and independent contracting of certificate and registration authorities by individual agencies.”).

30. Out of a total of 113.1 million returns filed for tax year 1997 and received by April 30, 1998, 18.4 million were filed electronically, 5.9 were telefiled, and 76.3 million were computer-prepared. See Taxpayer Statistics, supra note 6.

31. See Robert Pear, “Social Security Closes Online Site, Citing Risks to Privacy,” N.Y. Times, April 10, 1997 <>.

32. “Social Security Administration Reopens Web Site” (dated Sept. 7, 1997) <>.

33. See, e.g., Organization for Economic Cooperation and Development, “Individual Participation Principle,” OECD Guidelines Governing the Protection of Privacy and Transborder Flows of Personal Data at Part II 13, (visited Dec. 18, 1998) <>. This principle states that an individual should have the right:

  1. "to obtain from a data controller, or otherwise, confirmation of whether or not the data controller has data relating to him;
  2. to have communicated to him, data relating to him within a reasonable time; at a charge, if any, that is not excessive; in a reasonable manner; and in a form that is readily intelligible to him;
  3. to be given reasons if a request made under subparagraphs(a) and (b) is denied, and to be able to challenge such denial; and
  4. to challenge data relating to him and, if the challenge is successful to have the data erased, rectified, completed or amended."

34. RRA 2005.

35. “There can be no privacy if personal information is kept secret from its subject. With that said, the security of information is equally an important component to privacy. This language seems to balance both of those concerns. The IRS needs to involve security and privacy experts before December 2006, in order to insure that this difficult standard has been met.” Email interview with Ari Schwartz, Policy Analyst, Center for Democracy and Technology (CDT) (December 17, 1998).

36. “IRS to revamp computers” (Dec. 9, 1998) <>. On Dec. 9, 1998, the IRS announced that it had awarded a 15-year outsourcing contract to a private consortium led by Computer Sciences Corp, a contract which some valued at $8 billion. The consortium members include IBM, KPMG Peat Marwick, Lucent Technologies, Northrop Grumman, SAIC, and Unisys Corp. Id.

37. RRA 2003(a).

38. See “Electronic Services, 1999 Signature Pilot Information for Taxpayers” (visited Dec. 16, 1998) <>.

39. The list of practitioners was supplied to the IRS by H&R Block Tax Services, Inc., ProSeries by Intuit Inc., and the National Association of Enrolled Agents (NAEA). See id.

40. In fact, the Commission originally recommended that the signature requirement be eliminated altogether; as long as taxpayers kept paper copies of their returns on file, any subsequent controversies could be reasonably resolved. Phone Interview with Charles A. Lacijan, Member of Commission on Restructuring the IRS and Chairman of Electronic Tax Administration Advisory Committee, December 16, 1998.

41. See I.R.C. 6061(b)(2) (treating any return, declaration, statement, or other document filed and verified, signed, or subscribed under alternative signature “for all purposes (both civil and criminal, including penalties for perjury) in the same manner as though signed or subscribed”). The House version of RRA actually placed the burden on the taxpayer. See H.R. Rep. No. 105-364 at 203(a) (amending I.R.C. 6061 to read that “Any such return, declaration, statement or other document shall be presumed to have been actually submitted and subscribed by the person on whose behalf it was submitted.”).

42. See Florence Olsen, “The IRS Sees PKI as Its Secret Key to Net Tax Filing,” Government Computer News, Oct. 19, 1998, at 15. Stephen Holden, national director of Electronic Program Enhancement for the IRS, states that “We definitely presume that a public-key infrastructure is going to provide the kind of authentication and security that we believe is necessary.” The elements of this infrastructure include firewall equipment and maintenance, backup and disaster recovery for certificate repository systems, secure PKI facilities and documented procedures, skilled PKI personnel, help desk for managing certificates, cryptography housekeeping, and setup procedures for root certificate authority. Id.

43. Id.

44. Mr. Holden, see supra text accompanying note 42, admitted, “Since this is new technology for us, we know there will be some surprises…The Federal PKI Steering Committee is working on what I would call a model certificate policy that federal agencies could adopt.” Id.

45. Just as a passport must be issued by a governmental agency, a digital signature must be authorized by a Certification Authority (“CA”), which heads the PKI. The process varies across technologies, but the typical process is as follows. The party applying for a certificate sends a public and private key pair to the CA with proof of her identity. The CA must verify the digital signature by computing a new hash result of the original message by means of the same hash function that the signer used to create the digital signature. Using the public key and this new hash result, the CA must check whether the digital signature was created using the corresponding private key and whether the new hash result is identical to the original hash result contained in the digital signature. If so, the CA will have ascertained both signer authentication (the signer is who she actually claims to be) and document authentication (the message and the signature were actually signed by the claimed signer). After verifying the applicant’s identity, the CA puts the public key in the new certificate, electronically signs the certificate to vouch for its validity, and sends the certificate to the applicant. In addition to the CA’s digital signature and the public key information, the certificate typically contains the signature information and name of the CA, the owner’s name, and the certificate’s operational period. See Abanet, supra note 23.

46. See Lonnie Eldridge, “Internet Commerce and the Meltdown of Certification Authorities: Is the Washington State Solution a Good Model?”, 45 UCLA L. Rev. 1805, 1813-14 (1998).

47. Greenleaf and Clarke, supra note 21, at 1.1

48. See Eldridge, supra note 46, at 1820-1823.

49. There are two general types of invasion of Internet user privacy. The first, referred to as “identity theft,” occurs when a thief illegally accesses a user’s personal information and performs some acts under the user’s alias or diverts payments from the user’s account. The second occurs when a business legally obtains personal information about a user and for solicitation purposes or sells it to third parties. See Mark E. Budnitz, “Privacy Protection for Consumer Transactions in Electronic Commerce: Why Self-Regulation is Inadequate,” 49 S.C. L. Rev. 847 at 851 (1998).

50. See Weitzner, supra note 27, and Greenleaf and Clarke, supra note 21, at 2.2.

51. See Wagner, supra note 28 (referring to a quote made during a meeting with CDT to discuss ACES on May 27, 1998).

52. Phone Interview with Charles Lacijan, supra note 40. The Ontario government may become one of the first countries with a national digital identification system. In December 1998, it announced it had awarded Entrust Technologies Inc. a $1.1 million contract under which it would provide digital certificates to 1,000 social workers, with the long-term goal of extending the program to all eleven million Ontario residents electronic identities. See “Ontario Plans Program To Issue Electronic IDs From Entrust of U.S.,” Wall St. J., Dec. 15, 1998, at B6.

53. For a discussion of this issue from a market perspective, see infra Part II.B, “Unintended Market Effects.”

54. RRA 2001(a)(1).

55. See, e.g., Michael A. Graetz and Deborah H. Schenk, Federal Income Taxation: Principles and Policies 30-31 (3d ed. 1995) (“There is widespread agreement that the criteria to be used in evaluating taxes are equity, efficiency and simplicity”).

56. RRA 2001(a)(3).

57. “Net Factoids,” Searcher, Nov. 21, 1997, 1997 WL 10141616. See also Presentation by Stephen Holden, “Electronic Tax Administration: The Last Twelve Months, The Next Twelve Months, Strategic Plan” (accessed Dec. 20, 1998) (on file with author) (IRS statistics showing that the typical online user has an adjusted gross income of $52,323).

58. According to the IRS, 94.1 million of the 120.4 million filers in 1996 had adjusted gross income ranging from $0 up to $50,000. See Taxpayer Statistics, “Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 1994-96” (visited Nov. 17, 1998) <>.

59. See “Net Factoids,” supra note 57 (citing a 1997 Price Waterhouse Consumer Technology Survey conducted by Opinion Research Corporation).

60. According to the Census Bureau, as of March 1997, 23.9% of the population at least 25 years of age had completed a bachelor’s degree. See Jennifer Day and Andrea Curry, “Educational Attainment in the United States: March 1997”, U.S. Census Bureau Current Population Report P20-505 (1998). The Bureau estimates that as of September 1998, the total population was 270,498, of which there were 137,992 females. 11.3% of the population was classified as Hispanic and 12.1% as black, not Hispanic. See Laura K. Yax, Population Division of the U.S. Census Bureau, “National Estimates: Annual Population Estimates by Sex, Race and Hispanic Origin, Selected Years from 1990 to 1998” (last modified August 20, 1998) <>.

61. See Phone Interview with Robin Marusin, supra note 8. See also Hearings, supra note 7 (testimony of Representative Rob Portman).

62. RRA 2002(a). RRA also requires the Treasury to evaluate the effects of extending the deadline for providing taxpayers with electronic copies of information returns (other than Forms W-2) from January 31 to February 15. RRA 2002(b).

63. See Merry Mayer, “IRS advisory group will promote electronic filing,” Government Computer News, Sept. 28, 1998, at 71.

64. See, e.g., Hearings, supra note 7 (testimony of Donald Lubick, Acting Assistant Secretary for Tax Policy of the Department of the Treasury) (“Alternative deadlines we think may well impair tax compliance, will certainly cost revenue in favor of sophisticated taxpayers who have balances due. Moreover, since sophisticated balance-due taxpayers might be more likely to file electronically if the deadline were extended, postponing that deadline for electronic filers would be unfair compared to middle- and lower-income working families who are frequently in a refund position”).

65. RRA 2001(f)(2).

66. See Bloom, supra note 25.

67. Phone Interview with Stephen Holden, supra note 8. According to statistics compiled by the IRS, the typical taxpayer who uses a tax practitioner to file electronically has an adjusted gross income of $24,199, claims the Earned Income Tax Credit, and receives a refund of $1,827. Presentation by Stephen Holden, supra note 57.

68. For example, beginning in January 1999, Block Financial and Intuit, two tax software developers, will offer free electronic filing for users of their Web-based products. These programs will be limited to taxpayers who file a 1040EZ return in the case of Block’s products and to taxpayers who have adjusted gross incomes of less than $20,000 in the case of Intuit’s products. These two target populations are comprised of lower-income taxpayers who represent approximately half of all taxpayers. Phone Interview with Stephen Holden, supra note 8./p>

69. VITA services low to moderate income, disabled, non-English speaking, and elderly taxpayers, and TCE services taxpayers age 60 and over. Both provide free electronic filing at selected libraries, shopping malls, and local community centers. See “Electronic Services: Using IRS e-file at VITA/TCE Sites” (visited Dec. 19, 1998) <>.

70. Phone Interview with Stephen Holden, supra note 8. These charges currently range from $10 to $15. See Hearings, supra note 7 (testimony of Joe Langer, President of National Association of Computerized Tax Processors).

71. The rise of companies such as Wit Capital, which provides online investors with access to initial public offerings that would otherwise be distributed through underwriters, and eBay, an online auction service that matches buyers with sellers, are just a few examples. See (visited Dec. 20, 1998) <> and <> (home pages for eBay and Wit Capital).

72. See, e.g., “Encyclopedia of the New Economy” (visited Nov. 23, 1998) <>; Eric Lundquist, “Quit Dissin’ the Web’s Middlemen,” July 14, 1997 <>.

73. Realistically, however, tax software is not likely to threaten or significantly alter the livelihood of practitioners. If history provides any insight into the future, taxpayers will continue to rely on their services regardless of changes in the filing process; the percentage of returns filed by tax preparers has remained fairly steady at approximately 50% for twenty years. See Phone Interview with Charles Lacijan, supra note 40. At least in part, demand for tax services is fueled by adoption of Code provisions incomprehensible to the average taxpayer. See, e.g., I.R.C. 1(h) on the calculation of capital gains (1998). Assuming that Congress continues to create new tax law and the Code continues to change, tax preparers and practitioners have no reason to worry about unemployment. But see James H. Johnston, “Is Everyone Ready for ‘E-Law’? Online?” Legal Times, Nov. 2, 1998, at 29 (citing Intuit Turbotax software as a example of how electronic law may replace tax accountants, because it interviews the user and then prepares the tax return just as a CPA would).

74. The IRS has contracted with U.S. Audiotex, NOVUS Services, Inc., and Intuit, Inc. to provide credit card processing services for balance due Form 1040 taxpayers to use MasterCard, American Express, or NOVUS/Discover credit cards to pay their taxes in 1999. Both electronic and paper filers will have the option to pay taxes by credit card through a toll free number, 1-888-2PAY-TAX, but the IRS is focusing on electronic filers and telefilers. See IRS Press Release, “IRS Partners with Industry to Expand Electronic Transactions,” IR-98-55 (1998); “Electronic Payment Options for Taxpayers” (visited Dec. 16, 1998) <>.

The option to pay taxes by credit card raises additional fairness issues. It could be a valuable tool to attract balance-due taxpayers to electronic filing, who unlike refund-due taxpayers are not enticed by the promise of expedited return processing. By using a credit card, these taxpayers would be able to postpone their tax liability interest-free for one credit card billing cycle. E.g., Phone Interview with Charles Lacijan, supra note 40. However, these balance-due taxpayers tend to be higher-bracket taxpayers who have income outside of wages and interest, such as capital gains. To make up for the lost float on that interest, taxes on lower-bracket taxpayers could increase, effectively creating a subsidy for higher-bracket taxpayers. Cf. Lubick, supra text accompanying note 54.

Moreover, the credit card option has been criticized by some as encouraging consumers to deepen debt, effectively increasing the tax rate through the high interest rates charged by the credit company. See, e.g., Bill Atkinson, “IRS credit-card plan called ‘insane,’” The Baltimore Sun, Aug. 30, 1998, at 1D.

75. “[T]he Internal Revenue Service should cooperate with and encourage the private sector by encouraging competition to increase electronic filing of such returns.” RRA 2001(a)(3).

76. See Mayer, supra note 63.

77. See Weitzner, supra note 27.

78. These are the three elements that led to the standardization of the “QWERTY” keyboard, rather than a more efficient layout such as Dvorak, according to economist Paul A. David. See Paul A. David, “Clio and the Economics of QWERTY,” AEA Papers and Proceedings, Vol. 75, No. 2, at 332 (May 1985)./p>

79. These manufacturers (with on-line software in parentheses) include Atilla M. Taluy (Atilla M. Taluy), RCS Rhodes Computer Services (Taxslayer), Intuit Inc. (TurboTax, MacInTax, WebTurboTax), UTS (, Block Financial Corp. (Kiplinger TaxCut), Tax Systems, Inc.(File Safe), Tax Systems, Inc. (Prep 1040 Personal), George Albert & Co. (GAC Little ELF, Home Accounts Tax Modules), UDS ElectroTax, LLC (UDS ElectroTax Individual), Computer Language Research (One, Nelco (Tax Wizard), AM Software (Personal 1040 - AM Tax), TaxLink, Inc. (AutoTax), 2nd Story Software (Tax ACT), ETAX Corporation (ETAX). See “1999 Signature Pilot Information for Taxpayers” (visited Dec. 16, 1998) <>.

80. See Philip S. Corwin, “Digital Signatures and Signature Dynamics: Some Issues to Consider,” 17 No. 9 Banking Pol’y Rep. 1, 14 (1998).

81. See Eldridge, supra note 46, at fn.32 (citing Noel D. Humphreys, “Now May Be the Time to Consider a Certification Authority Business,” N.Y.L.J., Jan. 10, 1995 at 5).

82. Phone Interview with Charles Lacijan, supra note 40. For a discussion of these privacy concerns, see supra, Part I, “Technology and Taxpayer Privacy.”

83. This would not preclude government entities from any and all involvement in the certification process. The Postal Service, for example, has recently developed its own Certification Authority that could play a valuable role in meeting both verification and Internet access needs (see infra, Part III.A, “Increasing Internet Access”.). Interview with Jon Cook, Strategic Planner, U.S. Postal Service (Dec. 15, 1998).

84. See, e.g., “MCG: Internet Open Group on Certificate and Security” (visited Dec. 20, 1998) <> (home page for the Meta-Certificate Group, a non-profit group composed of participants from 26 countries and focused on using applied cryptography to solve Internet certification and security problems).

85. Cf. Weitzner, supra note 27 (“Despite ACES’ decision to use multiple contractors, the system still plans to limit the tools, technology and verification systems. Undoubtedly, this has centralized the over-arching structure of ACES. The World Wide Web has shown that distributed systems can be successful in assuring the flexibility to develop a diversity of systems while allowing for a wider range of consumer choices.)”

86. See RRA 2001(a)(2), 2001(b)(1).

87. House Representative Rob Portman, one of the original sponsors of RRA, touted electronic tax filing as a “classic win-situation for IRS and the taxpayer.” See Rob Portman, Congressional Press Release, Paperless Tax Filing is Pro-Taxpayer, Sept. 12, 1997.

88. Telephone Interview with Stephen Holden, supra note 8.

89. FY 1996 Cost of Submission Processing in the Service Centers, IRS/Treasury Publication No. 10806 (3/98).

90. See H.R. Rep. No. 105-364 at 201.

91. See, e.g., Hearings, supra note 7 (testimony of Donald Lubick, Acting Assistant Secretary for Tax Policy of the Department of the Treasury) (“[W]e’re concerned about mandates or their functional equivalents through specific targets and we are afraid that this will introduce a rigidity in an area where flexibility is really the order of the day”).

92. A historian also might have doubts independent of these statistics. In 1993, the IRS established an electronic filing goal of 80 million tax returns by 2001. By the 1997 tax filing season, the IRS had only achieved one-quarter of its goal, having received approximately 20 million individual tax returns electronically. See H.R. Rep. No. 105-364 at 33.

93. According to a Fall 1998 CyberStats report by Mediamark Research Inc., 72 million (37%) of Americans have access to the Internet. “Number of Internet Users, Today” (visited Nov. 22, 1998) <>.

94. See “Net Factoids,” supra note 57.

95. One report projects the number of Internet users to reach 85 million by the year 2002. See “1998 eOverview Report” (visited Nov. 22, 1998) <>.

96. Phone Interview with Robin Marusin, supra note 8.

97. See, e.g., Hearings, supra note 7 (testimony of Thomas Zimmerman, president of H&R Block Tax Services, and Roger Harris, vice chairman of the Federal Tax Committee of the National Society of Accountants). 53.0 million of the 61.1 million returns filed by paid preparers for tax year 1997 and received by April 30, 1998 were computer-prepared. See Taxpayer Statistics, supra note 6.

98. See supra text accompanying note 6.

99. The Commission, which originally proposed the goal, decided on the 80% figure after engaging in a similar analysis of the current tax filing population. Indeed, the Commission members even at one point discussed setting a goal of 100%. Phone Interview with Charles Lacijan, supra note 40.

100. Regardless of whether Internet access becomes more widespread, the privacy concerns discussed in Part I may make the IRS’ 80% goal even more difficult to achieve. About 25% of the public is unwilling to reveal personal information in exchange for benefits. See Budnitz, supra note 49, at 849 (citing testimony of Dr. Alan F. Westin, Publisher Privacy and American Business: Hearings Before the House Banking and Financial Services Committee Financial Institutions and Consumer Credit Subcommittee). Thus, the IRS may face the additional challenge of changing public perception of privacy protection in order to increase electronic filing.

101. To date, the Postal Service has not formulated a plan to provide Internet access in postal service centers, but it remains “conscious of the haves and the have-nots” and continues to consider the possibility. Phone Interview with Jon Cook, supra note 33.

102. Because the option to file electronically remains a voluntary choice under RRA, it is possible that there the implicit two-tiered structure described supra in Part II.A (“Widening the Gap Between the Haves and the Have-Nots”) will become a fixture of the tax Code. As phrased by Representative Cardin, “I would hope, as we develop financial incentives for electronic filing, that we don’t build into the system additional costs that are going to be difficult to back out of.” See Hearings, supra note 7 (testimony of Representative Benjamin Cardin).

103. As stated by Robert Carver, the former manager of the IRS computer centers, “I only see more complex information being required by the IRS in the future. The only feasible way for the IRS to receive, validate and manipulate all this data is through electronic filing.” See Hearings, supra note 7 (testimony of Robert Carver, former manager of IRS computer centers).

104. See IRS Press Release, supra note 74.

105. Bar-code scanning, an established retail practice, demonstrates the human tendency to place unwarranted trust in technology. Many Americans pass through checkout lines without glancing at the receipts generated by the scanners. Yet the average national error rate for scanned retail transactions is almost 5%. See Bob Trebilcock, “The Price is … Wrong,” Good Housekeeping, Sept. 1, 1998 (citing a 1996 FTC study).

106. See RRA 2004(a).

107. RRA 2004(a).

108. RRA 2004(b).

109. Phone Interview with Charles Lacijan, supra note 40.

110. See RRA 4022.

111. See, e.g., I.R.C. 24 (1998) (Child Tax Credit allowing a $500 credit per child, but reducing the credit by $50 for each $1,000 by which adjusted gross income exceeds a threshold amount of $110,000 in the case of a joint return, $75,000 in the case of an unmarried individual, and $55,000 in the case of an individual married filing separately); 25A(b) (1997) (Hope and Lifetime Learning Credits allowing a Hope Scholarship Credit for tuition and related expenses up to $2,000 and a Lifetime Learning Credit of 20% of tuition and expenses up to $1,000, but reducing the sum of these credits by an amount which bears the same ratio to $1,000 as the excess of adjusted gross income over $40,000 ($80,000 in the case of a joint return) bears to $10,000 ($20,000 in the case of a joint return)); 151(d) (1996) (phasing out personal exemption of $2,000 by 2% for each $2,500 by which adjusted gross income exceeds a threshold amount of $150,000 in the case of a joint return, $125,000 in the case of a head of household, $100,000 in the case of a single taxpayer, and $75,000 in the case of an individual married filing separately).

112. See supra text accompanying note 30.

113. As the Center for Democracy and Technology points out, “Simply mandating agencies to allow all services off-line avoids dealing with the difficult concerns around these issues.” Weitzner, supra note 27.

Graham Greenleaf and Roger Clarke further elaborate:

"No one is yet proposing that possession of a digital signature be compulsory, and some might think its ‘optional’ or ‘voluntary’ nature as a tool for business and the technologically literate would remove privacy concerns. However, if individuals increasingly find it necessary to provide digital signatures for mainstream transactions, and to participate effectively in cyberspace, it is likely that they will be forced to establish their identities with one or more certification authorities in order to do so…We must remember that the possession of an `Australia Card' was to have been ‘voluntary,’ and the use of a Tax File Number is still (in theory) voluntary. But the reality in both cases was ‘don't leave home without one’!"

See Greenleaf and Clarke, supra note 21, at 3.

114. See “Federal Agency Projects Using Public Key Technology” (visited Dec. 19, 1998) <>.