The pros and cons of filing taxes electronically

Taxes can be filed electronically either through a tax preparation software or directly via the online version of tax software producers or accounting service providers. Electronic filing of taxes has been an official method and accepted by the U.S. Internal Revenue Service since 1986 (irs.gov). There are many advantages to both Government and tax filers when tax information is filed electronically.

The Internal Revenue Service Restructuring and Reform Act of 1998 was enacted as law for the purpose(s) of modernizing and streamlining the tax authority's operations in addition to assisting tax payers with their tax preparation and making adjustments to other tax filing rules. However, even with the many advantages, there are also some disadvantages of electronic tax filing that may sometimes by overlooked. This article will discuss the pros and cons of filing taxes electronically.

Pros of electronic tax filing

The number of tax filers who have used electronic tax filing has increased steadily for several years. This is due to the pros of electronic tax filing in addition to the U.S. Department of the Treasury's administrative goal of making the tax filing process digital. For the government, a predominantly digital tax filing process saves the government money in data entry expenses and shifts responsibility of finding errors to the tax preparation software, and individual tax filer. The tax filer pros of filing taxes electronically are listed below:

• Faster refund: Refund processing time may take as little as 2 weeks
• Efficient: Recording and transmitting of tax information is faster
• Less paperwork: Paper tax forms such as form 1040 do not need to be mailed
• Digital copy: Digital copies can be stored on a computer or disk
• No mailing costs: Transmitting of data itself is included in the service
• Can transfer federal information on to State tax application
• Math check and guided completion aids in tax filing accuracy
• Reduces need for expensive "anticipated refund loans"
• Online payment of taxes via multiple methods

Con of electronic tax filing

• Not always free: For high income earners and State tax returns a fee may be charged
• Will owe taxes faster if tax is due: If a tax filer owes taxes, the more efficient method could lead to faster processing of official acknowledgement of owed taxes.
• May not accommodate some complex tax filing procedures: 2% of tax forms and/or procedures cannot currently be accommodated by electronic tax filing.
• No paper copy unless one is printed: Paper copies may be desirable in some cases
• Personal information transferred through a third party: When intermediary services are used, their database may store personal tax information.
• Increased risk of computer identity theft: Stored tax information may exist on 1) personal storage devices, 2) a financial services firm and 3) the tax authority.
• Computers may inaccessible by some segments of the population

Disadvantages of electronic tax filing are sometimes overlooked in the interest of acquiring a faster tax return. Some of the cons of digital tax filing may be minor as data encryption become more advanced and there may always be people who are either located to remotely to have internet access or do not have access to a computer. Despite these cons of electronic filing, the availability of electronic tax filing is useful if not beneficial to many tax filers for the reasons illustrated in this article.

The U.S. Department of the Treasury has actively promoted electronic tax filing for several reasons which include 1) reducing costs 2) modernizing the tax processing system and 3) reducing paper requirements of the IRS. The number of electronic tax filings have become a major form of tax filing in recent years and are likely to continue as such in the future if past tax filing statistics trends remain strong indicators.

Source(s):

1. http://www.irs.gov/efile/article/0,id=120353,00.html
2. http://www.treas.gov/press/releases/rr1915.htm
3. http://www.irs.gov/newsroom/article/0,id=170407,00.html
4. http://www.pmstax.com/gen/bull9808.shtml

Guide to Sales and Use Taxes

The difference between sales tax and use tax is that sales tax is charged at the time of sale whereas use tax is levied retroactively some time after the selling of a product. If purchases comprise a large part of personal income spent, sales and/or use tax could add an extra 5-7.3% to the total bill. This article will describe sales and use tax and provide examples of each and will then offer tips for saving and/or avoiding sales taxation.

Sales tax

Sales tax varies from State to State and some localities may charge additional taxes to raise money for municipal projects. Sales tax is also higher for some products than others. For example, several States have high sales taxes on cigarettes and beer. New Jersey and Rhode Island have the highest tax on cigarettes and $2.58 and $2.46 per pack respectively. California and New Jersey are among the highest taxed States in terms of Sales at 7.3% and 7% however some States with seemingly average sales tax rates such as Virginia also charge a 2% tax on food.

0% Sales tax states do exist, however the price of goods may be higher especially in those sales tax free States such as Delaware and New Hampshire, which are charged tax by the government on gross receipts prior to transactions at the retail level. (moneycentral.com) A list of the sales tax free states is below in addition to Colorado which has the lowest sales tax of the States that charge sales tax.

• Oregon
• Alaska
• Montana
• New Hampshire (Subject to pre-retail tax)
• Delaware (Subject to pre-retail tax)
• Colorado 2.9%

Use tax

Use tax is a type of tax administered by States when taxes that should have been paid by residents of that State are somehow avoided. (nolo.com) In some instances such as purchase of large equipment that needs to be registered and/or licensed, use tax can be levied fairly easily. However, in the case of voluntary use tax disclosure on items purchased out of State, the collection and reporting of the use tax becomes more haphazard. (wikipedia.com)

When use tax does apply to purchase made out of State, that use tax may be avoided by keeping the purchase item out of state in addition to registering the item out of State. In other words, for the use tax to not apply, the storage and registration of large equipment subject to use tax must be in the State in which no sales tax was originally charged. (oatax.com)

How to avoid sales tax

There are actually a few ways to not pay sales tax. Some of these methods may still be subject to tax if they are sold in a business context and if State and Federal taxation rules apply. However, there are ways to obtain products for free and/or minimize sales tax costs, some of which are listed below. Moreover, the following list illustrates that sales tax isn't absolute and usually applies to the most convenient method of sale which quite often is retail sales through licensed businesses with physical addresses at which transactions take place.

• Deduct sales tax on IRS Schedule A
• Barter through barter exchange networks
• Buy used through non-taxable venues
• Purchase through the Internet
• Attend private sales
• Take advantage of tax-free days and select sales tax only states
• Shop in sales tax free States
• Shop across State lines with lower taxes
• Have purchased products shipped to an out of state or international address

The more products that are purchased, and the higher the price of the item, the greater the incentive may be to consider options to sales taxation. When sales tax is successfully avoided by utilizing sales tax minimization techniques, a use tax may apply and be required by law. However, this is not always the case as with barter, residence within a sales tax free state, tax holidays etc.

In some cases, a municipal or county sales tax may also be assessed and added to the State sales tax rate if any. In such instances one will either discover this additional tax on a sales tax or through inquiry to the county or other source. In the case of large purchase for which a large amount of tax has been paid and when an individual or household itemizes income deductions, sales tax may be deductible.

Sources:

1. http://www.nolo.com/definition.cfm/Term/B3E6B054-CBDF-408E-9E607EA598A19240/alpha/U/
2. http://articles.moneycentral.msn.com/Taxes/Advice/TheBestAndWorstStatesForTaxes.aspx?page=2
3. http://moneysmartlife.com/how-to-avoid-paying-sales-tax/
4. http://www.ehow.com/how_2080714_shop-online-avoid-sales-tax.html
5. http://en.wikipedia.org/wiki/Use_tax
6. http://www.oatax.com/ar1112006.htm