What Is Electronic Tax Filing and How Does It Work?

Filing taxes electronically has become the preferred method for many due to its speed, convenience, and security. Instead of mailing paper forms, taxpayers can submit returns online using tax software or government-approved platforms, reducing errors and processing times.

Who Can File Electronically

Most taxpayers, including individuals, businesses, and tax-exempt organizations, are eligible to e-file, though eligibility depends on income, filing status, and return type. The IRS Free File program allows individuals with an adjusted gross income (AGI) of $79,000 or less in 2024 to use free tax software. Those exceeding this threshold can still e-file but may need paid software or a tax professional.

Businesses, including corporations and partnerships, can e-file, with some required to do so. Partnerships with over 100 partners must e-file, as must corporations with assets of $10 million or more when submitting Form 1120. Tax-exempt organizations filing Form 990 must e-file if gross receipts exceed $200,000 or total assets surpass $500,000.

Self-employed individuals and gig workers can e-file, including Schedule C for business income, if their tax software supports the necessary forms. Those with complex deductions, such as depreciation or multi-state income, may need specialized software or professional assistance.

Key Filing Steps

Gathering necessary documents ensures an accurate return. Taxpayers should have W-2s, 1099s, and other income statements, along with records of deductions and credits. Investors need Form 1099-B for capital gains and losses, while homeowners may require Form 1098 for mortgage interest deductions. Missing or incorrect documents can lead to discrepancies that trigger IRS scrutiny.

Choosing the right e-filing method is crucial. Taxpayers can use IRS-approved tax software, hire a tax professional, or use the IRS Free File program if eligible. Many tax software programs check for errors and flag potential issues, reducing the likelihood of rejected returns. Those claiming deductions like student loan interest or education credits should confirm their software supports these forms.

Before submitting, reviewing the return is essential. Taxpayers should double-check Social Security numbers, bank account details for direct deposit refunds, and reported income. Even minor mistakes, such as transposed numbers, can cause processing delays. Many e-filing platforms provide a summary highlighting potential red flags, such as missing income sources or unusually high deductions.

Payment Methods

Taxpayers who owe a balance have several electronic payment options, each with different processing times and potential fees. The IRS Direct Pay system allows payments directly from a checking or savings account without additional charges. Payments typically process within one to two business days, and users can schedule payments in advance.

For those preferring debit or credit cards, the IRS partners with third-party processors. Credit card payments incur fees, usually between 1.87% and 1.98%, while debit card payments have a flat fee of around $2.50. Credit card payments may also accrue interest if not paid off immediately.

Electronic Funds Withdrawal (EFW) is available when e-filing through tax software or a professional preparer. This method authorizes a direct debit from a bank account at the time of filing. Unlike Direct Pay, EFW requires the return to be filed electronically at the same time.

The Electronic Federal Tax Payment System (EFTPS), operated by the U.S. Department of the Treasury, is used by businesses but is also available to individuals. Enrollment takes up to five business days, but once set up, payments can be scheduled up to a year in advance. Unlike third-party processors, EFTPS does not charge fees, making it a cost-effective option for estimated tax payments.

Records to Keep

Maintaining documentation is necessary for tax compliance and audit protection. The IRS generally requires taxpayers to keep records for at least three years from the filing date, though some situations require longer retention. If income is underreported by more than 25%, the statute of limitations extends to six years, and in cases of fraud, there is no time limit on IRS inquiries.

Supporting documents for deductions and credits should be kept with the tax return. Those claiming charitable contributions need receipts or acknowledgment letters, while individuals deducting medical expenses should retain statements showing payments and reimbursements. Business owners should keep records of asset purchases, depreciation schedules, and payroll tax filings for audits or future tax planning. Digital copies are acceptable as long as they are legible and accessible.