Bye, Bye Batch Processing

We know the drill. If the taxpayer hasn't received their tax refund by Tuesday, they won't get it until the next week. The IRS mails the checks on Friday because they batch process the returns. Noon on Thursdays the gates open and all the return that have been received since the prior Thursday are admitted to the processing queue. A return arriving at 2pm on Thursday will sit for a week. This system was in place when all returns were mailed and has continued with e-filed returns. In fact, the IRS publishes a chart each year, the Refund Cycle Chart, I use to tell clients when to expect their refund.

This will be changing next year with the introduction of Modernized e-File (MeF). MeF use Extensible Markup Language (XML) and is the industry standard for storing and transmitting data. MeF is not completely new. This is the system the IRS has been using for business (1065, 1120) returns since those programs began. Transmission of the 1040 returns and schedules has been based on a system the IRS created in the mid-1980s. The move to MeF for the 1040 series will speed up processing and integrate with the new CADE (Customer Database Access Engine) system.

All returns I e-file are acknowledged. Either the IRS accepts the return or rejects it for matching issues. Currently, a return I e-file can take a minimum of several hours to a couple of days to be acknowledged. Batch processing applied here also. During tax season, a return I file at 10:50 will make the 11am cut off and I should get an acknowledgment by 4 or 5 pm. Last year, returns were picked up 3 times a day. Off season, an acknowledgment can take several days since pick-up are only once a day Monday through Friday. With MeF, I will receive an acknowledgment in 5 minutes to a couple of hours depending on system workload. The IRS is calling this "real time" processing. Faster acknowledgment means I can fix errors in the return and re-file the return sooner. (There is nothing worse than telling a client their refund will be delayed a week because an entry error caused the IRS to reject the return and the corrected return didn't make the Thursday cut off.) The error message are supposed to be easier to understand, too.

MeF will get a return into the IRS system sooner. I get acks faster and the taxpayer should get refunds sooner. A few years ago, some 1040EZs began being processed using the CADE system (they were still transmitted by the old system). Clients who's return was one of the randomly selected returns said they saw refund Direct Deposited in a much shorter time frame than the 2 week average for a direct deposit.

MeF has a several of other advantages over the current system. Teamed with CADE, MeF will help coordinated between IRS computer systems and allow the IRS to more easily compare return info to data in their computers. XML allows the attachment of PDF files. This will be especially helpful when Congress makes last minute changes to the Code. MeF will allow e-filing of multiple years. I will be able to e-file 2008 return until October 15th of this year. The IRS then closes the e-file system to get ready for 2009 returns. Once the system is fully implemented, I will be able to e-file the current year and the 2 prior years. The system will only close for a couple of weeks (as opposed to the 3 months now).

Modernized e-File is being phased in over the next several years. In January of 2010, Forms 1040, 4868 and 21 related forms and schedules will enter MeF processing. This will cover most of the returns I file. Most notably missing is the Schedule F. The second phase, 2011, doesn't look like it will add forms. The IRS is saying hardware and code optimization's (fixing the bugs?) But the MeF FAQ the IRS has issued do set January of 2011 as when back year e-filing will begin. Finally, in January of 2012, the remaining 1040 forms and schedules will be available for modernized filing.

Modernized e-Filing is going to make major changes to the tax preparation business. But I think that is another post. The IRS has a lot of info about MeF on their web site. The best place to start is here.