"E-filing" increased 17 percent during the 2002 filing season, to 47 million filers, said Terry Lutes, director of the agency's Electronic Tax Administration. Most of those returns were sent through professional tax preparers, he told the ETA Advisory Committee.

"That's 36 percent of the tax returns in this country, and I'll match that record against anyone trying to convert people to online financial transactions," Lutes said. "However, that was the 'easy' 47 million, the next 47 million ... don't have online access, don't have resources, or may be more reluctant to use technology."

E-filing is one of the best early examples of the online marketplace government can provide, said Kevin Belden, the committee chairman and a tax executive with IBM Global Services in Armonk, N.Y. Overall expectations for the service should be grounded in the fact that it will take time for a wider selection of taxpayers to notice e-filing's benefits, he said.

The agency will gather information during the 2003 filing season to research why people stick with paper returns, Lutes said. Efforts are underway to broaden the public's understanding of the e-file program, including letting students file returns at their schools.

The IRS also has entered into a three-year agreement with the Free File Alliance, a group of tax-software companies. The deal could let up to 78 million taxpayers e-file for free, Lutes said, and some tax preparers are considering providing Internet access to those without a computer. The deal is expected to attract at least 1 million additional e-filed returns this coming year, he said.

The ETA's efforts are properly focused on tax professionals, said committee member Edward Feinstein, vice president of field operations and development at H&R Block.

"Roughly 30 million returns are being handled by practitioners and e-filed, so it's to the program's advantage to go after those who might not have embraced it, or maybe could file even more than they have been," Feinstein told United Press International. "Over the next year or two or three, as the alliance gains momentum, there will be software developers and paid preparers who will figure out ways to attract even more people."

One possible problem with the system could involve the IRS customer service system dealing with questions about commercial products the agency has no control over, said committee member Rick Oelerich, owner of a Davenport, Iowa, accounting firm. Disclaimers and other online notices have kept the volume of such calls low, Lutes said. The ETA is considering sampling calls during the upcoming filing season to research further reductions in the problem, Lutes said.

The 2003 version of e-filing will have several improvements, including entries for educator expenses and the retirement savings contributions credit, said Jo Ann Blank, director of the agency's Stragetic Services Division. The online Form 1040 also will allow taxpayers to record income from a foreign employer without a wage statement, she told the committee.

Inclusion of the retirement savings credit will ensure millions of taxpayers continue to file online, Feinstein told UPI.

New online tax forms for 2003 include credit for health insurance costs, and taxpayers with a foreign address will be able to apply for an extension more easily using the agency's TeleFile system, Blank said. The system's improvements also cover the 38 state tax agencies that participate in e-filing, she said. Instead of requiring simultaneous filing of federal and state returns, the system will accept state returns by themselves, as well as multiple state returns, non-resident or part-year resident returns, she said.

Business e-filers will benefit from items including wider online access to employee tax forms, Blank said. For 2004, the agency hopes to include individual filer forms for employee-provided health care, along with dealing with the issue of couples who choose the "married filing separately" category in community-property states, she said.

-- SCOTT R. BURNELL, UPI Science News