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When electronic filing was first available only federal returns could be transmitted this way. It was still too new and costly for states to setup but it didn't take long before they too embraced the process. A significant number of restrictions kept the number of returns electronically filed low but the numbers have increased dramatically over the last decade.

At first, the tax-paying public did not eagerly utilize this process, especially since most tax preparation firms charged a separate fee for this service. Some taxpayers still refuse to electronically file their tax returns. The reasons are many and in most cases completely mythical. I'm going to give you five reasons why you should file your federal and state tax returns electronically.

First, let's examine why the Internal Revenue Service (IRS) and the states prefer electronic filing. To do this, we must consider what the process was like prior to implementation of electronic filing. Every tax season the IRS would "gear up" by hiring thousands of seasonal workers to process tax returns that arrived through the mail. These workers would do a variety of tasks to include opening and sorting the returns, but their primary duty was data entry. For decades the IRS has been capturing all of our information on a computer to process and analyze. One of the more amusing reasons people would give for not electronically filing was that they refused to have their tax return on a computer, something they couldn't stop nor control.

As you have probably surmised, when the IRS receives your tax return electronically the agency doesn't have to hire extra workers to key in your data. Data entry is also prone to human error, which costs the IRS time and money to correct. A substantial cost savings was also realized when the IRS first provided direct deposit of tax refunds. The first year that refunds were electronically deposited, the IRS saved an estimated 35 million dollars on postage alone.

Another benefit of electronic filing is accuracy of critical information. When a tax return is submitted to the IRS electronically the information listed on the documents such as name, date of birth and Social Security Number (SSN) can be verified with the Social Security Administration (SSA) within days. If the information doesn't match the SSA records the tax return is then rejected electronically but is quickly available for corrections and retransmission.

A common problem with data matching occurs

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