IRS Modernized e-File (MeF): A Blueprint For Public & Private Sector Partnerships In A 21st Century Digital Economy (DRAFT)
Kin Lane (@kinlane)
The first income tax was assessed in 1862 to raise funds for the American Civil War, and over the years the agency has grown and evolved into a massive federal entity that collects over $2.4 trillion each year from approximately 234 million tax returns.
While the the IRS has faced many challenges in its 150 years of operations, the last 40 years have demanded some of the agency's biggest transformations at the hands of technology, more than any time since its creation.
In the 1970s, the IRS began wrestling with the challenge of modernizing itself using the latest computer technology. This eventually led to a pilot program in 1986 of an new Electronic Filing System (EFS), which aimed in part to gauge the acceptance of such a concept by tax preparers and taxpayers.
By the 1980s, tax collection had become very complex, time-consuming, costly, and riddled with errors, due to what had become a dual process of managing paper forms while also converting these into a digital form so that they could be processed by machines. The IRS despereatly needed to establish a solid approach that would enable the electronic submission of tax forms.
It was a rocky start for the EFS, and Eileen McCrady, systems development branch and later marketing branch chief, remembers, “Tax preparers were not buying any of it--most people figured it was a plot to capture additional information for audits." But by 1990, IRS e-file operated nationwide, and 4.2 million returns were filed electronically. This proved that EFS offered a legitimate approach to evolving beyond a tax collection process dominated by paper forms and manual filings.
Even Federal Agencies Can't Do It Alone
Even with the success of early e-file technology, the program did not get the momentum it needed without the support of two major tax preparation partnerships--H&R Block and Jackson-Hewitt. These helped change the tone of EFS efforts, making it more acceptable and appealing to tax professionals. It was clear that e-File needed to focus on empowering a trusted network of partners to submit tax forms electronically, sharing the load of tax preparation and filing with 3rd party providers. And this included not just the filing technology, but a network of evangelists spreading the word that e-File was a trustworthy and viable way to work with the IRS.
Bringing e-File Into The Internet Age
By 2000, Congress had passed IRS RRA 98, which contained a provision setting a goal of an 80% e-file rate for all federal tax and information returns. This, in effect, forced the IRS to upgrade the e-File system for the Internet age, otherwise they would not be able meet this mandate. A working group was formed, comprised of tax professionals and software vendors that would work with the IRS to design, develop and implement the Modernized e-File(MeF) system which employed the latest Internet technologies, including a new approach to web services which used XML that would allow 3rd party providers to submit tax forms in a real-time, transactional approach (this differed from the batch submissions required in a previous version of the EFS).
Moving Beyond Paper One Form At A Time
Evolving beyond a 100 years of paper process doesn't happen overnight. Even with the deployment of the latest Internet technologies, you have to incrementally bridge the legacy paper processes to a new online, digital world. After the deployment of the MeF, the IRS worked year by year to add the myriad of IRS forms to the e-File web service, allowing software companies, tax preparers, and corporations to digitally submit forms into IRS systems over the Internet. Form by form, the IRS was being transformed from a physical document organization to a distributed network of partners that could submit digital forms through a secure, online web service.
Technological Building Blocks
The IRS MeF solution represents a new approach to using modern technology by the federal government in the 21st century Internet age. In the last 15 years, a new breed of Internet enabled software standards have emerged that enable the government to partner with the private sector, as well as other government agencies, in ways that were unimaginable just a decade ago.
Websites and applications are meant for humans. Web services, also known as APIs, are meant for other computers and applications. Web services has allowed the IRS to open up the submission of forms and data into central IRS systems, while also transmitting data back to trusted partners regarding errors and the status of form submissions. Web services allow the IRS to stick with what it does best, receiving, filing and auditing of tax filings, while trusted partners can use web services to deliver e-Filing services to customers via custom developed software applications.
Web services are designed to utilize existing Internet infrastructure used for everyday web operations as a channel for delivering trusted services to consumers around the country, via the web.
An XML Driven Communication Flow
XML is a way to describe each element of IRS forms, and its supporting data. XML makes paper forms machine readable so that the IRS and 3rd party systems can communicate using a common language, allowing IRS to share a common set of logic around each form, then use what is known as schemas, to validate the XML submitted by trusted partners against a set of established business rules that provide enforcement of the IRS code. XML gives the ability for IRS to communicate with 3rd party systems using digital forms, applying business rules to reject or accept the submitted forms, which then can be stored in an official IRS repository in a way that can be viewed and audited by IRS employees (using stylesheets which make the XML easily readable by humans).
Identity and Access Management (IAM)
When you expose web services publicly over the Internet, secure authentication is essential. The IRS MeF system is a model for securing the electronic transmission of data between the government and 3rd party systems. The IRS has employed a design of the Internet Filing Application (IFA) and Application to Application (A2A) which are features of the Web Services-Interoperability (WS-I) security standards. Security of the MeF system is overseen by the IRS MITS Cyber Security organization which ensures all IRS systems receive, process, and store tax return data in a secure manner. MeF security involves an OMB mandated Certification and Accreditation (C&A) Process, requiring a formal review and testing of security safeguards to determine whether the system is adequately secured.
Business Building Blocks
To properly extend e-File web services to partners isn't just a matter of technology. There are numerous building blocks required that are more business than technical, ensuring a healthy ecosystem of web service partners. With a sensible strategy, web services need to be translated from tech to business, allowing partners to properly translate IRS MeF into e-filing products that will deliver required services to consumers.
Four Separate e-Filing Options
MeF provided the IRS with a way to share the burden of filing taxes with a wide variety of trusted partners, software developers and corporations who have their own software systems. However MeF is just one tool in a suite of e-File tools. These include Free File software that any individual can use to submit their own taxes, as well as free fillable digital forms that individuals can use if they do not wish to employ a software solution.
Even with these simple options, the greatest opportunities for individuals and companies is to use commercial tax software that walks one through what can be a complex process, or to depend on a paid tax preparer who employ their own commercial versions of tax software. The programmatic web service version of e-file is just one option, but it is the heart of an entire toolkit of software that anyone can put to use.
Delivering Beyond Technology
The latest evolution of the e-file platform has technology at heart, but it delivers much more than just the transmission of digital forms from 3rd party providers, in ways that also make good business sense:
- Faster Filing Acknowledgements - Transmissions are processed upon receipt and acknowledgements are returned in near real-time, unlike the once or twice daily system processing cycles in earlier versions
- Integrated Payment Option - Tax-payers can e-file a balance due return and, at the same time, authorize an electronic funds withdrawal from their bank accounts, with payments being subject to limitations of the Federal Tax Deposit rules
- Brand Trust - Allowing MeF to evolve beyond just the IRS brand, allowing new trusted commercial brands to step up and deliver value to consumer, like TurboTax and TaxAct.
Without improved filing results for providers and customers, easier payment options and an overall set of expectations and trust, MeF would not reach the levels of e-Filing rates mandated by Congress. Technology might be the underpinning of e-File, but improved service delivery is the thing that will seal the deal with both providers and consumers.
Multiple Options for Provider Involvement
Much like the multiple options available for tax filers, the IRS has established tiers of involvement for partners to be involved with the e-File ecosystem. Depending on the model and capabilities, e-File providers can step up and be participate in multiple ways:
- Electronic Return Originators (EROs) - ERO prepare returns for clients or have collected returns from taxpayers who have prepared their own, then begin the electronic transmission of returns to the IRS
- Intermediate Service Providers - These providers process tax return data, that originate from an ERO or an individual taxpayer, and forward to a transmitter.
- Transmitters - Transmitters are authorized to send tax return data directly to the IRS, from custom software that connect directly with the IRS computers
- Online Providers - Online providers are a type of transmitter that sends returns filed from home by taxpayers using tax preparation software to file common forms
- Software Developers - write the e-file software programs that follow IRS specifications for e-file.
- Reporting Agents - An accounting service, franchiser, bank or other person that is authorized to e-file Form 940/941 for a taxpayer.
The IRS has identified the multiple ways it needed help from an existing, evolving base of companies and organizations. The IRS has been able to design its partner framework to best serve its mission, while also delivering the best value to consumers, in a way that also recognizes the incentives needed to solicit participation from the private sector and ensure efforts are commercially viable.
Software Approval Process
IRS requires all tax preparation software used for preparing electronic returns to pass the requirements for Modernized e-File Assurance Testing (ATS). As part of the process software vendors notify IRS via an e-help Desk, that they plan to commence testing, then provide a list of all forms that they plan to include in their tax preparation software, but do not require that vendors support all forms. MeF integrators are allowed to develop their tax preparation software based on the needs of their clients, while using pre-defined test scenarios to create test returns that are formatted in the specified XML format. Software integrators then transmit the XML formatted test tax returns to IRS, where an e-help Desk assister checks data entry fields on the submitted return. When IRS determines the software correctly performs all required functions, the software is approved for electronic filing. Only then are software vendors allowed to publicly market their tax preparation software as approved for electronic filing -- whether for usage by corporations, tax professionals and individual users.
Another significant part of the MeF partnership equation is providing seamless interaction with the electronic filing of both federal and state income tax returns at the same time. MeF provides the ability for partners to submit both federal and state tax returns in the same "taxpayer envelope", allowing the IRS to function as an "electronic post office" for participating state revenue services -- certainly better meeting the demands of the taxpaying citizen. The IRS model provides an important aspect of a public / private sector partnership with the inclusion of state participation. Without state level participation, any federal platform will be limited in adoption and severely fragmented in integration.
To nurture an ecosystem of partners, it takes a wealth of resources. Providing technical, how-to, guides, templates and other resources for MeF providers is essential to the success of the platform. Without proper support, MeF developers and companies are unable to keep up with the complexities and changes of the system. The IRS has provided the resources needed for each step of the e-Filing process, from on-boarding, to how to understanding the addition of the latest forms, and changes to the tax code.
Market Research Data
Transparency of the MeF platform goes beyond individual platform operations, and the IRS acknowledges this important aspect of building an ecosystem of web service partners. The IRS provides valuable e-File market research data to partners by making available e-file demographic data and related research and surveys. This important data provides valuable insight for MeF partners to use in their own decision making process, but also provides the necessary information partners need to educate their own consumers as well as the general public about the value the e-File process delivers. Market research is not just something the IRS needs for its own purposes; this research needs to be disseminated and shared downstream providing the right amount of transparency that will ensure healthy ecosystem operations.
Political Building Blocks
Beyond the technology and business of the MeF web services platform, there are plenty of political activities that will make sure everything operates as intended. The politics of web service operations can be as simple as communicating properly with partners, providing transparency, or all the way up to security, proper governance of web service, and enforcement of federal laws.
The submission of over 230 million tax filings annually requires a significant amount of architecture and connectivity. The IRS provides real-time status of the MeF platform for the public and partners, as they work to support their own clients. Real-time status updates of system availability keeps partners and providers in tune with the availability of the overall system, allowing them to adjust availability with the reality of supporting such a large operation. Status of availability is an essential aspect of MeF operations and overall partner ecosystem harmony.
An extension of MeF platform status is the ability to keep MeF integrators up-to-date on everything to do with ongoing operations. This includes providing alerts when the platform needs to tune-in platform partners to specific changes with tax law, resource additions, or other relevant news of operations. The IRS also provides updates via an e-newsletter, providing a more asynchronous way for the IRS MeF platform to keep partners informed about ongoing operations.
Updates over the optimal partner channels are an essential addition to real-time status and other resources that are available to platform partners.
In addition to resources, status and regular updates of platform status of the overall MeF system, the IRS provides insight into where the platform is going next, keeping providers apprised with what is next for the e-File program. Establishing and maintaining the trust of MeF partners in the private sector is constant work, and requires a certain amount of transparency -- allowing partners to anticipate what is next and make adjustments on their end of operations. Without insight into what is happening in the near and long term future, trust with partners will erode and overall belief in the MeF system will be disrupted, unraveling over 30 years of hard work.
The Modernized e-File (MeF) programs go through several stages of review and testing before they are used to process live returns. When new requirements and functionality are added to the system, testing is performed by IRS's software developers and by IRS's independent testing organization. These important activities ensure that the electronic return data can be received and accurately processed by MeF systems. Every time an IRS tax form is changed and affects the XML schema, the entire development and testing processes are repeated to ensure quality and proper governance.
Secure transmissions by 3rd parties with the MeF platform is handled by the Internet Filing Application (IFA) and Application to Application (A2A), which are part of the IRS Modernized System Infrastructure, providing access to trusted partners through the Registered User Portal (RUP). Transmitters using IFA are required to use their designated e-Services user name and password in order to log into the RUP. Each transmitter also establishes a Electronic Transmitter Identification Number (ETIN) prior to transmitting returns. Once the transmitter successfully logs into the RUP, a Secure Socket Layer (SSL) Handshake Protocol allows the RUP and transmitter to authenticate each other, and negotiate an encryption algorithm, including cryptographic keys before any return data is transmitted. The transmitter’s and the RUP negotiate a secret encryption key for encrypted communication between the transmitter and the MeF system. As part of this exchange, MeF will only accommodate one type of user credentials for authentication and validation of A2A transmitters; username and X.509 digital security certificate. Users must have a valid X.509 digital security certificate obtained from an IRS authorized Certificate Authority (CA), such as like VeriSign or IdenTrust, then have their certificates stored in the IRS directory using an Automated Enrollment process.
The entire platform is accredited by the Executive Level Business Owner, who is responsible for the operation of the MeF system, with guidance provided by the National Institute of Standards (NIST). The IRS MITS Cyber Security organization and the business system owner are jointly responsible and actively involved in completing the IRS C&A Process for MeF, ensuring complete security of all transmissions with MeF over the public Internet.
A Blueprint For Public & Private Sector Partnerships In A 21st Century Digital Economy
The IRS MeF platform provides a technological blueprint that other federal agencies can look to when exposing valuable data and resources to other agencies as well as the private sector. Web services, XML, and proper authentication can open up access and interactions between trusted partners and the public in ways that were never possible prior to the Internet age.
While this web services approach is unique within the federal government, it is a common way to conduct business operations in the private sector -- something widely known as Service Oriented Architecture (SOA), an approach that is central to a healthy enterprise architecture. A services oriented approach allows organizations to decouple resources and data and open up very wide or granular levels of access to trusted partners. The SOA approach makes it possible to submit forms, data, and other digital assets to government, using XML as a way to communicate and validate information in a way that supports proper business rules, wider governance, and the federal law.
SOA provides three essential ingredients for public and private sector partnership:
- Technology - Secure usage of modern approaches to using compute, storage and Internet networking technology in a distributed manner
- Business - Adherence to government lines of business, while also acknowledging the business needs and interest of 3rd party private sector partners
- Politics - A flexible understanding and execution of activities involved in establishing a distributed ecosystem of partners, and maintaining an overall healthy balance of operation
The IRS MeF platform employs this balance at a scale that is unmatched in federal government currently. MeF provides a working blueprint can be applied across federal government, in areas ranging from the veterans claims process to the financial regulatory process.
The United States federal government faces numerous budgetary challenges and must find new ways to share the load with other federal and state agencies as well as the private sector. A SOA approach like MeF allows the federal government to better interact with existing contractors, as well as future contractors, in a way that provides better governance, while also allowing for partnership with the private sector in ways that goes beyond simply contracting. The IRS MeF platform encourages federal investment in a self-service platform that enable trusted and proven private sector partners to access IRS resources in predefined ways -- all of which support the IRS mission, but provide enough incentive that 3rd party companies will invest their own money and time into building software solutions that can be fairly sold to US citizens.
When an agency builds an SOA platform, it is planting the seeds for a new type of public / private partnership whereby government and companies can work together to deliver software solutions that meet a federal agency's mission and the market needs of companies. This also delivers value and critical services to US citizens, all the while reducing the size of government operations, increasing efficiencies, and saving the government and taxpayers money.
The IRS MeF platform represents 27 years of the laying of a digital foundation, building the trust of companies and individual citizens, and properly adjusting the agency's strategy to work with private sector partners. It has done so by employing the best of breed enterprise practices from the private sector. MeF is a blueprint that cannot be ignored and deserves more study, modeling, and evangelism across the federal government. This could greatly help other agencies understand how they too can employ an SOA strategy, one that will help them better serve their constituents.