Your biggest refund, guaranteed? Internet access, tax filing method, and reported tax liability

Abstract

The fraction of US individual income tax returns filed as hand-prepared paper returns fell from 31 to 15% between 1999 and 2004, reflecting the spread of high-speed Internet and increased use of tax preparation software. I use zip code-level Internal Revenue Service tax data from 1998 to 2007 and Federal Communications Commission Internet service provider data to examine the effect of high-speed Internet availability on tax reporting behavior. Differences-in-differences results show increased rates of itemizing, higher total value of itemized deductions, and lower tax-to-income ratios after high-speed Internet becomes available. I differentiate between access in the tax year and the filing year and show that the tax reporting effects are driven by filing year availability and that filing year Internet availability also positively predicts electronic filing. I use instrumental variables methods to explore the relationship between Internet availability-induced electronic filing on tax reporting behavior and find suggestive evidence that e-filing driven by Internet access increased itemizing rates and total value itemized and lowered tax-to-income ratios. The results suggest changes in tax filing method driven by increased computer use and Internet access helped taxpayers identify relevant deductions and credits and lowered reported tax liability.