Jacquelyn H. Tracy, president of the R.I. Society of Certified Public Accountants, says electronic filing of tax returns will benefit both government and individuals.

The Providence Journal / Connie Grosch

PROVIDENCE — Big changes are in store for individuals, businesses and others who file tax returns.

A little-noticed provision in a new federal tax law will — for the first time — require all but the smallest tax preparation firms to file federal tax returns electronically — a process known as “e-file.”

The Rhode Island Division of Taxation is also quietly working on a far-reaching expansion of its own e-file procedures.

The result will be a sharp increase in the number of state and federal tax returns that are filed electronically instead of on paper by mail.

This, in turn, should generate additional savings to the state and federal agencies that process tax returns — at a time when Rhode Island and the nation face big budget deficits.

More e-filing will benefit individuals, too, said Jacquelyn H. Tracy, president of the Rhode Island Society of Certified Public Accountants.

With e-filing, taxpayers need not worry about mailing their returns, she said. They promptly receive proof that their returns have been filed, and they typically receive refunds sooner, said Tracy, partner in Mandel & Tracy LLC, a CPA firm in Providence.

The first major shift springs from legislation approved by Congress (H.R. 3548) and signed into law by President Obama on Nov. 6.

That law focused mainly on extending unemployment benefits, and on modifying and extending the federal income-tax credit for first-time homebuyers.

But under another, less-publicized provision, the federal government set an e-filing requirement for individual income tax returns filed by tax return preparers.

About 20 states — including Rhode Island — have some type of e-filing mandate already in place. But until now, the Internal Revenue Code has expressly prohibited Uncle Sam from requiring preparers to e-file individual federal returns.

The new law thus represents the first time in history that the federal government has issued such an e-filing mandate. And the threshold has been set so low that nearly all paid preparers will be required to comply.

(The new federal law does not require individual taxpayers to e-file. But about 60 percent of taxpayers use a preparer. Therefore, some taxpayers could soon be required to e-file through their preparers for the first time.)

In general, the new federal law requires every tax-return preparer who prepares more than 10 returns a year — including individual, estate and trust tax returns — to file electronically.

The federal mandate will take effect for returns filed after Dec. 31, 2010.

But Rhode Island is ahead of the curve, the result of legislation approved by the General Assembly and signed into law by Governor Carcieri in July 2008.

That law generally authorized state Tax Administrator David M. Sullivan to require e-filing by every paid preparer who prepares more than 100 Rhode Island tax returns.

Sullivan put the e-file mandate in place on Jan. 1, 2009, for personal income tax returns. Partly as a consequence, the e-filing of state income tax returns — which was already on the rise — took a big jump. About 358,000 Rhode Island returns have been e-filed so far this year, up 22 percent from last year, state figures show.

Overall, more than six out of every 10 Rhode Island personal income tax returns are now filed electronically, Sullivan said.

But when the new federal law takes effect about a year from now, with its lower threshold, “That’s going to have a tremendous impact on us,” Sullivan said. That is because preparers who e-file a taxpayer’s federal return typically e-file the Rhode Island return at the same time.

Rhode Island is one of nearly 40 states that take part in a joint federal-state partnership which allows the electronic filing of a taxpayer’s federal and state income tax returns at the same time, according to the Internal Revenue Service.

Thus, as more federal returns are e-filed, more Rhode Island returns will be, too, Sullivan said.

In the meantime, the state is in the process of upgrading its computers to mesh with a new system that the IRS is in the process of phasing in, said Michael F. Canole, the state Division of Taxation’s chief of examinations, and Susan M. Galvin, the agency’s chief of tax processing services.

As a result, e-filing will soon be allowed for some Rhode Island personal income tax returns that could not be e-filed before because they included lengthy and detailed supporting documents; e-filing of corporate tax returns for the first time (probably starting in June or so); and e-filing of information returns filed by partnerships (probably late next year), Galvin and Canole said.

From the government’s standpoint, e-filing saves money. It costs the state tax agency about $1.50 to process a paper return, compared with 70 to 80 cents for an e-filed return, Sullivan said. And when the new procedures take effect, “I would think the expense saving on the processing on the state side just has to be tremendous,” Tracy said.

Many preparers have long offered e-filing as an option to clients, Tracy said. In her practice, 95 percent of returns are e-filed, she said. Tracy said her firm does not charge add-on fees for electronic filing “because we want to encourage e-file.” Some firms pass along the extra cost, either as part of their overall fee or as a separately stated fee, she said. Fees vary by preparer.

ndowning@projo.com