Ready, Set, Return

California rolls out its Ready Return pilot for the 2005 tax season.

by / March 28, 2005
"In this world, nothing can be said to be certain, except death and taxes," Benjamin Franklin once wrote.

Death comes only once in a lifetime, but dreaded tax time looms on April 15 annually.

"For most people, filling out their tax return is about as fun as having a root canal," said California State Controller Steve Westly, who also serves as chairman of the state's Franchise Tax Board (FTB). "If we can give people a chance to skip the trip to the dentist, we'd love to do that."

This year, the FTB is offering a new pilot program to certain taxpayers. For a test group of 10,000 Californians, Ready Return is expected to take the headache out of filing a tax return.

Ending the Paper Chase
"The idea is to reduce the filing burden," said FTB Spokeswoman Denise Azimi. "We get a lot of complaints that it's a drag."

With Ready Return, taxpayers won't stand in long lines to get forms or worry about which form is right for particular filing needs -- the tax form is already completed for each individual using information on file with the FTB.

"You don't have to do any calculations or collect documents on your own. Employers provide so much information to the government based on your W-2 that it seems like a value-added service," Azimi said. "Since we already have the information, why do we make you go get blank forms, read the instructions, determine what you need to do? There's a learning curve there."

With Ready Return, a user simply logs on to the FTB Web site. His or her tax return has been filled in by the FTB using information already provided by the taxpayer and his or her employer -- the FTB does the math, while taxpayers review the figures, make necessary corrections and send their returns back electronically.

"If you agree with the return, you can even send it in on paper. You don't have to e-file it," Azimi said, stressing that the responsibility to file an accurate return still rests with the taxpayer, and the same rules still apply. "We're trying to accommodate by filling out a return based on the information we have. If the taxpayer determines it's not accurate, they've got to correct it."

The FTB didn't need to create any new systems or applications to launch the Ready Return pilot -- existing information systems were tapped for the front-end processes, and the FTB simply modified its existing e-file system for the back-end processes.

"In terms of implementing the Ready Return Pilot, we followed our board's direction," Azimi said. "Since the FTB, by law, can specify the form and manner of filing, existing policy supported offering Ready Return as a filing option."

By Invitation Only
The FTB is sending out 50,000 invitations for this pilot, and from that number, the agency hopes to attain a sample group of 10,000 taxpayers to evaluate Ready Return. Based on the pilot's success, the FTB will decide whether to expand it to a wider audience.

According to the FTB's Web site, the invitations sent out in February provided taxpayers with all information needed to participate, including:

  • how to view the return online;
  • how to make changes;
  • how to get the refund deposited directly into the user's account;
  • how to e-file the return; and
  • what to do if the taxpayer doesn't want to participate.

    There's no obligation to participate in the program.

    "We're telling the taxpayer, 'Here's your information and how we think your return should look. If you agree with it, submit it, and if you don't, correct it. And if the whole concept bothers you, shred
  • it up and start from scratch,'" Azimi said. "We encourage electronic filing because it saves the state money, but you don't have to do that."

    Westly thinks filing electronically is a smart idea.

    "You get your tax refund sooner," he said. "More than 60 percent of all Californians get a refund, so why not file online and get that sooner? It can also save the state as much as $1 per return, so it's a win-win."

    The assumption is that making filing easier for people will increase compliance -- more than 800,000 Californians don't even file their taxes because they are intimidated by the process, the FTB said. Using Ready Return may ease their apprehension.

    Those eligible for the program file bare-bones basic returns; that is, single taxpayers with no dependents, standard deductions and income from wages only. Those with itemized returns, attached schedules and capital gains are not eligible -- at least not yet, Azimi said.

    "It could be expanded to about 3 million people in the future if this pilot proves successful, but it's never going to take care of all 14.4 million," she said.

    Hacking Worries?
    Many people worry about putting their personal information on the Web, and rightly so. In one recent case, a hacker breached the network of T-Mobile USA, and before being apprehended, accessed personal information on hundreds of customers, including their Social Security numbers.

    When hackers infiltrate everything from Bank of America to Paris Hilton's cell phone, there's reason to wonder about the privacy of electronic data.

    "I don't think anything's foolproof," Azimi said about security concerns. "We have very high standards concerning encryption, security. We use industry banking standards. We haven't had any problems with hackers. We're constantly monitoring for problems."

    Ready Return is just one component of a multifaceted FTB e-services system, which allows California taxpayers the ability to access information and transmit data over the public Internet. Using industry standard 128-bit Secure Sockets Layer (SSL) encryption, the FTB ensures security and privacy of taxpayer data, as well as the security and availability of their network.

    "The security design for all of our e-service applications is based upon the principle of 'defense in depth,'" Azimi said. "This ensures that anyone entering our network is properly authenticated and restricted to those areas they are authorized to use."

    Since the FTB's e-service capabilities were already in place prior to the Ready Return pilot program's implementation, no new security measures were required. Both Azimi and Westly noted that the same security concerns exist with the U.S. Postal Service. Anyone can break into a mailbox -- that's why federal laws prohibit tampering with U.S. mail.

    "I've directed the FTB staff to apply the same privacy standards it currently uses in other tax filing programs," Westly said. "We're not increasing the risks to any of the taxpayers."

    Blocked by the Competition
    The state encountered opposition in the past from tax preparers when it attempted to create a similar offering for taxpayers. In 1999, the FTB and Department of General Services (DGS) attempted to build online tax software and offer it to the public as an FTB service by adding the project onto an existing contract, according to tax preparation industry sources. The move was challenged in a joint suit filed by H&R Block and Intuit, in which the plaintiffs argued that the state had broken the law by not offering the job up for a public bid. A Superior Court judge in Sacramento ruled in favor of the plaintiffs.

    Intuit believes every California taxpayer deserves the right to independently and privately prepare his or her own taxes, said Julie Miller, a spokeswoman for Intuit, which sells tax preparation software.

  • "This FTB pilot really undermines the fairness, basic principle and right of every taxpayer to privately determine their own tax liability," Miller said.

    She said Intuit believes California taxpayers don't need Big Brother's help to determine what they owe the government, and that it's not in the tax collector's best interests to help taxpayers pay the lowest legal tax liability.

    There is also concern at Intuit that, because this program targets people with simple returns, the people are predominantly lower income minority taxpayers who may be put at an unfair advantage.

    "How intimidating is it to get a letter from the state revenue agency with a tax bill?" Miller said. "Are they likely to even challenge that determination by the state? It's like getting a letter from the IRS."

    There is doubt among tax preparers like Intuit that Ready Return will increase compliance, as claimed, or help reduce the state's annual $6.5 billion collection shortfall, as reported in an article by The Sacramento Bee about the Ready Return program.

    "Our feeling is that it doesn't improve compliance because it doesn't capture nonreported, self-employment income," Miller added. "It's going to apply to the W-2 wages that are already being reported."

    There are people who won't benefit from the Ready Return pilot, Azimi acknowledged.

    "If you have a complicated tax scenario -- enough where you need to seek advice -- then you probably do want to talk to a tax professional or buy some sophisticated tax software," she said.

    Westly said programs like Intuit's TurboTax clearly fill a need and have shown their appeal to some taxpayers.

    "We think the public should use whatever best suits their needs," he said. "The Ready Return is really targeted for people who are simply taking their W-2 and filling it in. Most of the other products are for people who have more complex returns. We're trying to make filling out people's taxes easier. To the extent we can do that, I think it's a good thing."

    Miller contends that Ready Return isn't simplifying the tax filing process that much. Taxpayers must still file federal taxes in addition to their state taxes. The benefit of Intuit's TurboTax Software over Ready Return, she said, is that you only have to do your taxes once.

    "You do your federal return -- all that information flows into your state return," she said.

    It's not a question of unfair competition, Miller added, saying that TurboTax versus Ready Return isn't really an apples-to-apples comparison. Through the Free File Alliance, software companies like Intuit are currently offering their software to taxpayers for free. The full software package retails for about $30 at Office Depot, Staples or Wal-Mart.

    "It's about tax revenues," she said. "The FTB can position it that this is about ease of use, but the state controller has come out and said they estimate this return-free system is going to generate billions of dollars in state tax revenues."

    When asked if she thinks the outcome of Ready Return will adversely impact companies like Intuit, Miller said it's hard to say, at least now.

    "Today? No. We're watching it closely," she said. "We're interested to see what happens."

    Time Will Tell
    The best part about any of these online programs is they ensure a whole lot less scribbling and paper crumpling for the often-bewildered taxpayer -- if there's an error in a person's tax return, it's going to be less of a problem than before. Now it's as simple as click, delete, re-enter.

    As the frenzy to file intensifies, most Californians would probably agree that any program that can make the yearly tax filing experience any less pencil gnawing is a boon, but only time and testing will reveal how well Ready Return will fill the bill for them, or the tax return.

    "This is the first-of-its-kind program in the country," Westly said of Ready Return. "If this goes well, we can take the headache out of taxes for an awful lot of Californians. The only way to know for sure is to try it. The people of California speak, and if they tell us they like it, then we'll go forward. If not, if people have concerns, then we tried. The key is, California ought to be an innovator, and that's what I'm determined to do."
    Sue Owens Wright Contributing Writer