SOLUTION SUMMARY

PROBLEM/SITUATION: State tax and revenue agencies collect less than what is owed.

SOLUTION: Imaging captures more data from tax forms to improve audits. Imaging also reduces the manpower needed to process tax forms.

JURISDICTION: Delaware Division of Revenue; Massachusetts Department of Revenue, Wyoming.

VENDORS: Northrup Grumman, Unisys, Kodak, Fujitsu, Sony, Plexus, Sun Microsystems, Microsoft, Informix, Datacap, Task Master, Intel.

CONTACT: Alan Golobski, deputy commissioner, Massachusetts Department of Revenue, Processing Division, 617/887-5010

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By Tod Newcombe

Contributing Editor

Massachusetts taxpayers will discover some changes when they receive their tax forms this month. Instead of writing their figures on lines, they will need to put every numerical digit for income, deductions, credits and taxes into a box. While the boxes might be a pain for some, for the Department of Revenue (DOR), they add up to big benefits.

Completed tax forms -- pouring into DOR's mailroom between now and April 15 -- will bypass the army of keypunch operators and go straight to scanners for conversion into electronic images.

At the same time, intelligent character recognition (ICR) software will read all those handwritten numbers and convert them into data that the computers can use to verify the accuracy of the forms. "We're going to be able to capture twice as much data as before," remarked DOR Commissioner Mitchell Adams. "It was just too expensive doing it manually."

DOR is building a two-phase integrated imaging system with Unisys that can process all personal income tax forms.

The scanning and data capture benefits DOR in two ways. On the front end, it reduces the need for manual keypunching, filing and other labor-intensive tax processing tasks. According to Adams, the efficiency of imaging reduces the cost of processing a form from $1.28 to less than $1.00. At the back end, the extra data gives DOR the ability to carry out more accurate audits, which helps to increase voluntary tax compliance. More compliance equals more revenue for the state.

CLOSING THE TAX GAP

Auditing affects only a small percentage of tax returns, but results can be significant. The nation's federal and state tax system is based on voluntary compliance. What tax agencies are owed, but don't collect, is known as the tax gap. For states, closing that gap as much as possible is a major priority. The IRS, for example, calculates that a 1 percent boost in voluntary compliance brings in approximately $5 billion in additional revenue. To realize that benefit and to increase overall efficiency, the IRS has undertaken a multi-billion dollar investment in imaging and information management modernization.

"State legislatures aren't going to raise taxes," said Ken Rainey, director of program development and marketing for tax processing at Unisys Corp., "so states have to realize more net revenue from existing tax rates." Besides figuring out how to increase compliance, tax agencies are also under pressure to become more efficient. In the past five years, manpower at Massachusetts' DOR has shrunk 28 percent. With fewer resources available to collect taxes, agencies are hard-pressed to improve the way they process tax forms.

Imaging technology is one way to achieve these goals. Little more than a high-tech filing cabinet several years ago, imaging has matured into a productive processing and management tool that has become more affordable as hardware and software prices drop. More importantly, ICR as well as optical character recognition software, has greatly improved, making it possible for an imaging system to capture an image of a tax return and convert it into valuable data.

Despite the introduction of electronic tax filing methods, which bypass paper tax forms entirely, Commissioner Adams and other tax experts believe tax agencies are going to be dealing with paper for some time to come. Given that situation, and the maturity of imaging