While the Internal Revenue Service is struggling to modernize its tax system using technology, state revenue agencies are doing the same job very nicely. The IRS, which has spent billions of dollars in recent years trying to automate tax processing and has little to show for its efforts, could learn a thing or two from a growing number of states that have successfully installed imaging-based tax systems.

According to a survey conducted by G2 Research, a significant number of states plan to implement imaging-based tax systems over the next three years. Already, at least a dozen states have installed imaging to process tax returns.

Why the rush to use imaging? Simply because the technology has become cheaper, easier and better. Revenue agencies can use the improved technology to achieve new levels of efficiency and productivity. For example, high-speed duplex scanners can whisk through stacks of double-sided returns without a jam. Software automatically de-skews the occasional image that comes out crooked.

Optical character and intelligent character recognition software together with special forms processing software can turn the most obstinate of returns into valuable data for tax staff to analyze and, if necessary, audit.

This kind of front-end processing, once done by legions of temporary

and permanent clerical staff, has cut the cost of tax processing for downsized revenue agencies. The Massachusetts Department of Revenue, for examble, which saw its manpower shrink by 28 percent over five years, installed an imaging system and saw the cost of processing a

tax return drop from $1.28 to less

than $1.00.

The Delaware Division of Revenue saw its volume of returns increase 40 percent in five years while authorized staffing levels dropped by nearly 20 percent. Not surprisingly, imaging has become a cornerstone of the division's information infrastructure initiative.

EXTRACTING MORE INFORMATION

Despite all the rhetoric about cutting the country's tax burden, collecting tax revenue at the state level remains a big business. In 1994, the 50 states collected nearly $374 billion in taxes, according to the U.S. Census Bureau. State tax sources ranged from individual and corporate taxes to general sales, selective sales, license, motor fuel and a host of other obscure taxes.

State legislatures may not want to raise tax rates, forcing revenue agencies to collect a larger percentage of what is owed by their existing tax base. At the national level, the IRS currently collects 87 percent of the taxes it is owed. The federal agency wants to use imaging and other technologies to boost that figure to 90 percent. By extracting more information from tax returns via automation, states hope to boost their rate of collection too. In addition, faster processing of tax returns can lead to better customer service in the form of more rapid refunds and faster answers to taxpayer's phone queries.

Besides speeding up front-end processing of tax returns with high-speed scanners and recognition software, imaging technology provides revenue agencies with powerful storage systems, such as 14-inch WORM (write once, read many) optical storage discs that can hold 20 to 30 gigabytes of images and data. When integrated with a popular relational database, such as Oracle, Informix or Sybase, searching for a copy of a citizen's tax return can be done in seconds, not days or weeks.

More importantly, imaging gives revenue agencies a powerful tool in workflow. Able to process returns in parallel rather than the traditional serial approach, agencies not only speed up the tax process, but can also use the technology to shift work tasks in a blink of an eye. If, for example, phone queries are running high on a certain day, managers can use workflow software to shift workers away from processing and over to customer service.

Using workflow can be trickier than that, of course, but the results can also be more dramatic. Delaware used workflow to increase the