Tax Processing at the Top: How the Big States Use Imaging

States that collect the most tax revenue use imaging in surprisingly different ways.

by / December 31, 1997
In 1996, states collected $418.6 billion in tax revenue. How much of that was processed by imaging technology is unknown.

The nation's three largest states in terms of tax revenue -- California, New York and Texas -- are in a league of their own. They have accounted for more than one quarter of all state tax revenue collected in 1996. The number of taxpayers and tax documents processed by these states is equally big: California receives more than 13.5 million income tax returns each year; New York gets about 10 million; Texas doesn't have a state income tax, yet it still must process as many as 13 million tax documents annually.

Not surprisingly, these three states have turned to imaging to automate how they process tax returns, but their reasons for doing so vary. So too, have their methods of deploying imaging.

New York: Speed the Return

When New York's state Legislature cut in half the time allowed for processing returns and mailing refunds, the Department of Taxation and Finance put imaging on the fast track; but that was 1994, and recessionary times kept a tight lid on capital expenditures. Rather than wait for the economy to improve, the department outsourced the operation to Fleet Bank.

As part of the agreement, the bank opens the mail; scans the documents; captures data using optical and intelligent character recognition; assigns tracking numbers to the images; and deposits any checks that come in. At the end of the day, Fleet gives the state a magnetic tape that contains all the data and images. State staff takes over and runs the data through all the edits and audit routines and generates the refund checks.

1998 marks the third year of a 10-year contract with Fleet and the first year where imaging will be used on all 10 million income tax returns. According to George Mitchell, deputy commissioner for the department's Office of Revenue and Information Management, the state has been able to meet the Legislature's mandate of mailing refunds within 45 days, instead of 90 days in past years.

In addition, the state is on track to save between $7 million to $10 million annually, largely due to lower labor costs. "Tax season used to be a cottage industry of patronage jobs in Albany," Mitchell remarked. By outsourcing, the state's need for temporary labor -- and all its requisite costs -- has ended. "The bank is much more efficient in terms of employment," he said, creating a tremendous savings for the state. Over the course of the contract, the state expects to save as much as $100 million and will pay Fleet $250 million to $300 million for processing state tax returns with imaging.

For each return Fleet Bank processes, it receives a fee that varies according to the complexity of the document. About 55 percent of the returns are generated by professional tax preparers and are considered relatively simple to process. The other 45 percent are mostly handwritten and take more processing time.

Fleet Bank uses client/server technology to process the returns. High-speed, duplex scanners, workflow software, barcoding and a network capable of handling 800,000 images per day lies at the heart of the current system. Eventually, the imaging application will be integrated with the state's back-end tax compliance and auditing sections.

But for now, the emphasis is on speed, cost reductions and continuous attention to the special relationship the state has with Fleet Bank. "We have to fashion working relationships that are on a day-to-day basis," said Mitchell. "Everything we do is jointly planned and developed. That takes getting used to on both sides of the partnership."

California: Keep It Simple

California has the oldest imaging application for processing tax returns in state government. Started in 1992, the system has stayed steadfastly simple despite five years of technological improvements. "We were driven by the market," explained Frank Lanza, director of processing services at California's Franchise Tax Board (FTB).

The market back then was the 60 percent of income tax returns prepared by the state's professional tax preparers. These returns are computer generated and easy to process. "We didn't attempt to scan hand-prepared returns because the technology at the time didn't produce the accuracy that met our strict criteria," said Lanza.

The board uses high-speed Kodak scanners and optical character recognition software from Caere Corp. to process as many as 250,000 returns in a single day and up to 4.8 million in a year. The system is strictly a forms processing operation. Document images are not retained for archival use. "Right now, the cost of storage and the lack of a robust network infrastructure are the main reasons we aren't storing images," explained Lanza.

But the current system is about to change. Plans are underway to capture and retain the images and to use intelligent character recognition technology for processing the millions of handwritten returns that are sent in each year. FTB hopes to use the Internet as part of the tax processing pipeline. The board is in no hurry, however, and will wait until the technology is reliable. Their goal is not to adapt new technology as quickly as possible "but to reduce operating costs," said Lanza, "while providing the highest level of service to tax preparers and taxpayers."

Texas: No Income Tax But Plenty of Paper

With no state income tax, the Texas Comptroller of Public Accounts doesn't have to worry about processing huge stacks of returns during the month of April. Nor does it have to deal with state requirements to mail millions of refund checks within a certain time frame.

Instead, the emphasis is on back-end processing. "We capture images to help our file maintenance program," said Jennifer Richards, imaging project manager for the Office of the Comptroller. A high-speed Scan Optics scanner feeds as many as 80,000 sales and franchise tax forms per day into a FileNet image processing system. More than 6 million or 50 percent of the paper documents the tax agency receives are imaged and read by OCR (optical character recognition) software. The data is uploaded to a mainframe computer for processing.

A software program "scrapes" key field data about each document from the mainframe application and indexes all the images, which are initially stored in the system's cache for faster retrieval, before being routed for storage in optical jukeboxes. "It's a slick process," remarked Richards, "that's practically free of any operator intervention."

Free of the laborious indexing task, staff can concentrate on processing the tax forms for exceptions, overpayments and adjustment notices. According to Richards, the biggest benefit of the system has been the ease of access to data and documents. "It's generated tremendous employee satisfaction," she said.

As sophisticated as the imaging application sounds, it was developed in less than six weeks. "We knew what we wanted and had control of the project," said Richards, in explaining why the rapid turnaround worked so well. She added it's important that you make imaging suit your needs and not the other way around.

January Table of Contents