by Steve Westly
I hope you enjoyed doing your taxes a couple weeks ago.
It seems odd to associate joy with tax preparation. After all, filling out tax returns is frustrating, confusing, stressful, and, if you hire an accountant or purchase special software, awfully expensive.
Yet in California we found an innovative way to use technology to streamline your taxes, save the government money, and get people their refunds faster. The program is called “ReadyReturn,” and it’s the sort of common sense approach that both parties ought to support. It was a glowing success in California — and there is no better time to take this program national.
In short, a significant percentage of Americans have one employer, little or no investment income, and take only standard deductions. In California, the Franchise Tax Board sends these people a copy of their completed state income tax returns with a note that essentially says: “Congratulations, your taxes are done.” Taxpayers have the option of signing the form and sending it back, modifying any of the information and re-calculating their return, or throwing it out and starting from scratch.
ReadyReturn has three big advantages:
1. Saves the filer time and reduces errors: Because the government already has basic income information for most Americans, it can almost instantaneously fill out your tax returns, saving you time and reducing the chance of errors.
2. Saves the government money: Because the forms are easier to read than hand prepared forms, the number of errors is reduced dramatically. This saves California’s Franchise Tax Board substantial money.
3. Get your refund faster: 70% of Americans receive tax refunds because most people “over-withhold.” With ReadyReturn, people receive their tax refunds within seven days — not weeks.
The average taxpayer in California saves 30 minutes of work and $40 by using ReadyReturn — and that is just for state taxes.
Now that ReadyReturn is completely online, California saves a stunning $2.25 per filing.
At the federal level, over 20 million taxpayers would be eligible for a similar program and broad adoption could save the federal government over $2 billion per year.
Government efficiency, a term not always applied to the I.R.S., is also enhanced using ReadyReturn. Regular filers are eight times more likely to receive an error notice than those using ReadyReturn, and return processing costs are lower due to a reduced “fall out” rate, more taxpayers e-filing and the reduction in error notices.
Response to ReadyReturn in California has been overwhelmingly positive. The initial trial in 2004 and 2005 received a 98.5% favorability rating from participants. It’s hard to imagine another government program with that level of public support.
The only opposition to making paying taxes easier comes, not surprisingly, from the tax preparation software industry. They are spending millions of dollars on a campaign to eliminate funding for ReadyReturn in California and will likely bring the same level of determination to Washington.
By enacting ReadyReturn, Congress can send a clear message to the American people that their interests come first. And there is no reason why Congress and the I.R.S. should stop there.
Third parties, like your employer, already send the government most of the data you need to prepare your taxes. A concept called “data retrieval” uses existing technology to enable the I.R.S. to fill-in most of the information for you.
Taxpayers, or their preparers, should be able to access this information and download it onto an electronic tax return. Allowing people to access this information would substantially reduce the largest component of tax filing costs: record keeping.
A “data retrieval” system could save taxpayers up to $10 billion in annual compliance costs. Equally important, the system would reduce the aggravation and anxiety most of us have about keeping records.
The primary difference between “data retrieval” and ReadyReturn is that “data retrieval” applies to all taxpayers — beyond the 20 million that are eligible for ReadyReturn. Many taxpayers have fairly complex returns with itemized deductions and income from various sources. “Data retrieval” won’t be able to calculate specific tax liabilities, but it can remove much of the work for most filers.
Critics will claim “data retrieval” is just another “big brother” government program. In reality, it is exactly the opposite.
“Data retrieval” represents an enormous leap forward in taxpayer rights. Why shouldn’t taxpayers know what information the government already has? By increasing transparency, taxpayers can avoid unnecessary stress and costly mistakes.
Additionally, if the government knows you’re using its data for your returns, it has less motivation to suspect any problems or, even worse, perform an audit.
Senators Ron Wyden (D-Ore.) and Judd Gregg (R-N.H.) recently introduced the Bipartisan Tax Fairness and Simplification Act of 2010, which gives taxpayers the option of requesting a completed 1040 form from the I.R.S. that they can “review, modify and sign.” While this feature is designed to work with the changes to the tax code outlined in the legislation, it shows this can be done. In the House, Congressman Jim Cooper (D-Tenn.) has already introduced a ReadyReturn bill and Congressman Bill Foster (D-Ill.) has introduced a bill to implement “data retrieval.”
Democrats and Republicans in Congress should reach across the aisle to embrace innovation and make paying taxes easier for millions of Americans.
Steve Westly served as California State Controller and Chair of the Franchise Tax Board from 2003 to 2007. He is now the Managing Director of The Westly Group, a clean technology venture capital firm.