FTA Continues Analysis of Electronic Filing of

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					            FTA Continues Analysis of Electronic Filing of Individual Income Tax Returns

This article represents the second installment of a two-part FTA
analysis on the impact of electronic filing in theworld of tax
administration. While Part 1, which appeared in last month's
edition, focused more on an overall e-filing landscape on the state
and federal levels, Part 2 investigates more specifically the effect
e-filing has had on how states process information and how e-
filing mandates have influenced the tax scene overall.

As recently as 2000, paper was the undeniable king of all tax
return media, accounting for 80 percent of all individual income
returns. Paper returns were the standard and the various forms of
non-paper filing (ELF, Direct 1-File, Telefile) were just begin-
ning to make inroads into the market.

In the first years of this new century, those inroads became
expanding avenues. E-filing enjoyed several growth spurts,
hitting its stride even as the American economy was downsizing.
By 2004, simple paper returns had lost their majority status; they
now make up only 49 percent of the total market. What seemed
impossible just a few years ago is currently becoming a reality as
tax administrators bear witness to the demise of the pulpy giant.

Returns that include bar codes also have taken on an increased
role in state filing. In 2004, 20 states had a program that called
for certain computer-produced returns that are filed on paper to
also include a 2-dimensional bar code capable of being read
quickly and accurately by either hand-held or high speed scan-
ners. While not as efficient from a processing standpoint as
electronic returns, bar code returns substantially reduce the
                                                                       One-Liners • GlobalExchange • 2005 Compliance
                                                                            Workshop Agenda • By the Numbers
                                                                                      2005 Conferences
                    (Continued on page 12)

                                              Tax Administrators News • February 2005                                  9
                                            West Virginia Gov.
                                            Manchin has ap-
                                            pointed       Virgil
                                            Helton to the post of
                                            tax commissioner.
                                            He is currently the
                                            deputy director and
                                            chief financial of-
ficer of the Lottery Commission. He also has worked as the CFO
for CDI Engineering Group, Inc. and as Senior Project Manager
of AddVantage Performance Group, Inc. located in Atlanta,                  Recent Headlines from TaxExPRESS
Georgia. He is a CPA and a graduate of Concord University in
West Virginia. Acting commissioner Dale Steager will return to
his position as general counsel for the Department of Revenue.
                                                                        News Round-Up from January:
Ken Miller has resigned his post as commissioner of the Indiana
Department of Revenue. He had been with the agency for 34               Congress’ first law of the year (H.R. 241) will allow taxpay-
years and had served as commissioner since 1992. Ken is known           ers to take a 2004 deduction on the income tax return for
for his pioneering work in the processing area, particularly the use    tsunami charitable donations made in January 2005.
of bar codes to capture income tax return information – a
technique now employed by about one-half of the states, Canada          The federal budget deficit will total about $427 billion in FY
Revenue Agency and the IRS. Incoming Indiana Gov. Mitch                 2005, the largest deficit ever and about $15 billion higher
Daniels has appointed Thomas Obsitnik as interim commis-                than FY 2004, according to an updated forecast released last
sioner. He is an accountant by training and has most recently           week by the Office of Management and Budget.
worked as an Investment Advisor with Eli Lilly and Company.
                                                                        In a sharp departure from prior years, several companies,
                                                                        including TurboTax (Intuit), are offering free electronic
France is offering                                                      filing and preparation for all taxpayers (or all taxpayers in
a tax credit equal                                                      selected states) without regard to income, as part of the IRS
to about $26.60                                                         2005 Free File Alliance offerings.
to taxpayers who
file this year’s                                                        Members of the federal tax reform commission will be:
individual tax                                                          former taxwriters Connie Mack of Florida (chair) and John
forms on the                                                            Breaux of Louisiana (vice chair); former IRS Commissioner
Internet. The 20-                                                       Charles Rossotti; James Poterba, who is with the department
Euro credit is called an experiment intended to boost online filing     of economics at the Massachusetts Institute of Technology;
over the next three years. French online filing doubled from            former GOP Representative Bill Frenzel of Minnesota;
600,000 in 2003 to 1.2 million in 2004. Officials hope the credit       Elizabeth Garrett, a law professor at the University of
will push them to the 2 million mark.                                   Southern California; Edward Lazear, professor of human
                                                                        resources, management and economics at Stanford
Spain has created the International Relations Coordination Unit         University's graduate school of business; Timothy Muris,
to oversee international tax relations. The new agency replaces         who is with O'Melveny & Myers LLP in Washington; and
a temporary work group that was created by a 1997 resolution.           Liz Ann Sonders, chief investment strategist with Charles
The unit will be part of the State Taxation Administration Agency       Schwab.
and will serve as Spain’s interlocutor with foreign tax agencies
and other international organizations.                                  The IRS has announced that it will discontinue its individual
                                                                        income tax TeleFile application after the 2005 filing season.
Japan’s Ministry of Economy, Trade and Industry is preparing to         That also means the end of TeleFile in the eight states that
submit legislation to Parliament that will create a limited liability   partner with IRS in the FedState TeleFile.
partner (LLP) system for supporting start-up businesses, small
investors and law firms. An LLP system limits investors respon-
sibility only up to their specific investment, while still allowing                      (Continued on page 13)
them to decide profit allocations and avoid corporate tax pay-
ments for the duration of their investment. Already widely seen
in the West, the LLP system is intended to foster new joint
ventures and high-risk projects.

                                               Tax Administrators News • February 2005                                               10
                          FTA Releases Priliminary Agenda for 2005 Compliance Workshop

2005 FTA COMPLIANCE WORKSHOP (GOV'T ONLY)                         1:30 p.m. – 2:15
March 13-15, Tampa, Fla.
‘EMERGING ISSUES IN ABUSIVE TRANSACTIONS                          Illinois’ abusive shelter legislation and voluntary compliance
MEETING’                                                          amnesty
March 16, Tampa, Fla.                                             Dan Hall, Illinois

PRELIMINARY AGENDA                                                Pulling It All Together, or “The Complete Collections Pack-
(NOTE: As always, the agenda is subject to change. In             age”
particular, new topics are being added. Get up-to-date informa-   Bart Graham, Georgia
tion from <http://www.taxexchange.org/member/meet/
agend_cw.html>. If you need a password, go to http://             IRS Tricks for Improving Filing and Payment Compliance
www.taxexchange.org/reg/.)                                        Jeff Stetina, IRS

                                                                  2:25 – 3:10
Monday March 14
                                                                  North Carolina Voluntary Compliance Program
8:30 - 11       General Session                                   John Sadoff, Alan Felton

Welcome                                                           Helping Delinquent Taxpayers Help Themselves
Harley Duncan, Executive Director, FTA                            Vicki Siekert, Wisconsin

Compliance Issues - State Taxes in Australia                      CD-Based Training for Out-of-state Auditors
Rob Dickens, State Revenue Office, Victoria, Australia            Tremaine Smith, Washington State

Tax Compliance approaches and Data Mining Strategies              3:20 – 4:05
Ermil Sipp, Head of Compliance Strategy, New South Wales,
Australia                                                         What Happens after a Voluntary Compliance Initiative?
                                                                  Debbie Petersen, Debbie Langsea and Fred Dong, California
Update from the U.S. States                                       Franchise Tax Board
Harley Duncan, Executive Director, FTA
                                                                  Tips for More Efficient Collections
                                                                  Charlie Helms, North Carolina
11:15 - 12:15
                                                                  Panel: The latest and greatest data exchanges
Removing Paper from the Audit Process                             Moderator: Rod Sterling, IRS
Sara Kelley, Minnesota
                                                                  4:15 - 5
Standalone Collections PC Tablet Project
Earl Millett, Louisiana                                           What’s Cool about the Multistate State Abusive Transaction
        ***                                                       Database
Wireless Computing Solution for Field Collection and Compli-      Stan Podhirny, New York State
ance                                                              Debbie Petersen, California Franchise Tax Board
Rick Ezell and Eric Stephens, Oklahoma
                                                                  Putting Tax Compliance Checks into High Gear
The Hottest Enforcement Activities: Tweaking Old Tools,           Vicki Siekert, Wisconsin
Stealing New Ones                                                 Jeff Scott, Kansas
Steve Cordi, Maryland

12:15 – 1:30      Lunch (on your own)                                                (Continued on page 14)

                                           Tax Administrators News • February 2005                                              11
                                                                                                                         goal is the same: To facilitate the growth of electronic filing to
                                                                                                                         the detriment of cumbersome and antiquated paper returns. The
E-File — Continued from page 9
                                                                                                                         Electronic Tax Administration Advisory Committee (ETAAC)
                                                                                                                         recommended in its most recent annual report to Congress that
                                                                                                                         the Congress “support mandated e-filing by paid preparers.” The
                                                                                                                         ETAAC argues that “[a] mandate will likely encourage develop-
        Distribution of State Returns by Type (2000)                                   resources required for            ment of consistencies in the processing of tax returns, which will
                                                                                       income tax return data            in turn lead to increased efficiency and, eventually, cost savings.”
                               0% 3%
                                                                                       capture for states.

                                                                                                                         The mandates also seem to be working in practice. Between 2003
                                                                                       In 2000, bar coding               and 2004, state electronic filing grew by 25 percent. However, if
                                                                                       was but a blip on the             you remove those states that have instituted mandates from the
                                                                                       radar, making up only             equation, that ratio drops by more than half to 12 percent. State-
                                                                                       1 percent of total state          level mandates also have the effect of increasing federal elec-
                                                                                       returns. In 2004, that            tronic filing. Overall, federal e-filing increased by 16 percent in
                                                                                       number had jumped to              2004; if the states with a mandate are ignored, the growth rate
                                                                                       a noticeable 9 percent.           drops to 9 percent.
          Paper    Bar Code    ELF - Practitioner       Direct I-file     Telefile
                                                                                       Though technically a
                                                                                       paper-based system,               These numbers seem to indicate that achieving the historical rates
          Distribution of State Returns by Type (2004)
                                                                                       bar coding takes full             of growth in e-filing may require the adoption of additional
                                    2% 2%
                                                                                       advantage of elec-                mandates.
                                                                                       tronic data capture
                                                                                       technology to stream-
                                                                                       line the processing of            Growth in Electronic Filing, 2003-2004 (Percent Change)
                                                                                 49%   filed returns.
                                                                                                                                                                All States                         w/o Mandates
                                               The various compo-                                                        State E-File                             25%                                  12%
                                               nents of “true” elec-                                                     Federal E-File                           16%                                   9%
                                               tronic filing have also
              Paper     Bar Code               taken a large bite out
                                   ELF - Practitioner     Direct I-file     Telefile

                                               of the paper behemoth:                                                    Comparatively, state electronic filing programs continue to grow
                                               While direct Internet-                                                    at a greater rate than their federal counterpart, yet have not yet
filing (returns filed directly to the state through the tax agencies                                                     matched federal totals. After a 48 percent increase between 1998
secure website) enjoyed a modest increase over the same 5 year                                                           and 1999, state e-filing totals have settled into a solid pattern of
period, from a negligible showing in 2000 to 2 percent of the total
in 2004, it is the growth shown by the ELF program and practi-
tioner filing that has threatened the paper return’s throne. In                                                                                       (Continued on page 13)
2000, ELF/practitioner returns made up only 16 percent of all
state returns (15 million returns). In 2004, how-
ever, that ratio had more than doubled to 38 percent                                                                     Distribution of State Income Tax Returns by Type
(39.2 million returns).
This is due in part to the adoption of e-filing
mandates in several key states. By 2004, five states
-- California; Michigan; Minnesota; Oklahoma;                                                          80%

and Wisconsin – had mandate programs in place.                                                         70%
In 2005, Alabama, New Jersey and Virginia like-
wise will roll out their respective mandate pro-
grams. Beyond these traditional mandates,                                                              50%

Massachussetts and Rhode Island have require-                                                          40%

ments that computer-prepared returns be filed ei-
ther elecronically or with a 2-D bar code allowing
rapid capture.

In general, the mandates require practitioners who                                                      0%
file a certain quota of returns to file them electroni-                                                           2000                 2001                2002                     2003              2004

cally. The specifics vary between the states but the                                                                           Paper    Bar Code   ELF - Practitioner   Direct I-file   Telefile

                                                                                         Tax Administrators News • February 2005                                                                                  12
                                                                                  are quicker, easier and more reliable. The numbers clearly show
                                                                                  that the future is bright for e-filing and if patterns persist, the
E-File — Continued from page 12
                                                                                  revolutionary will become the standard.

                                                                                  Until the next jump.
annual growth in the low thirties/
high twenties range. Generally,                                            Growth in State and Federal Electronic Filing
federal growth has lagged behind
state growth, allowing the state            70,000,000
programs to close the gap between
IRS and themselves. In 1998, 10
million state e-filed returns were
processed, compared to 24.6 mil-
lion federal e-filed returns (state/        50,000,000

federal ratio – 40.9 percent). In
2004, those figures were 43.3 mil-          40,000,000
lion and 61.4 million, respectively
(state/federal ratio – 70.5 percent).

Electronic filing is not losing steam;
on both the state and federal levels,       20,000,000

the medium is enjoying steady
growth and increased totals, due in         10,000,000
part to the success of e-file man-
dates. In the wake of this elec-
tronic tax revolution, only paper                             1998         1999           2000         2001         2002         2003         2004
                                            Total (State)   10,059,400   14,250,153     18,093,257   23,828,892   29,371,552   35,507,151   43,325,515
returns and Telefile returns are di-        Total (Fed)     24,599,870   29,388,510     35,423,612   40,227,166   46,858,257   52,892,955   61,432,113
minishing, falling to systems that

   One-Liners — Continued from page 10                                                selves, at least somewhat. What was once expected to be a $6
                                                                                      billion budget shortfall is now believed to be $4 billion.
                                                                                      Economists based their adjustment on improving revenues
                                                                                      and a better economic outlook.
  Montana has changed its e-mail configuration to First-
  Initial-Last-Name@mt.gov (from Name@state.mt.us) and                                Treasury has finally written the final rules for the state
  has changed its website to www.mt.gov/revenue.                                      participation in the federal refund offset program. (It is
                                                                                      normal for programs to exist under interim rules for many
  The e-mail configuration in Idaho has changed to first-                             years. This program has had an interim rule since 1999.) The
  initial-last-name@tax.idaho.gov.                                                    permanent rules were published in the Jan. 26 Federal
  A survey of business owners and executives says that labor
  productivity, skilled labor availability and labor costs are the                    Jeffrey Kupfer has been named Executive Director of the
  three most important factors in making business location                            President’s Advisory Panel on Federal Tax Reform.
  decisions, according to a study conducted for the Louisiana
  governor’s office.                                                                  The IRS has named Belinda McCafferty as Deputy Director
                                                                                      of the Office of Governmental Liaison and Disclosure.
  A preliminary count shows Nebraska’s amnesty brought in
  about $7.5 million, some $1.5 million more than estimated.                          Delaware’s Division of Revenue has received the 2004
                                                                                      Delaware Quality Gore Award. This is the highest award
  Mississippi collected $7.9 million from its recent amnesty.                         given by judges of the Delaware Quality Award and repre-
                                                                                      sents the first time that a state agency has reached this level
  New York’s budget problems are beginning to heal them-                              of achievement.

                                                Tax Administrators News • February 2005                                                                  13
                                                                 Wireless Remote Access for Auditors
                                                                 Dan Hall, Illinois
Compliance — Continued form page 11
                                                                 Panel Discussion: Fraudulent Preparers
                                                                 Tom Dixon, North Carolina
                                                                 Jerry McClure, Minesota
Immigrant Outreach, Education and Enforcement                    Gilda Mariani, New York City’s District Attorney’s office
 Alan Felton and John Sadoff, North Carolina
                                                                 Improving taxpayer use of the Internet though Web collabora-
Tuesday March 15                                                 tion; connecting auditors with taxpayers through VoIP
                                                                 Karen Wood, NJ
8:30 – 9:15
                                                                 Noon – 1:30 p.m.Lunch (provided)
E-Business: Using research tools to identify abusive tax
avoidance transactions                                           1:30 – 2:15
John Buchanan, IRS
                                                                 Uses for the IRS OVCI and ATAT data
What You Can Do With $3.2 Million                                Rilla Livingston, IRS
Jeff Scott, Kansas                                               Peggy Germano, IRS
                                                                 Debbie Petersen, California Franchise Tax Board
How We Sold an Effective Communications Strategy (to the         Stan Podhirny, New York State
compliance divisions and others)
Dave Bruns and Nancy Rowell, Florida                             Using the Employee Intranet as a Communications Tool
                                                                 Jo Voelker, Nebraska
9:25 – 10:10
Streamlined Sales Tax Project - Audit Issues Update              2:25 – 3:25
Bruce Christensen, South Dakota
Ed Phillips, Ohio                                                Using STAX to Find Investors in Son of BOSS and other
                                                                 Abusive Tax Shelters
What’s Cool in NJ: Special Projects, improved garnishments       Rod Oakes and Mike Whalin, former IRS compliance coordi-
and cross-training initiatives                                   nators and current STAX consultants
David Gavin, New Jersey
                                                                 Voluntary Compliance in the E-Generation
Audit Division's Use of Data for Filing Compliance               Deb Langsea, California Franchise Tax Board
State representatives (invited)                                  Don Cooper, Iowa
Phil Harden, NYS                                                 State representatives (invited)

10:20 – 11:05                                                    3:30 – 5 p.m.

Maximizing productivity by using EOAD-FedStar data               Roundtable Discussions:
Michael LaMothe and Joe Farro, IRS                               Audit
Paula Fallis, Kentucky                                           Criminal
Phil Harden, New York                                            Voluntary Compliance
Panel Discussion: Suspicious/Fraudulent Filers                   Discovery and Data
Dolores Furniss, Utah
Penny Feneis, Minnesota
Representative, New York City (invited)                          Wednesday, March 16

Amnesties and Tax Holidays: Compliance Issues and Lessons        8:30 – 4 p.m.
from the past, present and future programs                       General Session
Gwen Scott, Louisiana
Jerry Fiala, Nebraska                                            Welcome and Introductions
Don Cooper, Iowa                                                 Verenda Smith, FTA, and Representative, IRS
Debbie Langsea, California Franchise Tax Board
                                                                 ‘EMERGING ISSUES IN ABUSIVE TRANSACTIONS
11:15 - Noon                                                     MEETING’

                                           Tax Administrators News • February 2005                                           14
While the retail sales tax was intended to       business purchases. Meanwhile, states in the         produces national estimates on the degree of
apply to retail purchases by consumers,          southeast collected on 39.9 percent of sales taxes   pyramiding in the current system by different
over time it has grown to include business       from businesses. Louisiana collected the largest     industries.
purchases in some states. While the appli-       share from businesses, at 66.8 percent of total
cation of sales taxes to businesses purchases    sales taxes, followed by Washington at 57.7          The expansive study touches on other issues: It
has some advantages and disadvantages, it        percent. On the other end of the spectrum, Idaho     examines how the application of sales taxes to
is useful for state policymakers to under-       collected only 28.1 percent of the sales taxes       services would affect business and also includes
stand how much of their sales tax is levied      from businesses.                                     estimates on the share of different services pur-
on businesses and how they compare with                                                               chased by businesses.
other states. With this in mind, a recently      The report also examines several issues that arise
released study estimates sales taxes paid by     from taxing business purchases. The most promi-      The report, Sales Taxation of Business Inputs, is
businesses for each state.                       nent being tax pyramiding—taxing an input use        available for download from the COST website
                                                 to produce another taxable product. The study        at http://www.statetax.org/.
The Council On State Taxation
(COST) recently commissioned              Business Share of Total State & Local General Sales Tax Collections, FY 2003
a report, Sales Taxation of Busi-
ness, which uses the Ernst &                    Businesses Consumers % Paid by                        Businesses Consumers % Paid by
                                                  Share      Share   Businesses                         Share      Share   Businesses
Young input-output sales tax
model to calculate what portion          CT         1,570           1,603          49.5          AL        1,146           2,039         36.0
of sales taxes are paid by busi-         ME           323             549          37.0          AR          837           1,738         32.5
nesses and consumers. Accord-            MD         1,151           1,653          41.0          FL        5,304          10,353         33.9
ing to the data, the model esti-         MA         1,544           2,309          40.1          GA        3,666           4,762         43.5
                                         NJ         2,452           3,799          39.2          KY        1,104           1,306         45.8
mates that 42.8 percent of 2003          NY         9,166           9,049          50.3          LA        3,388           1,682         66.8
state and local sales taxes were         PA         3,057           4,775          39.0          MS          915           1,525         37.5
paid by businesses. It also esti-        RI           375             388          49.1          NC        1,880           2,807         40.1
mates that 38 percent of the total       VT            88             136          39.3          SC          837           1,713         32.8
                                         NE        19,726          24,261          44.8          VA        1,322           2,463         34.9
personal consumption expendi-                                                                    WV          285             719         28.4
tures were subject to state and          IL         3,230           4,492          41.8          SE       20,684         31,107          39.9
local sales taxes in 2003. Mean-         IN         1,287           2,672          32.5
while, it is noteworthy that 18          IA           789           1,231          39.1          AZ         2,769          3,129         46.9
                                         KS         1,063           1,362          43.8          CA        14,871         18,113         45.1
percent of the $7.3 trillion busi-       MI         2,606           5,508          32.1          CO         2,092          2,141         49.4
ness purchases were taxed.               MN         1,727           2,212          43.8          HI           542          1,139         32.2
                                         MO         2,029           2,489          44.9          ID           233            596         28.1
The share of state and local sales       NE           686             649          51.4          NV           945          1,353         41.1
                                         ND           177             233          43.2          NM         1,008            813         55.4
taxes levied on businesses varies by     OH         3,454           4,573          43.0          TX         9,108          9,967         47.7
state, as summarized in the accom-       OK         1,408           1,310          51.8          UT           707          1,345         34.5
panying table. The western region        SD           366             342          51.7          WA         5,553          4,064         57.7
collected the most from businesses,      TN         2,205           4,134          34.8          WY           308            268         53.5
                                         WI         1,615           2,458          39.7          West     38,136         42,928          47.0
with 47.0 percent of their sales taxes   MW        22,642          33,665          40.2
paid by businesses. It was followed                                                              US     100,055          133,093         42.8
by the northeastern region, levying      Source: see text.
44.8 percent of their sales tax on

                                                Tax Administrators News • February 2005                                                            15
     Comments? Corrections?!
               Lend Us a Hand and Send
               Us a Note:
                              (All Feedback Is Greatly Appreciated.)

                                                           August 7-10 - FTA Technology Conference; Columbus,
                                                           OH: Hyatt Regency Columbus

                                                           August 20-24 - MSATA; Topeka, KS: Capitol Plaza Hotel

March 13-16 - FTA Compliance Workshop ;Tampa:              Sept. 11-14 - Tobacco Annual Meeting; Big Sky, MT: Big
Radisson Riverwalk                                         Sky Resort

May 14-18 - FTA E-File Symposium; Atlanta, GA: Renais-     Sept. 11-14 - WSATA; Salt Lake City, UT: Downtown
sance Atlanta Downtown                                     Marriott

June 12-15 - FTA Annual Meeting;San Antonio, TX: Adams     Sept. 18-21 - NESTOA; New York City: Marriott Financial
Mark Riverwalk                                             Center

July 10-13 - SEATA; New Orleans, LA: Sheraton New          September 22-28 - FTA Motor Fuel Tax Section; Omaha,
Orleans                                                    NE: Hilton Omaha

July 24-29 - MTC Annual Meeting; Boise, ID: DoubleTree     October 8 –12 - FTA Revenue Estimating Conference;
Hotel Boise - Riverside                                    Oklahoma City, OK: Westin Oklahoma City

                                     Tax Administrators News • February 2005                                   16