Wednesday, April 19, 2006

California is testing whether the government can ease taxpayers’ annual pain by completing tax returns for them.

Under the pilot program, called “Ready Return,” the state mailed 50,000 taxpayers completed state tax returns that computers filled in from financial records on file. The taxpayers either signed them and sent them back or redid them each of the past two years that the state has run the program.

California’s test is being watched by Congress, the tax industry and economists, some of whom say the Internal Revenue Service — not individual taxpayers — should prepare simple federal returns.

“It would reduce the number of people filing what you might call small-potatoes returns,” said Austan Goolsbee, a University of Chicago economics professor.

He is participating in a study with the Brookings Institution to determine the benefits and costs of having the government prepare tax returns.

“If the focus were on the simplest cases, which amount to as many as 55 million returns, the cost would be small and possibly zero,” Mr. Goolsbee said.

He based his estimate on a 1990s study by the General Accounting Office, now called the Government Accountability Office that suggested the cost of policing errors in tax returns might be greater than having the IRS prepare simple returns. About a third of federal taxpayers could qualify to have the IRS prepare their taxes, he said.

The Brookings Institution is scheduled to publish the study later this spring or summer.

All of the California volunteers met the criteria of being single with no dependents and having only one job last year. They could not have earned interest on investments. They could not have a home mortgage, stock holdings or itemized deductions.

Of 50,000 taxpayers selected for the California program, about 10,000 used the option. The instructions were sent to them in English and Spanish.

“Overall, taxpayers were extremely satisfied with the program, according to a survey conducted by the [California Franchise Tax Board],” Harley T. Duncan, executive director of the Federation of Tax Administrators, an information resource group for state tax administrators, told the Senate Finance Committee earlier this month. The committee discussed how California’s experiment could resolve abuses by tax preparers and simplify returns for taxpayers.

The program cost California about $211,000 last year.

Although the idea sounds quick and easy, opponents question whether the IRS would try to maximize its own revenue first.

“Who would believe the IRS would strive to get your lowest possible tax?” said John T. Hewitt, chief executive officer of Liberty Tax Service, a nationwide tax-preparation company.

Information on the government-generated returns would be taken from records filed by employers and financial institutions, such as W-2 forms listing wages and withheld taxes, 1099 forms that report dividends and other income and 1098 forms for paid mortgage interest.

Which forms would be used has not yet been determined. It would depend at least partly on how quickly the IRS could assemble all the records to calculate the taxes or refunds for each taxpayer.

The Bush administration opposes the government’s being in the tax-preparation industry.

Treasury Secretary John W. Snow told Congress this month that government-prepared tax returns could create a conflict of interest.

“We aren’t tax-preparation people,” Mr. Snow said. “We’re not software-development people. There is a private market out there that does that and does it well.”

IRS officials said a better option might be to use the money needed for government tax preparation to hire more auditors and increase enforcement. The agency has no estimate of how much such a program would cost or how many employees would be required to administer it.

Federal legislation was introduced two weeks ago by Rep. Melissa A. Hart, Pennsylvania Republican, to prevent the federal government from getting involved in tax preparation.

“Many taxpayers who receive an official bill from the IRS will be extremely intimidated, particularly seniors, low-income and non-English-speaking citizens,” she said. “In some cases, taxpayers who might have additional deductions the IRS missed would be compelled to pay the bill without questioning it.”

The strongest opposition has come from the tax-preparation industry.

Some tax professionals say the forms give incomplete listings of income and could result in errors.

“I think it sends off a bad signal when the IRS prepares a tax return with some but not all income, because that assumes that other income will not be taxed,” said Alvin S. Brown, a Fairfax tax attorney. “That would create great confusion and probably a large loss of revenue to the Treasury.”

About 60 percent of this year’s 135 million federal tax returns are being prepared by someone other than the taxpayer.

Intuit Inc., maker of the tax-preparation software TurboTax, successfully lobbied the California Assembly to block a large-scale expansion of the Ready Return program. A bill is pending that could kill the program.

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