Every year before April 15th, Americans take time out of their busy schedules to fulfill their duty to pay income tax. (1) The average American dislikes this time of year because the tax return process is complex, costly, and anxiety-provoking. (2) The United States government taxes individuals based on their income, which equates to consumption plus changes in wealth. (3) The concept sounds simple, but the process is not. With hundreds of filing forms to decide among, (4) those taxpayers who cannot understand the process may feel compelled to seek paid, professional help by visiting a Certified Public Accountant (CPA) or a tax preparation provider, such as H&R Block or Jackson Hewitt. (5)
As technology has improved, new online tax services have launched, and the task of filling out tax returns has become less burdensome. (6) For example, the popular software package "TurboTax" provides a computerized, step-by-step process for filling out tax returns and then offers the option to "e-file." (7) Customers are drawn to TurboTax because of its ease and convenience. (8) Understandably, a constant demand exists for user-friendly computer programs that make complex tax filing processes simpler. However, companies with profit incentives are not the only entities that realize this--the government is also stepping into the arena. Recently, the California Franchise Tax Board instituted an online tax filing process called "ReadyReturn" that sidesteps commercial tax preparers and software providers by enabling taxpayers to e-file their California income taxes using income and tax liability information pre-calculated by the state." (9)
This Note posits that the federal government, via the IRS, should offer an equivalent of ReadyReturn to federal income tax fliers. It begins by reviewing ReadyReturn's development in California and explaining its operation within the state. It continues by examining whether ReadyReturn can be applied at the federal level and analyzing the legal implications of such a government-run tax-filing scheme. In evaluating ReadyReturn's pros and cons, the Note concludes that a national implementation of ReadyReturn would benefit both taxpayers and government in improved efficiency and compliance.
HISTORY OF READYRETURN
ReadyReturn has been a controversial proposition since its conception. The idea of a federally funded tax return program has garnered support from both the Democratic and Republican parties, (10) but simultaneously has battled some nonpartisan opposition. (11) Not surprisingly, one of its most strident opponents is Intuit, the manufacturer of TurboTax. (12) After successful pilot programs in 2004 and 2005, California was ready to implement ReadyReturn, but was sidelined by Intuit's attempts to block it. (13) The TurboTax developer spent a million dollars on lobbying efforts. (14) At first, the legislature ceded to Intuit's pressure and let the program die. (15) Subsequently, however, outgoing State Controller Steve Westly and his successor, John Chiang, recognized that the California Franchise Tax Board ("FTB") had the authority to effectuate the tax program on its own. (16) Stanford Law Professor Joseph Bankman, (17) a strong supporter of ReadyReturn, (18) helped diminish Intuit's influence by investing $30,000 of his own money to hire a business lobbyist. (19) Finally, on December 4, 2006, the FTB decided unilaterally to move forward with ReadyReturn despite legislative uncertainty. (20)
READYRETURN IN CALIFORNIA
The FTB introduced ReadyReturn to its taxpayers as a pilot program in 2005 and made it fully available in 2008 for the 2007 taxable year. (21) The program's objective, in shifting the majority of tax preparation work from the taxpayer to the government, was to alleviate the burden of filing taxes. (22) ReadyReturn uses information about the taxpayer already available to the state to generate a pre-filled tax return for the taxable year, which the taxpayer then must approve and submit. (23) Information about the taxpayer consists of wage and withholding information collected by the state from employers, as well as data from earlier tax returns filed with the state. (24) If the user finds discrepancies between her pre-filled tax return and her personal records, she may correct them online. (25) Additionally, if a taxpayer's situation changed during the taxable year--for example, if she got married, had a child, received other income, or became eligible for a tax credit--she can update her ReadyReturn online with the FTB's guidance. (26) The program is completely optional. (27) Roughly "one million taxpayers" were eligible to use ReadyReturn in 2008. (28)
Only a taxpayer who meets certain criteria is entitled to use ReadyReturn. The taxpayer must have filed a previous year California resident tax return under "single or head of household" status with "[n]o more than five dependents," taken the standard (not itemized) deduction, claimed no special credits other than the renter's credit, and derived income only from wages; additionally, the taxpayer must have only one employer during the taxable year. (29) Additionally, a limit on how much the taxpayer earned for the taxable year exists to regulate vertical equity. (30) An individual who can be claimed as a dependent is also able to use ReadyReturn. (31)
The ReadyReturn program is solely an Internet-based service. (32) Online, the user first confirms her eligibility to use ReadyReturn by inputting her last name and social security number; if eligible, uses the program; and finally, e-files her return when complete. (33) Taxpayers may also call and discuss their eligibility with an FTB representative. (34) For security reasons, each year ReadyReturn users are given a new Customer Service Number (CSN) that acts as a password. (35) ReadyReturn also provides help throughout the process via Internet pop-up instructions; a yearly Personal Income Tax Booklet; and a Taxpayer Services call center. (36)
Positive results from the 2004 and 2005 pilot programs prompted the FTB to go forward with the official ReadyReturn program for the 2007 tax year. (37) During the two pilot years, selected taxpayers were each mailed an invitation along with a pre-filled tax return and given the option either to disregard it or to modify and e-file it through the FTB's website. (38) The 2004 study revealed not only favorable taxpayer acceptance of the online program due to their reduced filing burden, but also the impression that it could help the FTB achieve a more efficient tax administration. (39) The 2005 study produced similar optimistic results. (40) Users viewed the pilot programs as a success, with ninety-eight percent of users stating that they would use ReadyReturn again, (41) and ninety-six percent of users affirming that it should be a government provided service. (42) With ReadyReturn producing so many positive reactions in one state, the benefits of implementing the program nationally appear promising.
THE INCORPORATION OF CALIFORNIA FRANCHISE TAX BOARD'S READYRETURN INTO THE FEDERAL TAX SYSTEM
Americans are subject to federal, state, and local income taxation. (43) The Internal Revenue Service ("IRS") (44) and the Internal Revenue Code ("IRC") (45) are, respectively, the government entity and statutory law that govern taxation in all fifty states. In addition, each state and municipality maintains its own system for taxing residents. (46) California's tax laws generally conform to federal tax law. (47) California and the federal government differ on some gross income and deduction issues, (48) but not so much as to affect the overall concept and calculation of taxable income. (49) Therefore, eligible taxpayers from all states conceivably could realize the benefits of California's ReadyReturn when filing federal income taxes.
It is estimated that programs like ReadyReturn "could be used by 40% of Americans who have basic tax liabilities, saving them 225 million hours of preparation time and more than $2 billion in tax-preparation fees...." (50) Also, after translating hours into dollars, the total amount of savings rises to 44 billion dollars over ten years. (51) Implementing a federal ReadyReturn option would encourage voluntary taxpayer compliance by saving users time and money, and would also allow the government to save time and resources at a reasonable cost. Furthermore, ReadyReturn would increase IRS efficiency, help the IRS find tax evaders, promote fairness, and help taxpayers understand the taxation process.
ADVANTAGES OF READYRETURN
The U.S. income tax system employs the theory of voluntary compliance, described by the IRS as "[a] system of compliance that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time." (52) This theory relies, at least in part, on individuals' general unwillingness to deviate from social norms, as stigma is attached to tax avoiders and cheaters. (53) However, an assumption that taxpayers voluntarily comply with tax laws is not entirely realistic; since the IRS only audits around one percent of the tax returns it receives, (54) tax evasion is still likely. (55) Indeed, the use of information technology to make it easier to obey tax law is one means by which the IRS hopes to improve voluntary compliance. (56)
ReadyReturn first reduces a taxpayer's burden by gathering her filing information for her. (57) ReadyReturn also creates a secure and private access point for the taxpayer's tax information; diminishes the likelihood of salary and withholding discrepancies; facilitates e-filing; and assists Spanish-speaking taxpayers with the filing process. (58) Taxpayers list the burdens and stress associated with the filing process as the primary reasons they avoid paying federal income taxes, (59) and by diminishing those burdens would mean more taxpayers are likely to comply voluntarily...
Get ready for the return! How to make filing tax returns more efficient: applying the state of California Franchise Tax Board's ReadyReturn to the federal tax system.
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