Innovation through technology: the success of Massachusetts' telefile program.

• Author: Adams, Mitchell

Telefile, which allows Massachusetts residents to file their income taxes by telephone, demonstrates that technology can generate cost savings and improve customer service without sacrificing security.

When the recession of the late 1980s left Massachusetts state government with the prospect of a $2.6 billion budget deficit, drastic measures were needed to make up for the revenue loss and to balance the state's books. As part of the 1991 downsizing of state government, the department of revenue (DOR) budget also was reduced; however, DOR had to shrink without interruption to services and in full compliance with the tax laws. DOR was required to maintain records for 3.3 million personal income taxpayers, account for $150 billion in taxable economic activity, and collect $10 billion in annual receipts.

To maintain a high level of service, the department shifted to technology whenever possible. For example, DOR developed a new automated bank levy system in 1993 which has resulted in the collection of $22.3 million in past-due tax liabilities while costing essentially nothing. The system performs the work of employees in generating notice letters, verifying due process, identifying a bank source, and completing other verifications. The automated bank levy system works through computer matching of information provided by Massachusetts banks with DOR's list of tax delinquents.

Another function improved through the use of technology is in the area of CP2000 automated audits. CP2000 refers to data tapes supplied by the Internal Revenue Service (IRS) and used to conduct DOR's most basic audits. The automated system sorts through the federal data and automatically prepares notices of proposed assessments to taxpayers. In the two years since its inception, the automated CP2000 project has more than tripled its productivity with one-third the staff.

Electronic funds transfer (EFT) is an area experiencing extraordinary growth since DOR established the program two years ago. EFT allows taxpayers to electronically transfer their payments from their bank accounts to DOR without the need for paper forms. In 1993, EFTs accounted for $1 billion of all trustee tax payments, such as sales taxes and withholding taxes, and is expected to reach $4 billion by next year.

The department implemented an interactive voice response (IVR) system in early 1995 to answer taxpayer inquiries. The IVR system significantly improved customer service, as it enabled taxpayers to call the department and receive answers to the most commonly asked questions without operator assistance. Similar to customer service lines used by many financial institutions, the taxpayer uses a touch-tone telephone to enter an identifying account number and is prompted through a set of choices to select specific information. With the IVR system, taxpayers can call the department 24 hours a day, seven days a week to find out whether their return has been received by DOR. They can investigate the status of their refund, order a tax form, and find out who to contact for more information. In the first year of service, the IVR system allowed 23 percent more taxpayers to be served than through the operator-assisted system. Taxpayers are able to have their questions answered more quickly and with fewer busy signals. There are more tax examiners available to handle complicated questions due to the IVR system handling more routine calls.

In 1995, the department launched the Telefile program, which provides taxpayers the option of filing their state income taxes by touch-tone telephone. At its heart, Telefile is an IVR system, which prompts the taxpayer to enter approximately 12 items of information in a routine that averages eight minutes. The Telefile system is available seven days a week, 24 hours a day. For those receiving refunds, checks are received in the mail within four days compared with up to six weeks for paper filers.

As a result of these innovations, DOR has 28 percent fewer employees than in January 1991, yet audit assessments are up 24 percent, collection of delinquent taxes has increased 40 percent, and revenue collected per full-time employee has increased 53 percent. The remainder of this article describes the Telefile program, illustrating in detail how technology can cut costs, improve service, and increase quality.

The Birth of Telefile

Massachusetts' DOR was not the first tax agency to use a telephone filing system. Mississippi and Illinois had pilot programs, but participation rates were lower than the Massachusetts DOR hoped to achieve. DOR wanted a high first-year Telefile participation rate, making the program cost effective and moving quickly toward paperless processing. DOR also wanted to allow taxpayers to submit their income tax returns by telephone without any preparer costs to them.

A Telefile task force was assembled comprising deputy...