Competitive Intelligence

California Wants to Do Your Taxes: An Idea Intuit and H&R Block Just Hate

The LA Times discusses the proposal that has more than a few business interests a little worried - especially those in the tax preparation business:

California's tax agency is moving forward with a revolutionary — some say disturbing — concept: having the government do your taxes for you.

Instead of getting blank forms in the mail this month, a small group of taxpayers selected for a pilot program will receive a tax return that's already filled out. All they'll need to do is sign it, enclose a check if they owe anything, and send it back to the state.

The Ready Return project puts the state in uncharted territory — and in the middle of the national debate over how to improve the way taxes are collected.

Experts are watching with great interest to see whether California is able to implement a system that is in effect in dozens of other countries but nowhere in the United States. It could ultimately be offered to more than 3 million Californians with uncomplicated returns.

"I think it is the most important tax move the state has ever made," said Joseph Bankman, a professor of tax law at Stanford University who is helping the state run the program. "It would make filing a tax return like paying a Visa bill."

Ready Return has sparked an outcry among conservatives and business groups across the country. Opponents call it Big Brother at its worst. They say they want a simpler tax system but don't want the government doing their taxes for them. They worry that if the program takes off here, it could spread nationwide.

Companies in the tax preparation business, such as TurboTax maker Intuit, H&R Block and FileYourTaxes.Com, say the state is overreaching. They have launched an aggressive lobbying campaign to stop the project. Letters denouncing the program as a cynical attempt to inflate people's tax bills are rolling in from as far away as Washington, D.C.

And nearly half the members of the state Assembly have signed a letter to the Franchise Tax Board, California's version of the IRS, saying the initiative — which was launched without lawmakers' consent — is "a dangerous precedent, leading us down a very slippery slope."

The legislators say they have concerns about privacy, taxpayer confusion and the potential for abuse.

"The proposal could have long-term negative effects on California businesses and families, yet is being rushed through with little debate," national anti-tax advocate Grover Norquist said in a letter to Gov. Arnold Schwarzenegger. The activist said the initiative "takes away one of the key taxpayer rights — the right to make financial decisions to reduce one's tax burden."

The program is a pet project of Controller Steve Westly, who heads the Franchise Tax Board. A former EBay executive, he has made it his mission to use technology to render the state tax system easier for Californians to navigate.

With Ready Return, he is picking up on an idea that has long been promoted by tax experts at the federal level but never got off the ground at the Internal Revenue Service, which lacks the technology for it. Currently, the IRS will calculate taxes owed for people whose returns are uncomplicated, but only after they complete most of the tax form.

"We are trying to reform the way we do business," Westly said. "California is the center for technology in the world. It is only natural we lead in this area."

Congress passed a bill in 1998 calling for taxpayers without complicated deductions to be able to avoid filing returns by 2007. After that time, the government would automatically send those people refunds or tax bills. Supporters of the idea note that many countries, including Britain, Germany and Japan, already have such systems in place.

But the initiative stalled in Washington. Experts say it is unlikely that the IRS will put the plan in place within two years — if ever. That leaves California far out in front.

Ready Return is aimed at 50,000 residents with simple returns: single, one job, no dependents, and no tax credits or itemized deductions such as the interest on a home mortgage. Their tax calculation is based on what was withheld by their employer. The reasoning is: The state already has that information; why not fill in the blanks?

Taxpayers who receive the filled-in return are free to toss it in the trash and go ahead doing their taxes the old way. But proponents doubt that many recipients, presented with such a simple procedure, will instead choose to grapple with complicated schedules and tables, and the need to add lines 23 through 34A and subtract line 35 from line 22.

"This is a way to simplify taxes," said William Gale, a policy analyst at the Brookings Institution who has long advocated a return-free federal tax system for those with the simplest tax situations. "I would think people would welcome this."

Several businesses, anti-tax activists and lawmakers do not.

"People who are sent these bills may be put at an unfair advantage," Intuit spokeswoman Julie Miller said. "They may be intimidated and be unlikely to challenge what the government says they owe."

Frankly, it sounds like a good case for having software to check that out... which is already part of the value-prop for tax-prep applications. However, I suspect most of the firms in this business are a little more than worried that, if the government suddenly takes all the headache out of doing taxes, there'll be very little need to apply technology - or an accountant - to the matter on your own.

- Arik