Increase Tax Revenues Without Proposed IT System

New Information Technology Project Proposed. The budget proposes a $3.9 million increase in General Fund expenditures and the addition of 58 positions in 2009–10 (phased in over the year) for FTB to (1) resolve an existing backlog in business entity return processing and collections correspondence, (2) hire additional staff and consultants to document FTB’s business processes, and (3) begin planning for the Enterprise to Data Revenue (EDR) project including issuing a request for proposals. The EDR project would take approximately seven years to implement and, once completed, would replace several older IT systems and streamline other existing systems. The FTB estimates the project will incur costs of $318 million during implementation (2008–09 through 2017–18) with annual costs thereafter estimated to be $14 million.

The EDR project proposes to increase revenues in a number of ways, including giving FTB staff access to all tax return data in an electronic form. The FTB asserts that having access to all of a taxpayer’s submitted tax return information in an electronic form will allow FTB to better detect and collect taxes from those who are not paying the amount of taxes they owe. The project also includes the following improvements to FTB’s systems that process personal income tax (PIT) and business entity tax returns:

• An underpayment modeling process that would be integrated with the Accounts Receivable Collections System and Taxpayer Information System.
• An enterprise data warehouse with data search and analysis tools.
• A taxpayer records folder that is accessible to the taxpayer and allows taxpayers and FTB staff to access the information.
• Re–engineering of existing business processes—including imaging of tax returns, data capture, fraud and underpayment detection, tax return validation, filing enforcement, and other audit processes—and integration of these enhanced business processes with FTB’s existing tax systems.
• Improved business services at FTB such as address verification, issuance of notices, and a single internal password sign–on for its IT systems.

Postpone IT Project, but Approve Resources to Process Backlog. The proposed project would improve and streamline existing IT systems and business processes at FTB. Yet, it would come with a hefty price tag. Given the state’s fiscal condition, we recommend postponement of the pre–procurement activities associated with the EDR project. We recommend, however, the Legislature approve 50 positions (phased in over 2009–10) to process the backlog in the business entity workload at a cost of approximately $2.5 million (General Fund). We recommend approval of these positions on a two–year limited–term basis, rather than as permanent staff, because the staff would process an existing backlog, rather than an increase in annual ongoing workload. These positions can be authorized independently of the IT project and are expected to accelerate $3.8 million in General Fund revenues in 2009–10, increasing to $14 million in accelerated General Fund revenues in 2010–11.

Direct FTB to Use Existing Tax Return Data to Increase Tax Revenues. Most PIT tax returns—68 percent or 10.4 million—and 16 percent (229,000) of business entity tax returns were filed electronically in 2007. However, the remainder of the tax returns were filed in a paper format. Only a portion of the information from paper–filed tax returns is scanned and keyed into FTB’s systems in order to make it available to FTB staff electronically. Because the two processes—electronic filing and hard–copy paper filing—result in two different levels of access to taxpayer information, FTB has limited itself to using only a portion of all tax return data in its automated systems regardless of how the return is filed. Therefore, the rest of the information (including all of the tax schedules) that FTB receives from taxpayers is only used in FTB’s manual—and more cumbersome—audit and collection processes.

In order to collect a greater amount of the taxes owed to the state, we recommend that the Legislature direct FTB to use all of the tax return information that it receives electronically in its automated audit and collection systems—rather than limiting itself to the same data that is available from paper tax returns. The FTB estimates that using the electronically filed data in this manner would increase General Fund revenues by approximately $20 million beginning in 2009–10 and require 17 additional permanent staff at a General Fund cost of $1.1 million. These staff would answer the telephones and handle the correspondence stemming from the increase in the number of audits, collections notices, and wage levies. In addition, expanding the use of automated tax audit processes should free up some staff resources at FTB. We believe that FTB could generate additional revenue by shifting staff resources currently used to conduct manual audits of the supplementary tax schedules and other information filed electronically to focus on paper returns. This would maintain a similar level of FTB focus on returns filed electronically and on paper.