Stateline Story

States push taxpayers to file online

  • January 06, 2006
  • By Kathleen Hunter

The books are barely closed on 2005, but state revenue officials are already trying to entice more taxpayers to file '05 state income tax returns electronically.

In Illinois, where recent increases in electronic state personal income tax filings mimic a national trend, slightly less than half of returns were filed by computer last year. But officials are optimistic that a majority will be filed via the Internet this year

Illinois tax collectors are relying on incentives such as direct deposit of tax refunds as quickly as three days after returns are filed and online responses to common questions about state taxes to lure more people away from traditional paper returns.

"It just makes sense. It helps the taxpayer because it's efficient and timely," Illinois Department of Revenue spokeswoman Geraldine Conrad said.

Last year, about 2.4 million of Illinois' 5.7 million personal income tax returns were filed electronically. That's 12 percent more than in 2004.

Nationwide, the number of state income tax returns filed electronically also is approaching half. About 48 percent were filed electronically last year, up from 42 percent in the year before and 31 percent in 2003.

Arkansas, California, Georgia, Iowa, Michigan and Minnesota are among states where more than half of the returns already are filed electronically.

Just five years ago, paper returns accounted for 80 percent of all state personal income tax filings. Much of the effort to move away from paper was due to state budget woes.

"A lot of growth in electronic filing occurred when states didn't have any money," said Harley Duncan, executive director of the Federation of Tax Administrators . "When the recession hit, there was a push to move to electronic filing because that takes paper out of the system, requires fewer people and helps save money."

Although filing deadlines vary widely in the 44 states that tax personal income, many taxpayers file their state taxes in conjunction with the federal government's April 15 deadline.

After a decade of double-digit growth in the electronic filing of state returns, experts predict that electronic filings could plateau unless states offer incentives.

"It's just getting harder to attract new people to the game by using the old method of trying to market it," Duncan said.

He cited Indiana and Virginia as states where new methods are being tried. In those states, for example, taxpayers can check the status of their state income tax refunds online.

In response to scant growth in online filings in Maryland, the state comptroller's office is pushing legislation granting taxpayers who file returns electronically a two-week extension on paying taxes to the state.

Thirteen states (Alabama, California, Connecticut, Massachusetts, Michigan, Minnesota, New Jersey, New York, Rhode Island, Oklahoma, Utah, Virginia and Wisconsin) also now require that tax preparers submit returns electronically

"That's what you'd call the low-hanging fruit," said Duncan, of the Federation of Tax Administrators.

Across the country, there are various means of filing electronically, including by personal computer using various commercially-sold software programs, by state-run Web sites in 20 states and by the Internal Revenue Service . Non-paper returns also are filed by phone.

The number of state income tax returns filed electronically still lags behind the federal e-file rate, despite states' efforts to encourage taxpayers to move away from paper filing.

About 44.4 million - nearly one-half - of all personal state income tax returns were filed electronically in 2004, compared to about 49.4 million federal returns - a gap that experts say states could have difficulty closing.

Most states now offer residents the option of having their income tax refunds directly deposited into their bank accounts, adding another level of efficiency and cost-effectiveness to the process.

"Just like the electronic filing, it's quicker, easier and cheaper," Duncan said. "It cuts down printing and mailing costs and printing and mailing time. It gets the refund to you three to five days quicker than you'd otherwise get it."

Corporate income and other business taxes are next on states' agendas, Duncan said. The IRS for the first time this year will require companies with gross assets of $50 million or more to file corporate income tax returns electronically. Seventeen states also will offer companies the option to file corporate income tax returns electronically this year. So far, Massachusetts is the only state that requires some companies to file corporate income tax returns electronically.

Thirty states also offer businesses the option to files sales taxes electronically.