IRS, Oregon to test joint filing initiative

The Internal Revenue Service and the state of Oregon plan to test this year the joint filing of federal and state tax returns by asking businesses to use a single paper form that the state would scan to capture data electronically and then forward to the IRS.

The project's main goal is to help small businesses reduce paperwork said officials involved with the experiment. But if successful the project also could help the IRS collect more data electronically. Also if the project can overcome the legal hurdles of how state and federal information can be shared similar problems with joint filing of electronic returns would be eliminated officials said.

"What's encouraging here is we're doing more than just talk " said Donna Hockensmith a project manager with the Treasury Department's Simplified Tax and Wage Reporting System (STAWRS) program. In addition to the project with Oregon STAWRS includes several initiatives - all currently in the pilot phase - that aim to make it easier for employers to deal with the IRS and state tax agencies on paper and electronically.

The Oregon/STAWRS Partnership as the project is called would outsource the processing of employers' quarterly tax returns to the state government. If after the initial test IRS and state officials decide to proceed the federal government would pay the state to handle the extra work but details have not been settled.

Although the Federation of Tax Administrators (FTA) the professional association for state tax officials wants the IRS to focus more on direct electronic filing some states including Montana have expressed interest in the Oregon/STAWRS idea. "We will be dealing with paper for some time " said Jeff Miller administrator of the Income and Miscellaneous Tax Division for the Montana Department of Revenue. Also the IRS and states would benefit from joint collections because they currently share data they gather separately.

The IRS recently canceled an imaging system that it was designing to capture data from its paper forms and last month said it plans to explore ways to outsource this function to private industry. Hockensmith said STAWRS would reduce the amount of paper coming into the IRS but added that 26 million employer tax returns collected by the agency are only a fraction of its annual workload.

Nevertheless she said "This is a way to get more electronic returns and every piece of paper [the] IRS doesn't have to handle helps."

Setting the Trend

Oregon will be the first state to test the idea because it already has the procedures and information systems in place to collect multiple taxes from employers. Businesses in Oregon file a single return that covers employee withholding unemployment insurance workers' compensation and two local transportation taxes.

The Oregon Employment Department collects the forms scans them and captures the data and then provides the state tax agency with the information on tape. Oregon and IRS officials are designing a form for the test that would incorporate information currently collected through the IRS' Form 941 the Employers Quarterly Federal Tax Return.

Many other states are also working to integrate their payroll tax collections said David Clark a Lafayette Calif. lawyer who heads an American Bar Association task force on these issues. "Pilot projects indicate there is some progress " he said and they are a welcome sign that the IRS wants to work with states to update their systems.

But whether the project will succeed is by no means clear. With all the information that has to be collected "we were amazed we could develop a scannable form " said Donna Hunter manager of the Unemployment Insurance program in Oregon. But that does not mean employers will like to use the form. Nor does it guarantee that the data can be captured at an acceptable rate.

Bigger obstacles threaten the project as well. To use the proposed forms officially would require Congress and the Oregon Legislature to rewrite disclosure laws that prohibit state and federal officials from using the same forms even to collect the same information.

"There has to be federal legislation passed that would allow the flow of information back and forth more easily between the states and the federal government " said Verenda Smith government relations associate with FTA. Such provisions most likely would be part of a broad tax bill that would be difficult to enact she added and "you don't want to go too far into piloting an idea if you can't get a law changed for five years."

Hockensmith said however that resolving these questions for paper forms could help with federal/state electronic filing initiatives because the disclosure rules apply to both formats. Electronic filing software can be programmed to replicate common data elements and give the IRS and states separate files - a strategy that STAWRS is pursuing with some other projects - but Hockensmith said this adds to the cost of the software.

The Oregon/STAWRS pilot is scheduled to take place in July working with a small segment of the state's 73 000 employers who file paper forms. Employers who participate still would have to send separate checks to the IRS.