Innovation through technology: the success of Massachusetts' telefile program.
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 commissioners, tax examiners, and those representing customer service and processing. The task force convened in early 1994 and presented recommendations to the commissioner several months later. The recommendations included instituting a voice signature, which was critical to achieving paperless filing. Tax returns cannot be filed without signatures, and the cost of requiring taxpayers to mail signature documents almost eliminated any cost savings. An effort was launched, therefore, to allow voice signatures as legal signatures.
Another recommendation was the establishment of a personal identification number for each Telefiler to increase the security of the system. The verification of data was also recommended by the task force; this could be accomplished by matching the taxpayers's Form W-2 information through other databases and through taxpayers' prior-year filing information. This step was crucial since DOR would not require taxpayers to mail to DOR their W-2 forms.
The task force also recommended establishing an income ceiling of $80,000 for Telefilers, which is the same ceiling required for ABC (easy form) filers. This minimized changes required to be made by programming staff. Another task force recommendation suggested allowing only taxpayers who have five or fewer W-2s to Telefile. DOR research showed that taxpayers with more than five W-2s constituted less than one percent of potential Telefilers.
Armed with the task force's recommendations, the department began to implement the Telefile program for the 1995 tax season. The only legislative hurdle that had to be overcome was the acceptance of a voice recording as a legal signature. In 1994, legislation was enacted to allow the commissioner to accept tax returns signed with a voice signature. This move was a giant leap toward the goal of paperless filing of tax returns.
Focus groups were used to help develop the Telefile phone script and worksheet. This was the first time that the department used focus groups to prepare for a tax season. DOR hired a marketing firm that organized three focus groups of 12 people each. The focus groups were a cross section of the taxpayer population. Some focus group members received a Telefile package in the mail and tried the system before the focus group meeting. Others tried Telefile for the first time at the focus group meeting and were asked to react to it. The focus group information resulted in changes to the design of the worksheet.
Telefile booklet instructions and the telephone script were finalized by DOR staff and a system consultant. The system was further tested by 3,000 individuals to identify any problem areas and to perfect the system. After all the preparatory work was done, the Telefile switch was officially flipped on January 16, 1995.
To Telefile a tax return, a taxpayer completes the Telefile worksheet, shown in Exhibit 1. This can be completed in about 10 minutes. The taxpayer then calls Telefile, which prompts the taxpayer to enter information using the telephone's touch-tone keypad. Telefile repeats the taxpayer's information to ensure accuracy and then computes the tax owed or refund due. The IVR system uses the taxpayer's voice as the signature for the tax return. The taxpayer does not have to do any mathematics; Telefile does the calculations. The only paper that is returned to DOR is from those owing a tax payment, who remit a voucher provided in the Telefile booklet. Also, DOR does not require taxpayers to remit W-2 forms because W-2 data are independently verified.
[EXHIBIT 1 ILLUSTRATION OMITTED]
Telefile data are entered into a freestanding bank of digital personal computers, downloaded seven times a day, and then transmitted to MASSTAX, the taxpayer database. Refund checks reach the taxpayer within three or four days.
Changing Taxpayer Behavior
Simply making Telefile available, however, would not guarantee that taxpayers would use it. Filing a return over the telephone is very different from filing on paper; therefore, an aggressive marketing campaign was employed to change taxpayer behavior to encourage citizens to Telefile.
A group of 1.1 million taxpayers who had previously filed the Massachusetts resident income tax short form (ABC form) was identified. It was decided to "force feed" 700,000 of them by sending only the Telefile booklet, while the remaining group received both a Telefile booklet and the ABC form. A little more than one-half of the original 1.1 million taxpayers who were mailed the Telefile booklet were actually eligible to file due to categorical exclusions, including change of address, change of filing status, dependent-care deductions, and out-of-state bank interest.
Telefile was marketed through a media campaign with radio spots, public service announcements, media events, and press coverage throughout the tax filing season. Telefile radio spots were developed by an advertising agency, and a modest budget of less than $40,000 was used to purchase time on several radio stations during the beginning of the tax season. The ads ran statewide in two phases on major AM and FM radio stations that were chosen based on matching station listenership with a demographic profile of taxpayers likely to use Telefile. Two radio ads previewing Telefile aired during the first week of January to coincide with the mailing of the Telefile booklets. The second set of ads ran in late January to coincide with taxpayers' receipt of their W-2s and other tax information.
Telefile also was advertised on public buses and trains. One thousand Telefile interior car cards were designed, printed, and sent to 10 public transit agencies in Boston, Worcester, Springfield, and Cape Cod. In addition, a 3' by 2' poster was prominently displayed at South Station, one of Boston's busiest transportation centers. The spaces were donated by the transit agencies as a public service.
Several months before Telefile was launched, reporters were allowed to preview Telefile and conduct a "live" test of the system. DOR officials barnstormed the state, talking about the Telefile program to any group who would listen. Visits were paid to major regional newspapers, talk-radio appearances were made, and meetings were held with Chambers of Commerce.
Prize Program Created. A prize-incentive program was created, which offered prizes to taxpayers who Telefiled. The prize program was funded by more than $20,000 raised from private sources, including the Associated Industries of Massachusetts, a business group interested in projects promoting efficiencies in government.
This incentive gave DOR a vibrant marketing tool. Five separate prize drawings were scheduled between January and April. The contest generated publicity both when the finalists were announced and at the prize-drawing events, which were held in shopping malls in different media markets across the state. The drawings featured 10 finalists, who were required to appear at the event to win a prize; four of the finalists received a gift certificate to the Massachusetts retailer of their choice. The gift certificates guaranteed that the prize money stayed within Massachusetts borders. The consolation prize for the other six finalists was $50 in cash, which they received at the drawing.
Press releases were issued to the hometown newspapers of the 10 finalists in advance of the event. The drawings themselves were solid media events suited to photo opportunities and television coverage. The drawings created a mini-drama as the 10 finalists stood onstage in a visible location in the malls, while the commissioner drew the winners' names out of a hat. The stages were decorated with balloons and signs promoting the Telefile program. The gift certificates were enlarged so they would show up in photographs. The prize drawings were featured in several television stories about Telefile, including a story on CNN in March.
The marketing efforts paid off. Telefile logged 17,000 returns during the first week. By the end of the filing season on April 18, 172,000 taxpayers, or 30 percent of the 575,000 deemed eligible to Telefile, had used the new system to file their state income tax returns. Comparatively, the IRS participation rate for its first year of telephone tax filing was 10.5 percent, Illinois processed 14,008 telephone returns, and Mississippi received 892.
The Benefits of Telefile
The benefits of the Telefile system are that it is easy to use, it improves customer service by providing almost instant refunds, it ensures accurate data with security measures designed to protect against fraud, and it can save up to 80 percent of DOR's processing costs.
Telefile Is Attractive to Taxpayers. The reason Telefile appeals to taxpayers is that it is simple, efficient, and convenient. It takes 10 minutes to complete the worksheet and eight minutes to make the telephone call. The program is available 24 hours a day, and taxpayers receive their refunds in three or four days. There were virtually no complaints about Telefile except from taxpayers who were not eligible to use it.
Telefile is Tough on Fraud. The department has gone to great lengths to prevent fraud in the Telefile program. Telefile's technology makes it possible for the department to match and verify data as they are being entered, thereby immediately detecting potentially fraudulent returns. Returns can be rejected and held pending verification by the taxpayer, or they can be referred for an audit. The computers are able to make data comparisons with other databases, such as employer wage reporting and the Registry of Motor Vehicles, to ensure that every valid return is accepted for immediate processing and that any invalid return is rejected at the door. The Telefile program uses personal identification numbers (PINs) for security. Telefile data are entered into the free-standing bank of personal computers rather than directly into the MASSTAX database. In an effort to minimize the potential for fraud, the two types of tax returns where fraud is most often committed--first-time filers and those with address changes--were not allowed in the Telefile system during its first year in operation.
Another security measure was the creation of Telefile as a stand-alone system. This ensures that taxpayers entering data do not have access to MASSTAX. The DOR's obligation is to protect the confidentiality of tax information, no matter how it is received, collected, or stored. That means that a return filed through an electronic medium, information the taxpayer provides to DOR in person or on the phone, or data that are obtained via a third party, such as an employer's report of withholding tax paid, are all protected by the same curtain of confidentiality. There is no outside access available to MASSTAX--not for DOR employees, not for nonemployees, not for anyone. It is a stand-alone system that has never been breached since its establishment in 1988. It is not a stop on the "information superhighway," either directly or indirectly. Nor does DOR maintain electronic links between its central database and other agencies' databases.
Telefile Reduces Processing Costs. Another benefit to add to the system's accuracy, security, and prompt refunds is Telefile's capacity to save money. Due to the standard processing costs avoided, the marginal cost-benefit is $1.28 per return. The break-even point for the 1996 tax season will be approximately 200,000 returns. With 400,000 Telefile returns, savings would amount to about $250,000, a 50 percent savings over the standard method. With future volume increases, savings are expected to reach $1.1 million annually.
In addition, the post-audit rate decreased by more than 15 percent with Telefile. No correspondence with the taxpayer was needed to resolve outstanding issues, such as missing information. Another benefit of the Telefile system is that once it is developed and implemented for a single application, it can be used to implement other IVR applications without incurring significant development costs.
Telefile Expansion Plans
Next year, DOR plans on dramatically increasing Telefile participation to save money and to move further toward paperless processing. The goal for 1996 is to have 250,000 taxpayers use Telefile. DOR recognizes that, to add taxpayers to the Telefile system, radical steps have to be taken.
A task force was convened to plan a way to expand the program without sacrificing quality or service. DOR wanted to maintain the short telephone call and a simple form. Another task force was convened to review the other Massachusetts income tax forms. Both task forces used focus groups to gain insight into how to improve the program. Most of the feedback was positive from those who used the system. The main complaint from those who were eligible but did not use Telefile was that they wanted a copy or a receipt of their tax return. Because DOR's Telefile program allows taxpayers to use a voice signature, it is a paperless system. Concluding from focus group data that providing taxpayers with an itemized receipt could dramatically increase the likelihood of taxpayers filing by Telefile, DOR created a receipt which could be attached to the tax-refund check and includes the tax return information filed by telephone. Taxpayers who owe tax also will receive an itemized receipt through the same system. Since most of the Telefile population is eligible for refunds, the steps to create an itemized receipt were not burdensome. DOR maintains paperless filing by not requiring any paper to be sent to the department.
Perhaps DOR's boldest move to increase the Telefile participation is the plan to eliminate the ABC short form. Instead of choosing from three forms--Telefile (easiest), ABC (easy), and Form 1 (long)--in 1996, Massachusetts residents will have only two forms available to file their taxes themselves: Telefile or the Massachusetts resident income tax Form 1. Telefile gives taxpayers quick refunds and is easy to complete. Although Form 1 is being redesigned to accommodate new "imaging" machines, it still will be much more complicated and time consuming than Telefiling. The focus groups have said that given the choice between the two, they would rather use Telefile than Form 1.
DOR is making other changes that may persuade more taxpayers to Telefile. Additional line items will be added, making most of the current ABC population eligible to Telefile. The major expansion areas are in accepting those who have changed their address, those who have received unemployment compensation, and those who have non-Massachusetts bank interest and dividends.
DOR will match databases with other state agencies to find taxpayers who should be filing taxes with the department but have not. Those first-time filers will be invited to file and will be sent a Telefile form with their own PIN. To minimize the possibility of fraud, DOR will remain strict in its policy of already knowing about taxpayers based on information gathered from other sources, such as the wage reporting database, before they file by telephone.
The department is also in the process of implementing new cutting-edge technologies to further improve the tax administration system. One is voice recognition that will be used for change of address and may be used to enhance security. Another is allowing next year's Telefilers to file from their home personal computers. The results of these efforts will significantly impact plans for the 1997 tax season.
Sharing the Telefile Experience
The Massachusetts Telefile program has won two prestigious national awards: the 1995 Innovations Award of the Council of State Governments and the Exemplary State and Local Award of the National Center for Public Productivity at Rutgers University. This recognition is evidence that the program can be used as a model for other states.
There is great interest in Massachusetts' experience across the country. More than a dozen states have contacted DOR for detailed information on the program and are actively pursuing Telefile. The IRS also has met with DOR program administrators to gain insight into how the department achieved such a high participation rate in the first year of operation. The IRS is looking at adopting Massachusetts' "force feeding" approach for distributing its telephone filing booklet next year. Telephone filing systems like Telefile may constitute a significant portion of the total returns processed in many states within the next two or three years.
There are several factors to be taken into consideration for operating a Telefile system. In each state it must be decided whether the demographics are conducive to telephone filing. In Massachusetts, more than one-third of all taxpayers were filing a simple tax form.
Paperless processing is a goal, as well as eliminating the labor-intensive operations that accompany paper filing. Another goal is for fraud and audit checks to be performed on-line while the return is being filed.
Telefile's first-year success has taught the department a few valuable lessons in planning the second year of the program. The key to any new consumer technology is getting people to use it and like it. The challenge of expanding Telefile has driven the department to make a few bold moves. The department learned that the carrot-and-stick approach is necessary to effect changes in taxpayer behavior. One carrot is that Telefilers will get their refunds faster and that it is easier to file taxes by Telefile than filling out the lengthy Form 1. Another carrot is offering prizes to Telefilers. The stick is that there is no more ABC form so that any short-form filer who wants to file a paper return next year must use Form 1.
People will accept new technology if it is easy to use. Taxpayers also must be made aware of the cost savings as a result of the new technology. They also want to know that they are doing their part to be environmentally friendly by filing without paper, thereby saving a lot of trees.
With the addition of improved tax filing technology, the department looks forward to the challenge of new frontiers during next year's tax filing season--new lessons will be learned and new ground will be broken.
Mitchell Adams, commissioner of revenue for the Commonwealth of Massachusetts, is a graduate of Harvard College and Harvard Business School. He has a broad management background with extensive experience in information technology systems.
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|Publication:||Government Finance Review|
|Date:||Dec 1, 1995|
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