California already has a free ReadyReturn option for taxpayers. The option involves the government's use of tax information from the previous year's return and combining it with information from the individual's W-2 form to prepare that person's taxes. The tax return is then sent by the state to the taxpayer, who then only has to review the return and sign it.
However, California's program isn't being used by a vast majority of residents, mainly because a lot of people don't qualify. To use ReadyReturn, taxpayers must have filed a 2010 California tax return as single or the head of a household, and to be eligible, the taxpayer can't have more than five dependents. Additionally, eligible taxpayers must earn wages from only one employer and claim only the standard deduction with no credits beyond the renter's credit. For some people, the program works; for others it's a headache; and for others still, it's simply not an option.
The pilot program saw just 13,500 out of 50,000 taxpayers participate -- that's a 27 percent participation rate. California has roughly 20 million taxpayers, so the overall participation rate amounted to less than .5 percent. In 2009, the rate went up to about 3 percent, meaning about 60,000 taxpayers.
Other than the limitations on who is eligible, why else is the program not very successful?
One reason may be that California residents are leery of state or federal governments preparing individual tax returns. Many people are looking for less government interference rather than increased control over personal finances. Also, there is the likelihood that a tax return prepared by the government, federal or state, is meant to produce the most revenue possible for the government rather than offer advantages to the taxpayer.
The IRS has recently been considering a federal tax preparation program similar to California's. But converting to such a system nationwide would end up being hugely expensive.
What is certain is that the current federal Tax Code remains extremely complicated, so a switch to simple returns would affect only simple tax situations. The accumulation of the more complicated returns in the U.S. would require exorbitant amounts of labor on the part of the government.
Individuals in California who have questions about their 2011 returns would likely benefit from consulting with a tax law professional. An attorney who focuses on California and federal tax laws can help ensure that all tax-related issues are considered while filing a return.
Source: Forbes, "Are You Ready for Government Prepared Tax Returns," Kelly Phillips Erb, Jan. 13, 2012