State Tax Board OKs Scaled-Back E-Filing Plan

About 40% of California taxpayers will be able to file state income-tax returns online directly with the Franchise Tax Board during the filing season that begins next month, under a scaled-back plan approved by the board.

In addition, the state announced Wednesday that it was sending 7,500 letters to taxpayers who are suspected of cheating to invite them to fess up, pay up and avoid harsher penalties that will go into effect next year.

Both moves followed up on programs launched earlier this year: a crackdown on tax cheats and a contentious proposal to allow direct online filing with the state government.

At a meeting in Sacramento on Tuesday, the Franchise Tax Board pondered shelving its fledgling NetFile program at the request of the tax software industry, which objects to competition from the government.

NetFile provides a direct link to the Franchise Tax Board. State officials said that although the program approved Tuesday offers few of the bells and whistles of privately produced products, it allows many people to file directly with the state. But the program excludes taxpayers earning more than $265,000 and anyone with certain types of income or deductions. As a result, about 8 million taxpayers cannot use NetFile.

State tax officials have suspended work on software that would allow every taxpayer to file directly.

Tax software companies, including market leader Intuit Inc., makers of Turbo Tax, objected to the state offering competing services and threatened to pull their own free-filing offerings in California if the state continued with NetFile. The software firms wanted the Franchise Tax Board to provide free electronic filing only through partnerships with private industry, similar to an approach used by the federal government.

On Tuesday, the tax board approved what California Controller Steve Westly called a “common-sense compromise,” putting a two-year moratorium on enhancing its software in exchange for the software industry’s continuing its free electronic-filing products.

Despite Westly’s characterization, the software industry has not endorsed the tax board’s action.

“We are disappointed with the decision,” Intuit spokeswoman Julie Miller said Wednesday. “We need to look at what the state is offering more closely before we make a final decision.”

The tax-cheat crackdown is part of an effort to reduce the amount of tax revenue lost to abusive tax shelters -- a sum estimated at $600 million to $1 billion annually. A law passed this year vastly increases penalties for participating in these shelters.

The “voluntary compliance” program announced Wednesday allows taxpayers who pay back taxes by April 15, 2004, to avoid the increased penalties.