August 2002

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Guest Commentary 

Barbara O'Connor is director of the Institute for the Study of Politics and Media and a professor of communications at California State University, Sacramento.  This op-ed piece was originally published August 1 in the San Francisco Chronicle.

When California's Franchise Tax Board unveiled a prototype online tax preparation program for low-income taxpayers earlier this year, it may have been acting to help an underserved group cross the digital divide. But what arose instead was a substandard program with severe privacy problems that ultimately makes the targeted people more vulnerable.

The fatal flaw in the program is that as taxpayers use the online system to prepare their 540 2EZ forms – the simplest California form and most commonly used by lower-income taxpayers – the tax agency could monitor or record every keystroke, just as if they were standing over your shoulder with a video camera. Drafts could be stored on state servers, enabling tax collectors to compare early versions of the form with the final return.

This is more than an invasion of privacy; it's also a surreptitious way to target one part of the population for audits.

Would low-income taxpayers, drawn to the FTB site by the promise of a faster refund, actually be targeted? The answer is clearly yes, if you look at national statistics. Audits of the working poor – particularly those who claim the Earned Income Tax Credit – by the Internal Revenue Service were up by 50 percent last year; the IRS has announced they will be targeted even more aggressively in the future.

Taxpayers also need to consider whether a site built and operated by the state will have their best interests in mind. There is an inherent conflict of interest when a tax agency provides preparation assistance, especially because its ultimate goal is to maximize the amount it receives from your checkbook.

Several philanthropic and private-sector Web sites already enable low- income taxpayers to prepare and file their state and federal taxes for free, however, and are designed to help find every legal deduction. These sites don't share private financial information with the government or anyone else, so the benefits of electronic filing – including added convenience and faster refunds – come without sacrificing privacy.

Private-sector sites also usually guarantee the calculations are correct and pay penalties if their software causes an error; whether the state would accept the same liability is an important and as yet unanswered question.

A bill now in the state Legislature, AB2781 (sponsored by Rebecca Cohn, D- Saratoga), would ensure that any future FTB electronic filing program would prohibit recording keystrokes or saving drafts. It also requires industry- standard encryption technology to ensure that the final forms are transmitted securely and cannot be inadvertently viewed by third parties during transmission.

It is hard to understand why the state needs an online tax return preparation system that is redundant with what is currently available and potentially singles out one segment of the population for harsher treatment. It's also hard to understand why any taxpayer would voluntarily choose to use a system that is less secure and puts them more at risk for an audit than free alternatives currently available.

Fortunately, the three-member board that oversees the FTB voted unanimously earlier this year to slam the brakes on the project, at least temporarily.

AB2781 encourages electronic filing but would stop the FTB staff's flawed 540 2EZ online preparation program before it can become another expensive entry on the state's long list of computer fiascoes. It also requires the FTB to report regularly to the Legislature on any plans it has to develop or implement new e-filing programs, and to ensure any new programs meet the highest privacy standards.

California has a history of setting standards that lead the way for the rest of the nation. But unless privacy standards like those in AB2781 are put in place, California will offer its citizens a substandard and ominous product that benefits the tax collector over consumers. In the end, the very people California is attempting to bring online – poor, minorities, disabled and other traditionally underserved populations – will have one more reason to stay away.