Tax Software Special Focus

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Is the sun setting on desktop-based tax preparation?

Introduction by Robert W. Scott
Individual stories by Carly Lombardo and Richard McCausland

When will the sun set on CDs as the preferred method of distribution for tax preparation software? Perhaps no time soon in a market in which ExacTax, Orrtax, and Petz still market DOS versions of their tax packages.

Partner Insights

But it’s not hard to see momentum building for online operations, through both Internet-based tax preparation and email and Web-based organizers that are shoving the marketplace down the online path.

The granddaddy of hosted preparation services is RIA’s GoSystem RS, now in its sixth season. During the last tax season, RIA Tax Compliance processed 20 percent more returns through GoSystem RS than in the year before, and the company expects to handle more than 1.2 million returns by the end of the year. This year, the tax preparation system will be joined by an online organizer, MyTaxInfo.

Meanwhile, rival CCH Tax Compliance is cranking up its Global fx Tax, used by 40 firms last year. For the upcoming 2003 tax season, CCH is expecting rapid growth in the use of Global fx “especially as bigger CPA firms analyze the benefits of outsourcing their IT requirements as they relate to tax work,” notes Kevin Robert, CEO of the Wolters Kluwer Tax and Accounting unit that includes CCH Tax Compliance. Robert continues, “Based on the results thus far, we anticipate having several hundred firms using Global fx this coming tax season.”

CCH is also promoting the end-user-oriented CompleteTax, which accounting firms can place on their Web sites for do-it-yourselfers to complete.

“Clients think they are going directly to the CPA firm,” notes Mike Sabbatis, vice president of business development for CCH Tax Compliance. About 200,000 returns were prepared using CompleteTax during the last tax season. Sabbatis notes that if users have difficulty completing a return online,  CompleteTax data can be transferred to the preparer’s ProSystem fx.

As to the market acceptance of Tax Notebook, CCH’s electronic organizer, Sabbatis says that 115,000 were downloaded during tax season, “which is up significantly.” The electronic version lets firms save the cost of sending out hardcover organizers while “they get about the same response rate that they were getting from the print organizers,” he says.

Also launching a hosted system, following a beta test during the last tax season, is Petz Enterprises, which has named its Web-based 1040 service VTax. VTax is designed for Electronic Refund Originators that operate a network of tax service bureaus.

Among other vendors, Tax Simple is offering Web-hosted tax preparation at a steep discount to the price of its CD-based tax package. Online access to federal and state forms, e-filing and RAL packages for 17 states is priced at $599, compared to $2,365 for the desktop version.

New to the Web is CPASoftware, which is introducing the Visual Suite Web update program, a utility that will enable users to schedule downloads of new versions on a user-selected schedule with they log into the system.

Still, some observers say that preparers are far more receptive to using online or email-based organizers than they are in preparing returns via the Internet.

“We are looking at a significantly higher volume of Web-based organizers,” says Jack LaRue, vice president of marketing for Dexter, Mich.-based Creative Solutions. When it comes to the company’s Web-based Virtual Office, although interest is increasing, “we had only a handful of firms that embraced it last year.” He notes, “We’ve got hundreds of firms using it, not thousands.”

One difficulty faced by all online applications is that firms would like to have all their data in the same place. Since accounting firms run as many as 36 different applications, the savings that are supposed to result from hosting, such as hardware administration costs, cannot be fully realized in a firm that has part of its data online and part on the desktop, says LaRue.

One organization with no immediate plans for Web-based preparation is Intuit’s Lacerte tax operations, which pulled its NetTax hosted product from the market last year, citing lack of demand.

“There’s been a lot of hype around this,” says Rajeev Vachani, group product manager for Lacerte. “When it comes down to the actual usage, accountants love to have control over the data.”

If preparers are not overwhelmingly ready for hosted software, the appeal of paperless operation is something that seems to be sweeping the market as the number of applications that let users save tax records in the Adobe PDF format grows.

Laser Systems expanded its Paperless Office initiative last season—it introduced the ability to save forms as PDFs—in the upcoming season, it will introduce a scan feature to allow attachments such as W-2s and workpapers to be stored electronically. Similarly, Petz Enterprises has implemented a feature to let users create a PDF of the pro forma and organizer forms for its CrossLink 1040 line. And in its second year on the market, Greatland/Nelco’s Great Tax package will also have the ability to print to PDF format.

Lacerte is going beyond merely using PDFs in its new Document Management System, enabling preparers to file documents electronically to the appropriate client folder. The system will store applications other than tax files, and although it’s currently a Lacerte-branded product, the capability could spread to the company’s ProSeries operation. While customers are not demanding online services, they are demanding products that help them reduce paper.

“We’ve seen a pretty big groundswell of demand among our users,” notes Kevin Reinard, senior product manager at Lacerte.

Not everyone loves PDF. CSI continues to use a proprietary storage tool that can let users save documents as PDF if they choose. However, LaRue says the system lets documents stored to the File Cabinet Solution be labeled, something that is not possible for those using the Adobe system.

Interest in electronic filing also is growing strongly. Laser Systems says the number of electronically filed returns for its TaxWorks System grew by more than 80 percent over the prior year, while the number of bank products doubled.

But while interest in managing paper is being driven by user demand, the need to provide more e-filing services is also being driven by mandate.

According to Vachani, California is mandating that anyone who prepared 100 returns in the prior year must e-file, although he adds that there is a possibility of waivers being available.

Moreover, Michigan has mandated that returns of the Single Business Tax be electronically filed, says Ray Jimmison, general manager of CPASoftware. “It can be attached to a 1040, 1120, or 1065 form,” he notes.

“I think we will see a lot of mandates,” agrees Vachani.  A state like Michigan, with a need to save money, is saying, ‘We don’t have the money to do your taxes. We need you to e-file,’” he continues.

Outsource Boom?

Vendors will also be watching their customers and firms will be watching their colleagues as all try to discern the demand for outsourced tax preparation.

Last year, outsourcing, which usually means making returns available to accountants in India via the Internet, appeared to be a trend ready to take off as companies such as Datamatics, SurePrep, Outsource Partners International, Xpitax, and Mphasis hit the market. This year, RIA Tax Compliance will join the list of companies supporting outsourcing.

But reaction concerning the adoption of outsourcing seems to be split. Lacerte’s Kashani says despite the hype, use of offshore processing has not advanced as fast as proponents had predicted.

“If you look at all the vendors that had projections last year, I’m hearing some have met 25 percent,” says Vachani. “There seems to be a lot of cultural barriers and concerns about the privacy of data.”

On the other side, CCH last season teamed with Datamatics to offer CCH ProSystem fx Outsource. Sabbatis says, “I think outsourcing is just about ready to explode.” He expects about 100,000 to 110,000 returns will be outsourced next season, with CCH handling about 35,000 of the total. But Sabbatis does not expect adoption to proceed evenly across different sized firms.

“Mostly the larger firms are the ones that are putting their toe in the water first,” he says. He notes that the larger the firm, the more experienced its partners are with outsourcing other aspects of their operations. “They’ve outsourced other parts of their organization,” he says. “Ernst & Young has been outsourcing technology and call centers, and counseling corporations to do the same for years.”

David Wyle, president of SurePrep, based in Newport Beach, Calif., is also optimistic, although he reports industry estimates that about 200,000 returns will be outsourced in the coming season. SurePrep handled about 6,000 returns this year at an average price of $93 per return and expects to process about 30,000 next year.  Wyle concedes that firms are being cautious.

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