In one way, the big story of the tax preparation market is not the continuing consolidation of vendors (the C), the increasing price competition, integration of products, or the growing importance of the Internet. All of those things, of course, remain important. But what has become obvious is an observation made by Andy Stadler, an Enrolled Agent who operates Terra Haute, Ind.-based Stadler & Associates. Increasingly, offering electronic filing is not a choice.
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"Even though the customers don't realize they are asking for it, they are almost demanding it," Stadler says. "They want to know what is going on with a tax return-they want to know when they are going to get a check."
And that means e-filing (the big E). In fact, Stadler, who has been in business for 35 years, discourages clients from filing paper returns.
"We went to a policy that if we don't email, we charge a $10 fee for using extra paper," he says. The firm also cautions taxpayers that paper is less secure. "We can't tell you if it got lost in the mail," he says.
Preparers and vendors say that much of the public is now aware of electronic filing and refund loans. Many will choose a preparer that offers those services and avoid those who don't.
"The taxpaying public is beginning to realize many of the benefits, including that there aren't as many mistakes on e-filed returns," says Gene Goldenberg, vice president of marketing for Rome, Ga.-based TaxWise.
Goldenberg notes that in the last season, the IRS says that e-filed returns represented 62.5 percent of all returns processed. He continues that the most dramatic growth has been among CPAs and accountants, who had been resistant. Helping that trend along is the increasing number of states mandating e-filing as well as the ability to file balance-due returns.
For 2006, West Virginia will mandate e-filing of 1040s, which would bring the total on that form to 13 with Louisiana expected to mandate e-filing of individual returns for 2007.
Consolidation continued with Creative Solutions purchasing Dunphy Systems and removing the last DOS package from the market. More recently, CCH acquired ATX/Kleinrock from the United Communications Group and also picked up TaxWise.
In fact, the TaxWise deal, announced after Goldenberg made his comments, coupled with the purchase of ATX, has potential to change how pricing works in the market. It clearly establishes a Big Three in tax software: Intuit, CCH, and Thomson Creative Solutions.
CCH emerges as a company with a tax prep market share that is no longer dwarfed by Intuit. Intuit had 109,000 firms using Lacerte and ProSeries for tax year 2005.
Noting that the company doesn't have as many users as Intuit, CCH CEO Kevin Robert says "We plan to get there." With ATX and TaxWise added, CCH probably has in the range of 75,000 customers, leaving No. 3 in the distance.
However, for end-users, it's business as usual, says Robert.
"Both lines are going to be kept independent," he says. However, Robert continues that CCH will bring in products that it acquired with the purchase of the former CPASoftware line from Sage this year to build suites at all price levels of the tax market. That includes suites for both ATX and TaxWise.
What CCH got with TaxWise was both a product that has a higher price point than ATX, but not as high as ProSeries, and a stronger foothold in the electronic filing market.
"E-filing is a very critical piece," notes Robert, who says that with additions to the ProSystem Tax e-filing offerings this year that the company's goal is that "we will have the best e-filing system across all product lines."
Most immediately, those moves have certainly produced mailings and e-mailings, as vendors position themselves for what they hope will be a group of taxpayers who have an interest in switching brand loyalties. And price is the No. 1 reason that vendors are featuring in their pitches.
Intuit offers ATX customers what it calls ProSeries at ATX prices. Most vendors were offering switchers a deal on conversions.
The highly publicized ATX deal hadn't caused resentment among other customers, says Sasan Goodarzi, vice president of Intuit's professional tax operations.
"We've had very little calls and discussion about why aren't we getting this offer," he says. That's at least in part because it has special deals for users of other products, such as Creative Solutions' UltraTax, and because Intuit is increasingly relying on price to compete with lower-cost offerings. The Unlimited 1040 is being offered at $999, down from $1,500 for tax year 2005.
The CCH acquisition of ATX was important to CCH, which wants to expand into the market that seeks lower-priced products, but felt that it couldn't accomplish that with its ProSystem fx Tax. However, despite the effort of competitors to stir up concern about the ATX user base, there doesn't seem to be a great deal of worry.
It was a non-event for ATX user Hal Hebert, owner of Hebert Service, based in Hayes, La. Hebert, who has been preparing taxes for 35 years, says that because CCH is so well known in the tax and accounting market, there is no need for worry.
"I'm not unhappy with it. CCH is a good company," he says.
Another tactic to appeal to converts has been the promise of early shipments, as touted by Intuit. Companies also made conversion services available earlier. Ken Crutchfield, vice president of marketing for ATX/Kleinrock, says that his company had conversions available for the Dunphy customers before CSI did.
However, CSI is happy with the rate at which the Dunphy users are signing up, and it saw no reason to tinker with its shipment dates, which were already relatively early, says Jack LaRue, CSI's senior vice president of marketing.
CSI is also happy with the pace of adoption of its electronic services.
The number of Web-based organizers grew from 14,000 for tax year 2004 to 34,000 for tax year 2005, with a 30 percent completion rate. That compares to a typical completion rate of 10 to 15 percent, LaRue says.
There were also about 10,000 1040 portals in use during the last season, the first full year that service was offered. The number of client portals of all types, including those that provide storage of various documents types, topped 85,000.
The Support Business
Technical support is always a major issue for tax preparers-for many it's often more important that the array of new software features trotted out by the vendors.
Randy Johnston, a partner with K2 Enterprises, a consulting firm that keeps track of performance by vendors throughout the tax and accounting business, says that 2006 was not the best year for CCH and Intuit Lacerte.
Goodarzi admits that Intuit had some problem with response time during the last season, but says that the company has addressed these issues.
"We have been making significant improvements in terms of adding better talent, better support for Lacerte," he says. The company also studied how calls should be routed, which can depend on the size of the firm and the time of the year.
Shipping the initial CD about four weeks earlier should also help since that will let support personnel grapple with installation issues earlier, instead of having those calls coming in when other support issues are being addressed.
As for CCH, Mike Sabbatis, the company's vice president of sales and marketing, notes that the company has made some changes for the upcoming season. One of those includes its tech support knowledge base, which spells out issues solved by tech support. That was made available to customers during the summer.
Sabbatis did not spell out the issues cited by Johnston.
CCH has also equipped its support staff with dual monitors because of the growing popularity of that environment.
"We live in the same environment our customers live with," says Sabbatis.
Three years ago, the outsourced preparation of tax returns was one of the hottest topics, as vendors lined up to urge firms to ship their returns offshore to save money on labor and enjoy the benefits of time shifting-returns sent to India could be finished during the night and ready for review when partners returned in the morning.
This year, none of the companies contacted about their plans for the 2006 tax year mentioned outsourcing as one of its features. That doesn't mean that the practice is dead.
"There are still some people who are not ready for it," says CCH's Sabbatis. "Yet, they don't have a solution to getting work done as it comes their way."
In 2004, the number of returns prepared abroad dipped on concerns over privacy and security.
However, he notes that in the last tax season, the number of returns processed via ProSystem fx Outsource was up 40 percent over tax year 2005 and that the pace is accelerating and the company expects an increase for tax year 2006.