Tax Software 2007

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The face of professional tax preparation is changing and is likely to evolve significantly over the next five years as technology developments revolutionize some of the most basic processes in preparation and reviewing, outside of the already automated calculation itself. The last few seasons have been dominated by vendors adding states, forms and incremental improvement in features. But the 2007 software is the beginning of a new era.

The trends raise the likelihood of the following:

*Data entry will be increasingly automated, although it's not clear which technology will win.

Partner Insights

*Portals will become the preferred way tax and other confidential documents will be distributed.

*Outsourced tax preparation is getting an uptick because of the tight labor market, even if it's not the hot item many expected.


"What I'm seeing is that optical character recognition is the big item," says Larry Gray, a partner with Alfermann & Gray, and an UltraTax user who has spoken on behalf of many tax and accounting vendors.

What Gray is referring to is the spread of scanning software designed to capture data from documents so that it can be entered directly into the tax preparation software.

While most vendors are working on scanning technology, the impression is that SurePrep, which provides outsourcing services and workflow software, is ahead of the pack with its 1040 Scan.

"We have heard mixed reports," says Teresa Mackintosh, VP of marketing for Thomson Tax and Accounting and its CS products. "Intuit really struggled with its Scan product. We heard similar things with CCH. We have heard good things with SurePrep."

However, most expect the others to catch up and a lot of products are in development.

According to SurePrep CEO David Wyle, 1040 Scan not only captures the data on the forms through scanning, but also organizes them and produces an indexed PDF and puts the content in the appropriate fields of Form 1040. Well, most of the data, because no one has yet produced foolproof image capture through optical character recognition.

"It should eliminate about 60 percent to 70 percent of data entry," says Wyle.

SurePrep claims its software can learn to recognize new forms, and that it has already learned many because of the vast number of American tax forms that make their way to SurePrep as part of its tax preparation outsourcing system.

Scanning, however, has to occur under certain conditions. Forms must be scanned at 300 dpi, either gray scale or black and white. And clients must test their equipment before they go into production.

Wyle advises clients to look at the quality of forms they scan and test the system before implementing it. The question is simply "Does it look as good as the hard copy?" says Wyle. And forms that are fuzzy on paper aren't going to improve when scanned.

Tom Davis, owner of Tom C. Davis, says the scanning applications are important because they not only eliminate time spent in data entry, but they represent reviewer tools which he considers to be in short supply, as opposed to the plentiful supply of preparer tools.

Davis says 1040 Scan lets the reviewer know the information originated via the scanning process and has been matched to other data.

"You can tell it was verified or if the client wrote the information in the organizer, or that these were matched back to the numbers on the W-2," he says. "In the early days of tax preparation, we would trace these numbers back."

Once reviewers accept such products, they will probably spend less time double checking the source of numbers, just as they long ago stopped double checking the calculations made by software to ensure they were made correctly.

Companies already in the market with scanning products are Intuit with its Source Doc Auto-entry, which handles W-2s and 1099s, and CCH with its ProSystem fx Scan. CCH is working to improve its system, making it "a lot more administrative friendly," says product manager Stuart Gill. CCH is also introducing enhancements to ensure crisper images through better recognition and says the company needed to produce higher-quality images with its product.

"We are looking to create a direct import of data from the scan," he says. "We are going to be rolling out a limited version."


Likewise, Intuit appears to be in a transition with SourceDoc.

"We are focusing on making improvements," says Jorge Olavarrieta, the Lacerte product manager. "We have some decisions to make about what technology we want to use or adopt."

He notes one of the challenges faced by developers is the wide variety of document types. When it comes to scanning W-2s and 1099s, "there are really hundreds of W-2s and 1099s," he says.

Other companies are also moving into the field.

"We are moving towards that," says Kelly Peterson, vice president of marketing for RedGear Technologies, the renamed parent of TaxWorks. However, she says the first venture into some kind of scanning product will not be available this year, and she can't predict when it might be a available in 2008.

However, scanning is probably not for everyone, especially the smaller offices or the high-volume retail chains. And it's dependent on the firm having a document management system, says Chuck Petz, VP at Tracy, Calif.-based Petz Enterprises.

"If you're an office that has moved towards a paperless office, that is great," he says. "I haven't had people banging on me telling me they have to be able to OCR a W-2." However, Petz does have another concern that involves the need for security. "We have been looking at signature pads where you have to capture a digital signature," he says.

Portal Power

The use of client portals for distribution of tax documents is also spreading, although many vendors are in the early stages of exploring the Internet tool.

The use of portals is being spurred by concern over security of client data. Multi-office and larger single-office firms, especially those with IT departments, are moving to requiring the use of Web portals for distributing client documents and forbidding emailing of completed returns. UHY Advisors of Chicago and WithumSmith+Brown of Red Bank, N.J., have already joined the ranks of those using portals for distribution of confidential client documents. UHY will make portal use mandatory after this tax season.

Thomson has been actively promoting use of a variety of portals, including payroll self-service, NetClient and 1040 portals, and now has more than 100,000 in use, according to Jack LaRue, the SVP of marketing for the company's tax and accounting products.


Drake Software is planning portals, although they may not be fully functional for tax season, according to marketing VP John Sapp.

"We're working on limited Web portals for the first four or five pages of our organizer," says Sapp.

Intuit is also likely to join the portal parade, at least with its Lacerte package, and probably by tax season. Asked about any plans, Intuit's Olavarrieta replies, "We are considering portals."

However, Petz believes policies and procedures involving document retention and destruction have to be in place. Also, he believes small firms don't have the resources to handle portals.

"The large offices are big enough to have a [data processing] guy to handle this," he says.

Up With Outsourcing?

One lingering question is to what extent professional tax and accounting firms will accept outsourced preparation.

Outsourcing looked like one of the hot trends a few years ago, but it ran into concerns about privacy and about whether American jobs were being exported to other countries.

"The outsourcing business is finally starting to pick up," says SurePrep's Wyle, whose company entered the market five years ago. And Mark Albrecht, CEO of competitor Xpitax, agrees with that assessment.

Between the first and second years, SurePrep had 400 percent growth and then between years two and three, growth slowed to a 15 percent increase, while since then, business has been almost flat.

However, the business is starting to grow again and a lot of it has to do with the continuing job market crunch.

"Staffing has been the biggest issue for accounting firms for a few years. That's just getting worse and worse. People are throwing up their hands and saying 'I've got to do something,'" Wyle continues. Firms are not leaping into the business in great numbers. But Wyle says the ones using such services are enthusiastic.

"Even though we haven't had many new customers sign up over the last few years the existing customers have expanded their use greatly," he says.

Robert W. Scott is editor of Accounting Technology and can be reached at Robert.scott@sourcemedia.com.

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