The 2005 filing season is heading into the homestretch with growth in nearly every category of filing, according to the latest interim figures released by the Internal Revenue Service.

At mid-season, out of 55 million returns filed, 72 percent of them were filed electronically - up by 5.6 percent over last year. While the IRS expects this percentage to decline as April 15 approaches, it also expects for the first time to have more than half of all individual tax returns filed electronically.

The figures show home computer use posting the biggest increase, at 14 percent. Overall return figures were down by 2.5 percent from last year at the same point in the season.

The decrease in returns can be traced to inclement weather and late 1099s, according to Lacerte group product manager Ryan Farley. "The general pulse is that practitioners got out of the gate a bit slower than previous years," he said. "The winter weather - particularly on the East Coast - and the fact that Fidelity and Vanguard provided taxpayers their 1099s three weeks later than last year were factors."

Bernie Kent, Midwest partner-in-charge of personal financial services for Big Four accounting firm PricewaterhouseCoopers, agreed. "At this point we've signed more gift tax than income tax returns," he explained. "With the gift tax returns, we don't have to wait for the K-1s or the amended 1099s to come in."

Business e-filing is also up, with over half of Form 1965s expected to be filed electronically, according to Farley.

The government figures that show e-filing running ahead of last year by 5.6 percent are surpassed by Intuit's own figures. "We're seeing e-filing running nearly 14 percent over last year's pace," said Julie Kozloski, product manager for Intuit's Lacerte and ProSeries e-file. "More and more professionals are moving to e-filing. In the past, they viewed e-filing as an extra service they could provide; now they see it as a way to save time and increase productivity in their offices. More are adopting e-filing as a standard business practice," she said.

Meanwhile, Intuit's consumer-oriented TurboTax has increased its overall volume by 6 percent for paid units through late February, according to Julie Miller, senior manager for corporate communications. "We're seeing much more robust growth on units sold over the Web than desktop units," she said.

TurboTax units donated over the Web through the Free File Alliance have increased a dramatic 156 percent over last year's figures.

CCH's Torrance, Cal.-based ProSystem fx has also experienced an increase in e-filing, according to Ernest Zoumot, director of software product management. "There's been a lot of success with electronic filing this year," he said. "Most taxpayers are using it so they can reduce the amount of time for refunds. The reason the percentage will go down as we get closer to April 15 is that more filers are procrastinators or people who don't get refunds," he said.

Global fx, ProSystem's Web-based program, has been adopted in greater numbers, and both the paid and the Free File versions of Complete Tax, CCH's consumer product, have accelerated, according to Zoumot.

"We have a good retention level with existing customers in Free File, and there has been a steady trickle of Free File users becoming paid customers," he said.

ProSystem fx Outsource, which is designed to address the downturn in new professionals entering the accounting industry, has grown exponentially since it was introduced two years ago, according to Mike Gamble, product manager for outsourcing.

"People are having a difficult time finding qualified tax professionals," said Gamble. "One of our ProSystem fx customers said, 'I'm tired of working 65 hours a week - what can you do for me?' I said 'Send us your return and you can go home.'"

"Our clients project the volume they will outsource, and they consistently underestimate," he added.

The American Institute of CPAs' recommendation that practitioners disclose to their clients that their returns may be outsourced is being followed, according to Gamble. "They're including this in the engagement letter," he said.

"When outsourcing as an issue first arose, it was all about security - now it's not an issue," he said. "Most of the industry literature was laying out both good and bad aspects of outsourcing. Now they're saying that the practitioner really needs to be looking at outsourcing as a strategic tool."

Carrollton, Tex.-based GoSystem has, likewise, experienced a tremendous increase in e-filing this season, according to product manager Boyd Gackle. "More of our clients are opting to e-file voluntarily," he said. "The numbers have skyrocketed: For Form 1040, they're up 78 percent, Form 1965 is up 136 percent, and corporate returns are up over 600 percent," he said.

For Dexter, Mich.-based Creative Solutions, overall e-filing is up 25 percent, according to vice president of marketing Jack LaRue. "The Web organizers have really taken off this year," he noted. "Last year, thousands were placed, and our customers got about a 30 percent return rate from their clients. That's a higher rate than with paper organizers - they get a 15 to 20 percent return rate."

This season's issues

It's been a busy season for tax research, according to Jill Senso, a tax research specialist at the Appleton, Wis.-based National Association of Tax Professionals.

"The Code Section 179 limitation was reduced for purchases of SUVs after October 22," she said. "That's had an impact on the number of calls we field. The alternative minimum tax is also more prevalent because there was no increase in the exemption amount. The cost of labor goes up, so people are making more money, and AMT is hitting the middle class," she said.

"Only a few more people will be subject to AMT this year than last year, since the legislative changes for 2004 were not that significant in terms of creating more AMT income," observed PwC's Kent. "More people will pay AMT this year, but it will be driven by circumstance rather than the tax code."

E-filing has been a boon for Holliston, Mass.-based preparer Larry Novick. "It's so fast, so impersonal, so efficient, and we have saved so much in paper and postage," he said. "The post office has to be hurting big time."

State mandates have helped fuel the e-filing surge. "Massachusetts mandated that all preparers with more than 200 returns have to file electronically," said Novick. "Next year it goes down to 100 returns. As long as you're filing state returns electronically, it makes sense to e-file the federal returns."

Not all clients, particularly on the upper end, are pushing for their returns to be filed electronically. "There's no demand for it from our clients," said Kent. "Most of the time we manage their taxes well enough so they're not getting unexpected large refunds."

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