Last tax season evidenced a disturbing development for professional tax preparers, but industry observers are hoping that other factors will mitigate the trend toward do-it-yourself preparation next year.
Although the total number of returns processed in 2014 was up slightly over the same time period as last year, the growth in DIYers outpaced the growth in professionally prepared returns. Those prepared by tax professionals grew feebly, up to 71,263,000 from 70,739,000 in 2013, for growth of 0.7 percent. Self-prepared returns, on the other hand, grew from 43,683,000 to 46,500,000, a growth rate of over 6 percent.
Yet most observers believe that the increasing complexity of tax law changes, including those incorporated in the Affordable Care Act, will continue to cause taxpayers to seek professional help.
The concerns of preparers this year are not drastically different from what they've been in prior seasons, observed Kerri Gibson, CPA, vice president and general manager, small professional, at CCH Small Firm Services, which offers the ATX and TaxWise tax prep solutions. "They still are faced with seasonal compression of their workload, and the complexity of the law and the forms. Not only does this make it harder for the average American to complete their own tax return, it also requires the preparers to keep up with compliance and accuracy."
"The third area of concern is retaining and capturing clients," she said. "Competition is fierce between the DIY market and other service providers. There are a lot out there, and they have to make sure they have a strong and differentiated value proposition," she said. "These are not new, but they're the three things that tax preparers face that keep them up at night."
The software industry is alive and well, according to Gibson: "The number of small firms is growing as people spin off from bigger accounting firms or from the private industry to start their own businesses," she said. "And we're continuing to focus on expanding solutions to help firms maximize their efficiency. We're looking at our products to make sure they focus on the core areas important to our customers."
SOURCES OF CONFUSION
Two hurdles tax preparers will see in the coming season are the Affordable Care Act rollout and the extenders, Gibson indicated. "The ACA is going to impact many taxpayers and preparers," she said. "For many of them, this will be their first encounter with ACA compliance, so it will be an ongoing education process, not only for tax preparers but for the software industry and for taxpayers."
The delay in enacting the extenders will cause confusion as well, Gibson noted. "The later in the season that changes are made, the greater the risk," she said. "Anytime you have segments of taxpayers affected by a potential delay in the tax season, it causes confusion."
Intuit group product manager Jorge Olavarrieta said that, beyond the ACA and the extenders, things are relatively quiet. "The extenders will keep people on their toes as to what is extended and what is not," he said.
"The ACA will be the big issue this coming tax season," he predicted. "It will likely drive clients to have their returns prepared professionally. People who were doing their own taxes in the past will need advice. It's fairly complex, with a lot of rules. Accountants will have to help and advise their clients."
"Part of the problems facing the taxpayer is that if they attempt to do it on their own, they may feel like they have everything correct, but if they don't understand how to go about making certain determinations, they might file an incorrect return," he said.
"Taxpayers doing their returns on their own may not be aware of the implications, and the software packages will have to account for the complex rules and regulations. We're doing some very interesting things with the ACA calculations to make it more transparent to the accountant to understand why a certain taxpayer fell into a specific scenario."
NEW TOOLS
Olavarrieta believes that the cloud has ushered in the dawn of a new age in software. "We're on the verge of some very big transformations that haven't been seen since the advent of software in the early 1980s," he said. "If you think about the journey that software has been on, from the PC was born software that eliminated the need for paper and pencil. Then came the Internet. Now we're at the point where the cloud can enable significant capabilities that haven't been available."
"Tax preparation," he explained, "is basically the compilation of various sources of personal and financial data that is provided by various institutions. These can be from the workplace or a bank or a stockbroker. It's like getting news around the world. Virtually all of the information needed for a tax return lives in the cloud."
"This is part of the reason that we invested so heavily in Software-as-a-Service," he said. "Software has been around for decades, but the ability to automatically get data into the software is becoming more of a reality. Our products reflect this, from importing W-2s to digital signatures. All of this data is living in a place where it can be accessed readily. We are getting to the point where software will no longer be 'data entry' but 'data consumer.'"
Jordan Kleinsmith, product manager for enterprise at Thomson Reuters, said that one of the software vendor's goals was to create a more consulting-centric value model for clients. "Preparers need to build a plan for their clients before they talk about preparation of the tax return," he said. "Too many give tax planning away as an afterthought. They complete the return, and then say, 'Oh, you could really benefit from opening a retirement account.'"
"They give away advice, which is really their highest value," he said.
Kleinsmith is focusing on facilitating fixed-fee recurring engagements, not only up front as part of a consulting package, but by integrating payroll, bookkeeping and accounting. To enable client collaboration, the company has built a special module.
"The Client Access component is a way for clients to log into the same database that powers Accounting CS," he explained. "The client can go to areas where the accountant trusts them to work."
Business guidance is an area that Kleinsmith sees as being "under-exploited."
"We're developing unique ways to engage business customers at the front end," he said. "In the past, we had organizers supporting returns exclusively for individuals. We're now building them out for other entities, to make it easier to be proactive with business clients, and cut down on the net amount of time necessary for the more complicated returns."
Ultra Tax and GoSystem are no longer marketed simply on the basis of the size of the firm, according to Kleinsmith. "There are situations where Ultra Tax is a better fit for a large firm, and there are small firms that might zero in on a particular niche that might find GoSystem is the better fit."
The preparer market is a mix, observed Angela Askew, tax product manager, and Jo Ann Cummings, technical product manager for tax at Wolters Kluwer, CCH.
"There is always turnover with firms that are already out there and have software. There are also new opportunities, and those come out of CPAs or professionals that split off from a firm, creating new firms, and also when firms merge. With all the fresh new young professionals coming out of college, there is a healthy mix that's out there in the market," said Askew.
"We look at the focus of our software to be compliance first," she explained. "Once we get past the compliance, then our goal is to delight our customers. The younger accountants coming out of college expect more from their software experience. They want it to not only do the core job, and to be accurate and correct, but also it should be fun, or at least a very positive user experience. We hit a bullseye this year with our product design."
With ProSystem fx and CCH Axcess, the solution is not dependent on the size of the firm, according to Cummings. "It's really a factor of the type of business that you are doing," she said. "ProSystem fx and Axcess cover the market, whether you're in the Big Four or a smaller firm in size of staff, or in the number of returns you do."
CCH Axcess, launched last year, provides a cloud solution with an integrated central database that offers a single point of access to handle all tasks associated with the tax process, from return preparation and compliance to file storage and practice. "One of the nice things is that you don't have to change your product in order to grow your business," noted Askew. "You can start smaller and grow without changing the products. And we actually help firms with that growth pattern, so we're able to grow with them."
"Compliance is our driving goal, and second to that is we want to help firms grow and manage their businesses," added Cummings.
DUE DILIGENCE ISSUES
The issue for preparers with the ACA is how to determine if someone had the minimum insurance for the year, said Timur Taluy, chief executive of FileYourTaxes.com and ProTaxPro professional software, and a member of the Internal Revenue Service's Electronic Tax Administration Advisory Committee.
"That's the question before the industry," he said. "Are preparers supposed to ask to see receipts from insurance payments or payroll stubs, or simply ask a couple of appropriate questions and take the taxpayer's word?"
"Every software will have to enable the new forms. Some of these are very detailed," he said. "They collect monthly information on income and family size. It's very complicated for a preparer to do a tax return if the taxpayer didn't have minimum coverage. And if a taxpayer did not have minimum coverage, then it becomes a very difficult task to reconcile what the penalty might be."
One of the greatest risks for tax season is the passing of late legislation, Taluy noted. "Late legislation will compress both the IRS's and the tax industry's programming cycle, so people are working more quickly and doing less testing. That creates more risk," he said.
"The ACA is a huge focus for all involved with tax processing -- the IRS, software companies, tax professionals and taxpayers," said James Stork, senior vice president at Drake Software. "Our priority is making the tax professional's job easier; we will be providing ACA tools, checklists, training and software that do just that. With our ACA solutions, tax pros will have the confidence to work through the ACA reporting requirements and calculations with their clients."
"We continue to hear concerns from the preparer community regarding safeguarding taxpayer information, which has generated a lot of interest in our online portals and our hosted software platform," he explained. "With the risks associated with identity theft and the penalties for failing to protect taxpayer data, tax professionals carry a huge burden, and we're trying to help alleviate that burden by providing practical safeguarding solutions."
