The 2006 filing season set a series of records, highlighted by 70 million tax returns filed electronically - up 6 percent from last year.
"I'm surprised at how much people have accepted e-filing," said Holliston, Mass.-based preparer Larry Novick. "A couple of years ago, no one wanted to give the government their checking account number; now everyone wants it. And it's been encouraged by the fact that in Massachusetts any preparer who does 100 or more returns must e-file at the state level. If you're going to e-file for the state, you might as well e-file your federal return."
The jump in e-filing reflected a larger increase in the use of electronic services, according to the Internal Revenue Service. The IRS saw new records in filings from home PCs and the use of its Web site, www.irs.gov.
"We saw a surge of e-filing at the end of the tax season, particularly with people using software on home computers," said IRS Commissioner Mark W. Everson. "Compared to recent years, we had much more e-filing in the weeks leading up to the deadline, signaling that more balance-due filers are embracing this service. Overall, we received more returns electronically this year than the number of paper returns that we processed for the entire United States in 1966."
The 70 million-plus e-filed returns accepted through the end of April exceeded the 68.5 million electronic returns received for all of 2005. The IRS expects that number to increase before the close of the e-filing season in October.
"We tripled the number of e-filed returns and extensions this year compared to last," said Jeanne A. Smith, a tax partner at Weaver and Tidwell, a regional Texas firm. "We've been e-filing for a number of years, but this year we decided to e-file everything we could. We weren't sure how our clients would react, but we had a great positive response."
Surging later and later
For Chuck McCabe, chief executive of central Virginia-based Peoples Income Tax, the filing season started weak but finished strong. "This usually happens when Easter is late. People tend to delay; psychologically, they think they have more time to get their taxes in."
Tax prep giant H&R Block similarly reported an increase in business toward the April 17 deadline. The company saw a 5.4 percent increase in total clients served for the second half of March, compared with the prior-year period.
Chairman and chief executive Mark Ernst pointed to missing documents, busy schedules and simple procrastination for the late filing, even though more than 70 percent of the late filers expected a refund.
Andrew Martin, manager of tax services for New York-based Fiducial, noted that many people were afraid to file early because they knew they would end up having to amend. "The big institutions weren't able to get correct 1099s out on time," he said. "By the end of the season, some taxpayers had three or four changes to their 1099s."
Martin said that the increasing number of states requiring e-filing has pushed up federal e-filing. "There's also the idea that if you can't pay on time, you can use your credit card to pay what you owe the IRS," he said. "The better way is to simply pay whatever you can, and let the IRS bill you for what you owe. The interest they charge will be significantly less than what you would pay using your credit card."
The delay in 1099s worked into the plans of at least one firm. "We've been trying to flatten out the season for our preparers and our clients, and this year it took hold," said Thomas Schulte, managing partner of Los Angeles-based RBZ LLP. "When we found that many of our clients weren't going to be filing on time anyway, we filed extensions for them. It saves on overtime, makes the summers more efficient and allows our tax professionals to avoid burnout."
Part of the process involved training clients, Schulte observed. "We tell them specifically when they can expect their return," he said. "If it's June 15, we make sure the return is completed by then."
Size matters
McCabe sees independent operators being squeezed by the franchise offices and do-it-yourselfers. "The expansion of the national firms and the aggressive marketing by TurboTax and Tax Cut, plus the competition from FreeFile, community service preparers and other businesses getting into tax preparation are putting pressure on the small, independent firms," he said. "There's been a lot of consolidation among the independents, since close to 70 percent of the owners are over 50. But if you don't want to sell and you still want to grow and remain independent, you're facing difficulties."
To remedy this, McCabe believes that seasonal tax firms need to add other services, such as small business accounting and financial, mortgage and insurance services, to generate year-round revenue. "Independent tax businesses must either become highly specialized or diversified to survive," he said. "In either case, they must develop a new business model and learn to use technology to keep up with the national tax firms."
Novick agreed: "In 10 years we won't be doing as many returns as we are today," he said. "The standard deduction keeps going up, and more people don't need to itemize. Slowly but surely the government is bringing its own flat tax - that's why so many are e-filing on off-the-shelf software."
The IRS said that nearly 20 million taxpayers - 3 million more than for all of 2005 - filed from a home computer. While this is up 18 percent from the same time last year, the number of returns filed through tax professionals was 50 million, only 9 percent over last year.
Matawan, N.J.-based CPA Salim Omar stressed the importance of customer relationships in the face of increasing competition. "It's getting tougher to bring in new customers. More franchises are entering the market, so you have to keep a good relationship with your existing clients as well," he said.
Omar, whose clientele is 30 percent personal and 70 percent business, said that his staff tries to know each customer on a first-name basis. "On a Saturday night in October or November, we rent out a restaurant and invite everyone whose return we did that year to a client appreciation party. Then in January we send out a client organizer, and make a phone call to assure they received it and schedule a time they can come in. If they don't come in by the first week in March, we call again and ask if they want to set up an appointment before the April rush, and offer a 20 percent March discount."
Omar recruits about 10 to 12 additional staff for tax season by offering tax courses. "We teach an advanced course in early December to recruit preparers, and another basic course in January to recruit administrative people," he said.
"We found that it's advantageous for administrative people to have a basic knowledge of tax," he said. "They can communicate better with the clients, and it gives the office a more professional atmosphere."
Weaver and Tidwell likewise emphasizes client contact as an aspect of the tax return experience, according to Smith. "We give our staff training and have them personally call the client. It helps the staff feel they're doing a higher level of work, not just crunching numbers, and the client appreciates the attention."
"We also found that food motivates accountants," he said. "So during tax season, we bring in evening meals and lunch on Saturday. It keeps people from going out of the office, and they can get their work done sooner and get home to their families. And on the Sunday before March 15, two partners went and handed out $100 bills to staff in the office to let them know we appreciated them being here to help us make the corporate deadline."
Regional New England firm Carlin, Charron & Rosen found that outsourcing returns allowed it to smooth over some of the tax season rough spots, according to Alan Osmolowski, head of the tax department.
"Our biggest challenge is attracting and retaining the best people," he said. "This year we outsourced over 2,000 returns. It helped us create a work environment conducive to retaining the best tax professionals. We want to allow our people to balance their life, even during tax season, so we don't do 70-hour weeks anymore."
Outsourcing allows professionals to do more tax planning and spend less time doing data entry and other "grunt work," according to Osmolowski. "We are 100 percent upfront with our clients," he said. "A few said they didn't want their return outsourced to India. The reality is the data is probably much safer than for someone here who applies for a mortgage. No paper or pencils are allowed in the building in Mumbai where the work is performed, and everyone gets scanned when they enter the building."
Osmolowski said that investment in IT has paid off for the firm. "We're trying to keep everything paperless," he said. "And we use technology to allow some of our employees to work from home. We've been able to keep key people who five years ago would be looking to get out of our firm because they couldn't work tax season hours. There's a trend to allow people to not work those kind of hours and still stay in the profession."
