The 2005 tax return season wound down with a larger-than-expected late surge of filers to make up for the slow start, according to preparers.
The season also saw more than the predicted number of taxpayers switching to e-filing, with over half of all returns e-filed for the first time.
A significant portion of the increase is due to the success of the Free File program, with more than 4 million returns filed as the season was closing, up 44 percent from those using the program at the same time last year.
"As we get deeper into the tax filing season, the percent difference between how many people are using e-file and how many used it last year keeps going up," said Internal Revenue Service Commissioner Mark W. Everson. "This shapes up as a really strong year."
"There were a lot more late filers this year," said Claudette Huggins, owner of five Jackson Hewitt locations in southeastern Ohio. "It seems like the season has been pushed back. The people who used to come in early March waited until the first week in April. People are just not concerned about taxes as much - we're getting people who say, 'I didn't file because I didn't think I would owe anything.'"
Huggins noted that fair weather tends to keep people away from tax preparation offices. "When it was 83 degrees and sunny, there was no traffic to our offices," she said. "But when it was overcast or rainy, things were busy."
Alan Strauss, a Manhattan-based CPA and tax attorney, experienced a later than usual filing season. "I think that clients are attending to their task later and later each year," he said. "In general, I think it's because people tend to put off unpleasant tasks, but for some reason this season has been worse than the past."
"Fortunately there were no significant changes in the tax law or reporting like last year, where people got their data late," he continued. "Maybe last year set a pattern, and people thought they would have to wait for their revised K-1s and 1099s."
"The filing season started off pretty slow," agreed Mike Fine, director of operations for Rockville, Md.-based Tax-Masters, as the April 15 deadline approached. "But it's raging right now. We've seen over a 100 percent increase in e-filing. The ones who are Internet-savvy ask for their returns in PDF format, so they can check it and send it back to us. This year we used our own proprietary Web organizer, which made everything flow more smoothly."
Fine said that the slow start to the season might have been caused by last year's election. "In an election year, taxes are a hot issue. In the immediately following year, tax season starts slowly because taxpayers are confused as to whether any changes were made, and the confusion turns to procrastination. We did a lot of last-minute extensions."
AMT surprise
The alternative minimum tax is surprising an increasing number of taxpayers.
"Some people sell real estate after letting it sit there awhile, and they're aghast that they owe $75,000 in taxes," explained Frank Grim, who owns six offices in the Hampton Roads, Va., area.
"People do things without being aware of the tax consequences," he continued. "They just don't know that there's a 10 percent penalty for pulling money out of an IRA. That's a high cost to pay for not checking first with a tax professional."
Boston-based consumer research firm Compete Inc. said that there is an increasing acceptance of the Internet to do business.
"Between February last year and February this year, IRS Web site traffic was up by over 20 percent," said Michael Bailey, managing director of financial services.
"Consumers are getting good deals by virtue of the competition between sites," he said. "For example, Bank of America gives its users a 50 percent discount to use either TurboTax or Tax Cut to do their returns."
Compete monitors consumer behavior with a panel of 2 million individuals, from which it extrapolates data for the general U.S. population.
Professional tax software manufacturers also reflected the surge in e-filing.
"Electronic filing is up 74 percent overall," said Boyd Gackle, product manager for RIA's Carrollton, Tex.-based GoSystem RS. "E-filed 1040s are up 67 percent, Form 1065s are up 82 percent, and Form 1120s are up by over 400 percent."
CCH's ProSystem fx experienced similar growth. "Overall, we had strong growth across the boards," said Jerry Connor, segment manager for ProSystem fx Software.
"A lot of the bigger firms that hadn't embraced e-file in the past embraced it this year," he said.
CompleteTax, CCH's consumer product, likewise exceeded its target in both its retail and Free File forms. However, outsourcing of tax returns has slowed somewhat, according to Connor.
"It's growing, but not at the percentage that some thought it would," he said. "Coming out of the election there were some political issues, so some firms have held off adopting it."
Connor said that most problems experienced by preparers this year occurred where there were changes, such as with the new Schedule M-3 or the redesigned Schedule K-1.
"Some of the firms that didn't participate in update seminars were caught off guard," he said.
Intuit Inc., the Mountain View, Calif.-based provider of ProSeries and Lacerte, said that its e-filing grew well over the nationwide rate of increase.
"We had at least double the IRS increase of 7 percent among our tax professionals," said Karl Grass, vice president and general manger of Intuit's Professional Tax Group.
Intuit added Express and Basic editions to its standard ProSeries Professional software this year. The Express edition is designed for preparers who file a high volume of e-filed and bank product returns, while the Basic edition is tailored for preparers who may do just a few returns, or for those for whom tax preparation is not a primary focus.
"We saw that the marketplace couldn't be categorized with a one-size-fits-all product," Grass said. "In addition to the heavy e-file and bank product preparers, there are those who may be new to the marketplace, or retiring or changing their concentration from a primary focus on taxes."
The new offerings have over 13,000 licensees, with more than half of them new to ProSeries.
He noted a change in the way that preparers are viewing document management systems in their workflow.
"We introduced a document management system several years ago, and we're beginning to see a change about going paperless," he said. "What's starting to change is not just seeing it as going paperless, but as a whole different way to manage workflow. For example, preparers are making use of review notes, sending them back and forth within an office. They're becoming more efficient in using digital information."
"As a result," said Grass, "we're now looking at linking together the software and hardware. Once you get the concept of not just going paperless, but simplifying the workflow and having hardware and software linked together, you've got a real productivity gain."
John Hewitt, founder and chief executive of Virginia Beach, Va.-based Liberty Tax Service, noted growth in the small stand-alone tax offices as well as tax prep franchises.
"Last year, there were a million more paid-preparer returns," he said. "Block lost about a half million, while Liberty and Jackson Hewitt grew a combined half million, so the mom-and-pops picked up a half million returns. This year it looks like they will be up about 650,000 returns."
