An early-season surge in tax filing - attributed by most observers to the declining economy - has thus far characterized this year's filing season.
At press time, the Internal Revenue Service had received roughly 56 million individual tax returns. Although the total number of e-filed returns was up by 5.6 percent, the total number of e-filed returns prepared by tax professionals was actually down by half a percentage point.
"There are a lot more people doing their own returns because they don't have the money to pay a preparer," noted Chuck McCabe, chief executive of Richmond, Va.-based Peoples Income Tax.
A recent study by The Conference Board confirmed the 2009 do-it-yourself filing trend.
Its Consumer Internet Barometer, which surveys 10,000 households across the country, found that about 40 percent of online households are planning to file their federal taxes online this year, up from less than 34 percent four years ago. "Convenience and speed are the primary reasons behind online filing," explained Lynn Franco, director of the board's Consumer Research Center. "Concerns over security, once a major deterrent, have declined substantially."
The IRS's mid-season study concluded that it expected to receive and process more individual income tax returns during 2009 than in 2007, but fewer than in 2008. The reason for this is that last year's results include the returns filed for the economic stimulus payments.
Despite the IRS projections, major software providers report growth across the board.
"Overall, our transmitted returns are up 7.4 percent," revealed Jo Ann Cummings, product manager for CCH's ProSystem fx. "Our biggest growth is in business returns, both federal and state. They're up over 96 percent from last year," she said.
"Our e-filing is up," echoed Scott Fleszar, senior director of strategic marketing for the Tax and Accounting business of Thomson Reuters. "Part of this is due to the state e-filing mandates. Twenty states now have e-filing mandates for Form 1040."
"E-filing is up 12 percent over last year," said Kathy Kirkendall, group product manager for Intuit's ProSeries. "The trend over the last four years has been double-digit increases in e-filing, except for last year, because of the late Alternative Minimum Tax legislation."
Both ProSeries and Lacerte have released Live Community - a link to other users embedded within the tax prep software that allows preparers to ask questions of their colleagues. "Our concern was whether accountants would be willing to help their peers during busy season," said Kirkendall. "The fact that 91 percent of over 8,000 questions were answered within 48 hours shows that they would."
Likewise, CCH Small Firm Services, makers of TaxWise and ATX software, is up in virtually every category, according to vice president of marketing Gene Goldenberg. "Our numbers are up, even though the IRS numbers for professionally prepared e-filing are down," he said.
John Sapp, a CPA and vice president of sales and marketing for Drake Software, likewise noted an increase: "Our volume is ahead of last year, and our e-filing is up by 10 percent."
Sapp credited the IRS with an efficient and responsive reaction to the confusion at the beginning of the season with the rebate and recovery credit. "They handled it well," he said. "The Electronic Tax Administration has done a stupendous job in running things smoothly."
It may be going "a little too smoothly," according to Mike Solomon, partner-in-charge of tax at the Philadelphia office of Amper, Politziner & Mattia PC. "As a result of the extension for brokers until the third week in February to get their reports out, our client information has come in very slowly. ... There's some concern that we'll be hit with an avalanche towards the end."
The economic stimulus legislation gives larger write-offs for depreciation, which has generated substantial business losses, observed Solomon.
"If these are large enough, they can be carried back up to five years. It's an exercise to figure out which year will give us the biggest refund. Clients want to file their 2008 return as soon as possible to allow them to take the [net operating loss] back and file another form to get their refund for prior years."
People are also getting larger refunds this year, Solomon explained. "In 2008, people based their estimated tax payments on 2007 income," he said. "Most of them didn't adjust their estimated tax payments or have their withholding adjusted when their income dropped."
The average individual refund as of the end of February was $2,869, a 9 percent increase over last year's average refund of $2,637, according to the IRS - though it said that the average refund amount generally will decrease slightly as the filing season progresses.
Miguel G. Farra, head of the Tax Department at Miami-based Morrison, Brown, Argiz & Farra LLP, also weighed in on NOL carrybacks. "A lot of taxpayers that had losses in business want their returns prepared quickly so they can get their refunds," he said.
To benefit from the five-year carryback, a business must have no more than $15 million in gross revenue averaged over the past three years, he noted.
As a further reflection on the economy, Peoples Income Tax head McCabe said that, although the tax prep business may be flat this year, the Income Tax School arm of the business is up well over 100 percent from last year. "We're still getting enrollments during tax season," he said. "The majority of students are people looking for jobs."
However, it has been reported that H&R Block experienced a decline in returns prepared at its retail outlets through the end of February. Although Block's total returns, including in-store and online, were down from a year earlier, its revenue increased due to higher fees.
Liberty Tax Service was up 100,000 in total returns at the end of February, according to chief executive John Hewitt.
"What happens is that millions of self-employed who don't pay estimated tax get to this time of year and are used to paying tax out of current income," he said. "In a recession, they don't file because there is no current income. But the penalty for late filing is 10 times the penalty for late payment, so they would be better advised to file and set up installment payments with the IRS."
Scanning technology continues to make life easier for preparers, as CCH, Thomson Reuters and Intuit all report advances in their scanning capability. Independents Copanion and SurePrep have also seen growth, particularly as a result of the regulations under Code Section 7216.
"We've been the beneficiary of the 7216 regs - which prohibit preparers from disclosing client information for purposes other than related to the tax return, such as for marketing - in that a lot of firms that outsourced abroad now want to outsource within the U.S.," said Copanion chief executive Steven Ladd. "Our product, GruntWorx, gives them a great way to keep their outsourcing onshore and avoid 7216 issues."
Bret Weir, vice president of sales and marketing for SurePrep, said that the company would end up growing by 20 percent. "A majority of that is attributable to onshore tax preparation processing," he said.
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