Increased use of e-filing, delays in software releases and confusion over a number of new tax law changes are chief among preparer concerns as this year's filing season rapidly draws to a close."Filing started off slowly, but it seems to be picking up," said New York-based CPA Mark Albaum. "The corporate returns are easier to control because you're in greater contact with them during the year. With individual returns, you have less control. The real estate market seems to have peaked - when people are buying real estate, they tend to have their taxes done sooner."

H&R Block also reported a slower-than-usual start to the filing season. "As we head into our busiest quarter of the year, we've seen an industry-wide slower start to the tax filing season than in previous years," said chairman and chief executive Mark A. Ernst.

"A later start to the tax season for both H&R Block and the industry has put us behind where we were at this point last year," he said. "The first peak of the filing season has been occurring later and later over the past few years."

The slow start is especially true of the more complicated returns, according to Chuck McCabe, chief executive of Richmond, Va.-based Peoples Income Tax Inc.

The Code Section 199 domestic production activities deduction, the uniform definition of a qualifying child, an additional exemption amount for individuals displaced by Hurricane Katrina, and new rules for the charitable contribution for the donation of a car are among the changes that practitioners face this season.

In addition, there are three standard mileage rates that may affect the practitioner: The rate started 2005 at 40.5 cents per mile, was raised to 48.5 cents per mile beginning Sept. 1, 2005, and dropped down to 44.5 cents per mile for 2006. A fiscal-year entity might be exposed to all three rates.

"Those with more complex returns are getting their returns done later this year," McCabe said. "With all the ads for do-it-yourself software, a lot of people are debating whether or not to do their taxes themselves, and then deciding to come in to a professional."

Delays, delays

Along with the slow start to the season, taxpayers in six states and the District of Columbia will have until April 18 to file their returns, according to the Internal Revenue Service. That's because the IRS's Andover, Mass., service center will be closed on April 17 for Patriot's Day, a state holiday in Massachusetts. The extra day applies to returns from Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont and the District of Columbia.

Meanwhile, some practitioners are experiencing delays with releases from their software companies.

"It's March already, and we have still not received all of our releases, especially where state software in concerned," said Terry Livingston, partner at the Rock Hill, S.C.-based firm of Gamble & Livingston CPAs LLP.

"Their corporate software isn't out yet, and most state 1041s are not released," he said. "We've been able to work around it with a back-up forms service we use, but the flow through from the federal to the state form doesn't work."

Some of the blame for this falls on the state revenue departments, according to software industry executives.

"In some cases, the states are understaffed, plus they have added strange requirements for approval," said John Vora, chief executive of Randolph, N.J.-based TaxSimple. "We submitted a printing form for one state in November, and didn't hear from the state until late December. They will reject an application for the smallest reason, but don't give enough turnaround time to correct it. It takes 20 days for approval, so you can't submit more than two or three times before the deadline passes."

"The states want us to take on part of their load to save them money. They should reinvest some of the money they save in the approval process," he concluded.

"It's a problem throughout the industry," remarked Gene Goldenberg, vice president of marketing at Rome, Ga.-based TaxWise. "We have been disappointed with the speed with which a number of state revenue agencies have responded. They need to approve the forms that the software reproduces, and they've been slow in doing that. It has delayed the promised release of state programs, especially corporation and partnership returns."

Alan Strauss, a New York-based tax attorney and CPA, experienced the delays from his software. "Going into the season, we thought everything would be smooth," he said. "But with the last-minute hurricane legislation, programmers did extensive revisions to the software. There are so many glitches and errors, we've had difficulty generating certain forms."

Ever-more e-filing

Jorge Olavarrieta, senior product manager for Lacerte software, said that an increase in e-filing occurred as anticipated. "There has been a significant increase in e-filing overall, and in its adoption among our base," he said. "To an extent, it's being driven by state mandates, but we've seen an increase in the adoption of business returns that haven't been mandated at the state or federal level. We have about a 20 percent increase in e-filed returns over last year."

Although Olavarrieta noted the need to move quickly to integrate changes made by the Gulf Opportunity Zone Act, which was signed on Dec. 21, 2005, he said that prior planning lessened some of the problems that could have caused. "We anticipated it and tried to actively communicate it to our customers so they could plan accordingly," he said.

Dexter, Mich.-based Creative Solutions has experienced significant increases in e-filing, according to Teresa Mackintosh, CPA and senior director of marketing. "E-filing numbers are up between 10 and 15 percent," she said. "It's about what we expected because of the new municipalities for which e-filing is now available, and also because of the state mandates."

Both e-filing and a wider adoption of the application service provider model show a significant increase, according to Ernest Zoumot, director of software product management for CCH's Torrance, Calif.-based ProSystem fx. "Adoption of the ASP model is gaining momentum," he said. "Global fx has increased over 30 percent so far this year. And CompleteTax [CCH's Web-based consumer offering] is up over 40 percent from last year's volume."

"A number of states now have business returns available for e-filing, and many more are coming next year. This is the first of several years in which we'll see a high adoption rate of business e-filed returns on the state level," he predicted.

The Internal Revenue Service announced an increase in electronically filed returns in its early-season filing statistics, led by an increase in home computer use. Out of 54 million returns filed through early March, 73 percent were e-filed.

"The home computer is increasingly replacing the paper tax form," said IRS Commissioner Mark W. Everson. "Both individual taxpayers and tax professionals are turning to e-file more and more because it's fast and accurate."

"We're seeing increases in e-filing early on, and we expect the trend to continue," he said. "So far, Form 1120s are up 120 percent, 1065s are up 74 percent and 1040s are up 30 percent. The state mandates have encouraged practitioners."

"In the past, people were reluctant to e-file," said Holliston, Mass.-based practitioner Larry Novick. "Even last year, there was hesitation on the part of most taxpayers. But this year, I've been amazed - all of a sudden everyone's embracing it."

"For the first time, they have no qualms," he said. "They realize that the government knows more about them than they do. Even my secretary says she wishes we did this 10 years ago - we save on postage, paper and ink. She has almost nothing to do, just give the client a copy and have him sign the form."

"With so many clients getting big refunds," Novick said, "I'm recommending they increase their withholding exemptions at work. The one exception involves the marriage penalty. One newlywed couple was in the 15 percent bracket before they were married, but now they're in the 25 percent bracket. That's one thing that still needs fixing."

Competition remains fierce both between software providers and between tax preparation companies.

"There's an intense price war going on between tax software companies," said Vora of TaxSimple. "We lost some customers to a cheaper company, but many are coming back - they didn't realize they would be charged extra if they did fewer refund anticipation loans. My advice to those who are thinking of switching is to read the small print and look for hidden charges."

"Jackson Hewitt took a little bit of a dent out of us and more out of H&R Block by their paystub lending," said John Hewitt, chief executive of Virginia Beach, Va.-based Liberty Tax Service. "But we expect a pretty good year. We're up by 25 percent now, and are looking for a good finish. Last year April was our best month, and we expect that to happen again this year."

Peoples Income Tax, with 17 offices in central Virginia, does approximately 20 percent of its business with bank products, according to McCabe.

However, he believes independent tax businesses should focus on moving into the higher-end returns.

"We're partnering with Genworth Financial and with a mortgage broker," he said. "Tax businesses need to move into other revenue streams and develop a year-round business as a result of competition with the national firms and the home software products."

TaxWise is also developing new products for clients to continue their revenue stream beyond filing season, according to marketing VP Goldenberg. The company has developed a range of home loan products using an Internet-based mortgage origination service.

"This will allow our tax professionals to become an employee of our mortgage subsidiary and participate in the mortgage origination process," Goldenberg said.

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