Report Projects Slow Growth for Tax Prep Software Revenue

The tax preparation software industry experienced minimal overall growth over the past five years, averaging only 0.1 percent annually to reach an estimated $2.4 billion in 2012, according to new research.

The report, released Thursday by the research firm IBISWorld, found that when consumer incomes fell during the recession, consumers became less willing to pay for tax preparation software. Industry revenue fell in 2008 and 2009. Revenue trends returned to growth as the economy stabilized, and growth is expected as consumer incomes continue to improve this year.

“The total market for tax preparation software has steadily increased,” wrote IBISWorld industry analyst Dale Schmidt. “Every year, a greater share of the population has access to a computer, and after a period of stagnation during the recession, the number of households is once again growing in earnest.”

At the same time, the rise of free Web-based tax software has eroded industry revenue over the past five years.

Other findings in the report showed that the average profit margin for the tax preparation software industry is relatively high due primarily to the dominant market position of Intuit Inc.  As the industry’s largest players continue to grow larger, the potential for a new player to grab market share will continue to decrease. Consequently, industry concentration is expected to remain high over the next five years.

Revenue growth over the next five years will come from both the expanding consumer base and the greater trust that consumers will place in the security of tax prep software.

“Smaller firms have struggled to remain profitable over the past five years, causing consolidation in the industry,” said Schmidt. “These smaller firms typically compete for a limited number of contracts for tax preparation firms, which use more robust and complex versions of the tax preparation software offered to consumers.”