Will there be new, low cost tax prep software?

[Roland Slugg]

Several members here have recently posted thoughtful comments in other threads about the trend towards consolidation of tax prep software into a small number of large companies and the inevitable price increases that invariably follow. Some have suggested the time is right for another company, consortium, or small group of individuals to jump in and fill the need for low-priced tax prep software. It's an appealing thought, and I do hope someone will take up the challenge, but I fear that is unlikely.

In the first place, the prices of the lower cost programs are probably not yet high enough, despite recent price increases, to sufficiently tempt others to jump in. Developing a quality tax prep program is a daunting and very expensive task, with a long lead time before any revenue starts coming in. I believe ATX, for example, started in about 1992, but its program was barely workable until around 1998 and still had significant bugs and quirks until 2003 or 2004. Just as it got to the point where it was pretty good, it was sold to Kleinrock, and now that it's working very well it has been gobbled up by CCH. It may remain available, of course, but at what cost?

The other major factor affecting the cost of tax prep software and would probably inhibit others from entering the low-priced market is e-file. The IRS loves e-file, of course, and so do most of the states, some of which have mandated it for preparers who do ### or more returns for paying clients. (### is currently 100 in California but lower in some other states, and I'm sure ### will be lowered to ##, then to # over the next few years.) It's easy to see why: We're providing a significant and valuable service to the IRS and the states ... for free. But at what cost to us and our clients? I estimate that the additional cost of software, so it will meet the federal and state e-file requirements is about 30%~35% of its cost. Add to that the additional time we must spend entering data not required on paper forms and our time spent dealing with returns after they are initially prepared ... authorizations, transmission, tracking acks, correcting rejects, etc. ... and it is a significant additional burden. Ahh, but according to the IRS, it's free! And the benefit to the taxpayer is what? Well, we save printing one copy of each return, and our clients save $0.63 to maybe $3.00 mailing each return. Oh, and they get their refund a few days sooner ... if they're due a refund.

I predict that a new, lost-cost tax prep program will come along only if it does not offer e-filing. I don't know if the IRS and the states would be able to prevent such a product's forms from being used, but I believe they would make it difficult at the very least. Due to some states' mandating of e-file unless the taxpayer doesn't want to, preparers who use the new program would have to ask every client to sign an "I don't wish to e-file" statement.

[RoseK]

e=file required

Several members here have recently posted thoughtful comments in other threads about the trend towards consolidation of tax prep software into a small number of large companies and the inevitable price increases that invariably follow. Some have suggested the time is right for another company, consortium, or small group of individuals to jump in and fill the need for low-priced tax prep software. It's an appealing thought, and I do hope someone will take up the challenge, but I fear that is unlikely.

In the first place, the prices of the lower cost programs are probably not yet high enough, despite recent price increases, to sufficiently tempt others to jump in. Developing a quality tax prep program is a daunting and very expensive task, with a long lead time before any revenue starts coming in. I believe ATX, for example, started in about 1992, but its program was barely workable until around 1998 and still had significant bugs and quirks until 2003 or 2004. Just as it got to the point where it was pretty good, it was sold to Kleinrock, and now that it's working very well it has been gobbled up by CCH. It may remain available, of course, but at what cost?

The other major factor affecting the cost of tax prep software and would probably inhibit others from entering the low-priced market is e-file. The IRS loves e-file, of course, and so do most of the states, some of which have mandated it for preparers who do ### or more returns for paying clients. (### is currently 100 in California but lower in some other states, and I'm sure ### will be lowered to ##, then to # over the next few years.) It's easy to see why: We're providing a significant and valuable service to the IRS and the states ... for free. But at what cost to us and our clients? I estimate that the additional cost of software, so it will meet the federal and state e-file requirements is about 30%~35% of its cost. Add to that the additional time we must spend entering data not required on paper forms and our time spent dealing with returns after they are initially prepared ... authorizations, transmission, tracking acks, correcting rejects, etc. ... and it is a significant additional burden. Ahh, but according to the IRS, it's free! And the benefit to the taxpayer is what? Well, we save printing one copy of each return, and our clients save $0.63 to maybe $3.00 mailing each return. Oh, and they get their refund a few days sooner ... if they're due a refund.

I predict that a new, lost-cost tax prep program will come along only if it does not offer e-filing. I don't know if the IRS and the states would be able to prevent such a product's forms from being used, but I believe they would make it difficult at the very least. Due to some states' mandating of e-file unless the taxpayer doesn't want to, preparers who use the new program would have to ask every client to sign an "I don't wish to e-file" statement.

Roland,

You always put things SO eloquently! I have enjoyed reading your posts and have received a lot of help through them even if you didn't know it. I was one of those "community" members who would read what was new every day and if I had a question, ask.

Anyway, you really thought about the statement ou have put here and I do agree. My husband designs software and he said there is no way an individual could just write a program one day and put it to use the nextl. It could take years to get it right. With taxes it is even worse because you have variables changing every year.

The states are demanding more and more to have us efile their returns. It costs us to have the software, have forms signed, etc, just like you said. But, you left out that the government, federal and state, saves a BUNDLE of money in the way of salaries for data entry people each year.

[jainen]

defective software

>>if the IRS and the states would be able to prevent such a product's forms from being used<<

There is no doubt. Since computer-prepared returns do not use official IRS forms, the software must be approved page-by-page. Even more daunting for the aspiring tax programmers, they must convince the IRS that each page will print correctly on every supported printer.

Besides, so what if someone developed a program that ran perfectly? Intuit and Block are huge, powerful lobbyists. They simply won't let the IRS test and certify newcomers in a timely manner. If they can't force the agency to act in their interest, they will get their Congressman to add a little earmark in some bill -- nonsense like approval is only available after a million returns have already been filed, or the tests have to cover at least five tax years, or the company has to be approved before the software can be, or money money money.

You know that's true, because last week IRS said that the filing deadline didn't apply as long as you used a particular corporation's defective software.

[George Boutwell]

Economics 101

>the trend towards consolidation of tax prep software into a small number of large companies and the inevitable price increases that invariably follow.<

I don't see price increases as the inevitable result of consolidation into three or four players. One post compared that situation to the price of catsup, but that is a commodity where additional sales require additional expenses for raw materials and distribution. The cost of developing and maintaining a software package distributed online to 50,000 subscribers, is not significantly less than the cost of selling it to 100,000 subscribers.

If the conspiracy theorists want to suggest that there would be price collusion among Intuit, Wolters Kluwers and H&R Block -- well, what has happened with Quicken and Money? Consumer accounting software is dominated by those two players, and Microsoft's price cutting hasn't put a dent in Intuit's better product. What has happened in the brokerage industry? Even in the oil industry, with consolidation of producers, refiners and distirbutors, the inflation-adjusted cost of gas today is far from its all-time high.

Of course, there are certain inefficiencies of scale that come from consolidation. It would cost IRS far more to centralize data entry in its Service Centers, than to require thousands of practitioners to perform the clerical work as a cottage industry. Besides, if the government isn't paying for it, it can ask for much more data.

[jainen]

I just wouldn't

>>what has happened with Quicken and Money?<<

That's a fine counter-argument, George, though I wouldn't call it 101. It can't be denied that so far the consolidation of tax software has produced vastly better products at only a modest price increase. I pay for my unlimited Proseries/e-file with a half dozen returns. The near future looks like more of the same as fabulous research capabilities are integrated.

Few of us would be able to work independently if it weren't for powerful software. More power means more independence to me, and that will surely come from the economies of scale as the company writes for a larger user-group.

For example, my practice is mostly 1040s, but this year I am expanding to small corporations, trusts, and estates. I would not attempt that without Intuit software--I just wouldn't.

[Roland Slugg]

And the sequel, Economics 102

I don't see price increases as the inevitable result of consolidation into three or four players.

Nor do I in all industries and with all products. It depends in large part on the elasticity of demand vis-a-vis changes in price. My guess is that tax prep software has a very inelastic demand, and that small or modest incremental price increases will not result in enough customer losses to cause a net reduction in revenue. This is because tax software is a big job to switch, and the cost of doing so in terms of time, hassle, and the new learning curve will take most consumers many years to recover when compared to the differential cost savings. CCH paid a huge ... and I mean HUGE ... premium for ATX, and I'm sure its management is betting that relatively few will make a switch, despite the initial flurry of complaints and threats. $5 or $6 for e-filing a return compared to the previous $0 doesn't sound too bad, until you multiply it by the number of returns done altogether.

What has happened with Quicken and Money? Consumer accounting software is dominated by those two players, and Microsoft's price cutting hasn't put a dent in Intuit's better product.

Case in point! Generic products such as catsup and gasoline, however, have very elastic demand triggers, so the companies that sell them try to offset this with advertising, nice labeling, and clever ploys like changing the spelling to "ketchup." It's perception, not true product enhancements, and it is effective to some degree.

Besides, if the government isn't paying for it, it can ask for much more data.

Very true. One of my many objections to e-file is that you can't tell what was submitted to the IRS (or states). Is it just the data on the forms themselves? Or do all the entries on all the worksheets get transmitted as well?

[DonPriebe]

What you don't see is what they get.

One of my many objections to e-file is that you can't tell what was submitted to the IRS (or states). Is it just the data on the forms themselves? Or do all the entries on all the worksheets get transmitted as well?

It wasn't that long ago that you could see what was being sent. I used to debug e-file problems by looking at the *.irs file, which was written in clear ASCII by PencilPushers and (DOS) OrrTax. And as recently as tax year 2002 you could still read it in ATX. But now the government has once again saved us from ourselves and everything is encrypted ...

Of course you can always wade thru Pub 1346 which defines the formats for the data to be transmitted. This helps when people ask (e.g.) if they have to enter the name and address on a 1099-DIV. If there is no format defined, then the data is not sent!

[erchess]

what info

goes to the IRS when people efile but not when they file on paper? I sometimes put into my computer a lot more detailed information such as all the charitable gifts a client made. It was my understanding that this sort of information stayed on my computer.

[Snaggletooth]

Economics

Arguments abound and can be fashioned against my plea for resistance of the corporate sucking-up of available software.

Lest anything be misunderstood, I have never supported the idea of general "deflation" of software prices. I could well be wrong about new software, but not stupid enough to expect all software companies to freeze their prices forever. My fees have doubled in the last ten years, and I don't expect general prices to behave any differently.

My issues are whether we should organize a reaction to the takeover of our industry by large institutions, and the substitution of big money, slick advertising, and corporate conniving to replace innovation and enterprenuel logistics.

All of the posts on this thread are well-thought-out and are borne of relevant and provocative thought. Thanks to all who have posted.

But it is quite strange that I started a thread a couple days ago for the purpose of evaluating software packages, and instead of evaluations, the responses were geared to sell-outs and buy-outs.

[Joe Btfsplk]

But it is quite strange that I started a thread a couple days ago for the purpose of evaluating software packages, and instead of evaluations, the responses were geared to sell-outs and buy-outs.

Too bad there was not more comments evaluating software. Anyone contemplating a change has to rely on the 'slick advertising' if all they have to go on is the claims of the software providers.

I think the consolidation will continue unless there is foreign competition. Look at what happened to the "Big Eight" accounting firms and the "Big Three" Automobile companies.

[jainen]

nothing at all

>>Anyone contemplating a change has to rely on the 'slick advertising' if all they have to go on is the claims of the software providers<<

You can call any publisher, or all of them, this morning and get the 2006 software for free. Then you can spend the rest of the year trying it out, including efile, tech support, compatibility with your printer -- the whole works. Would you prefer the casual anecdotes of unknown users whose practice is nothing at all like your own?

[George Boutwell]

Generic products such as catsup and gasoline, however, have very elastic demand triggers

Right. I have already switched to mayonnaise for my hot dogs, and Pepsi for my SUV.

[Chief]

NATP Survey of

Software, I believe is due out soon. Annually their members have a survey of software that really is an evaluation of tax software. This evaluation tool has proved to be quite valuable. I believe it came out last May. However, I had heard nothing yet about filling out an evaluation survey this year. I think that would prove helpful.

NATP would do well to speed up this process. These software companies want your renewal before May 1. They say their early bird expires then. I renewed my software before the tax season was over for this year.

[George Boutwell]

ATX Discount Expires June 30

>These software companies want your renewal before May 1. <

But ATX is offering the 10% discount through June 30. So I have to figure out whether that's a better use of my money, than buying puts on Intuit .. .

[HBurkholder]

off the wall

This is completely off the wall, but why don't we do something proactive instead of whining and moaning about "where to from here". I know probably different laws apply to this type business, but I come from a farm background. In the farming industry we buy inputs and sell product through co-ops. Sure, those beginning the venture need to invest money upfront, but once the co-op is up and running the control and profits are in the hands of the members. Raising the money may seem prohibitive but I do not think that is necessarily true. It seems the dissatisfaction centers around ATX (I am also an ATX user). I believe I remember seeing that ATX has 30,000 users. If each of these users would put up $500.00 we would have $15,000,000 to work with. Perhaps that would be incentive for one of the smaller companies to consider talking with a co-op group. These folks could then be hired back as managers and programmers.