Will there be new, low cost tax prep 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]

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.

[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.

[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.