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Thursday, Jan 26, 2023

Tax Preparers Thrive Symbiotically With Home-Based Software

Preparing your own tax returns for the Internal Revenue Service or the state Franchise Tax Board is like trying to change the oil in your car , “dirty, messy and inconvenient.”

At least, that’s the opinion of John Hewitt, chief executive officer of Virginia Beach, Va.-based Liberty Tax Service, and a pioneer of electronic filing and tax preparation software. This year, following a pilot program, the company , with more than 2,900 offices in Canada and the United States, including San Diego , is rolling out its own proprietary software, Libtax, at all of its locations.

Liberty Tax’s new software is “more tailor made for the way we do taxes,” explained Robert Berg, assistant area developer for Liberty Tax in San Diego County, and a sole proprietor of his own franchise, with an office in Kearny Mesa and a second office opening in Clairemont.

“We can actually track trends much easier with our new software and find out where we are getting clients from, where they heard about us, a whole range of things,” Berg said.

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But taxpayers won’t be able to buy it in retail stores, because it’s not designed for the do-it-yourselfers.

“There are changes in the tax law every year,” said Hewitt. “This is what drives people to a tax preparer. That, and the fear of the IRS. I’ve had thousands of people saying that they are afraid of the IRS, but they’re not afraid of the CIA or the FBI.”

Even some of those brave souls who do use their own computers to process their returns get cold feet, he said.

“They pay us to file the same return,” said Hewitt. “They say, ‘I don’t want to get into any trouble.’ ”

Berg recalled a woman who had done her tax return using the Liberty Tax online service.

“She didn’t think her refund was big enough, and came into my office and brought all her stuff with her,” recalled Berg. “She asked me to redo her tax return. I got the same numbers, but she insisted on paying me. I gave her a discount.”

Any major changes to the tax law also can boost business for local tax professionals, he said.

“When that happens, it confuses the general public, and this is when we see a big increase coming into our offices,” he said. “Then it drops off and they do it on their own, until the IRS does something again.”

Case in point: On Dec. 19, the U.S. Congress approved a one-year “patch” to the Alternative Minimum Tax, which was designed to make sure that high-income individuals pay their fair share of taxes. The AMT was never indexed for inflation , a problem that the patch is supposed to fix. The IRS said that it is reprogramming its income tax processing systems to prepare for the changes, and ease any delays that could result during the 2008 tax season.

In order to help tax professionals and software suppliers, the IRS intends to post revised copies of the 12 tax forms impacted by the AMT legislation within 72 hours after it’s signed into law.

Business Knowledge

The advent of home-based tax software doesn’t seem to be wiping out the independent brick-and-mortar tax preparers , at least not yet.

“It doesn’t affect our business,” said Stephanie Matticks, a partner at La Mesa-based The Office of Geri & Stephanie, and second vice president of the California Society of Tax Consultants, San Diego chapter. “Our clients want business knowledge, not just a tax return done. Actually, it helps us. Some of those tax programs don’t do it properly and, a year from now, the taxpayer gets a letter from the government.”

A lot of local independent operators minister to business clients, who tend to have more complicated tax issues. But Matticks, an enrolled agent, licensed by the U.S. Treasury Department, believes that even those individual taxpayers with relatively uncomplicated finances can benefit from a tax professional.

“We are still seeing those clients,” she said. “They want advice on how to plan for their kids going to college, where they should put their money and the tax ramifications if they start an account for them.”

Then you have the do-it-yourselfers who still want a fresh set of eyes, said Matticks, who charges an average fee of $300.

“Many engineers like numbers, and they tend to do their own tax returns, and then come in, because they don’t know about the new tax changes,” she said. “Tax laws are complicated.”

Credentials Count

In agreement is Val Daigle, managing member of Coronado-based Westax LLC , The Tax Specialists, who holds a master’s degree in taxation and an M.B.A. in financial management, with a minor in accounting. An enrolled agent , a credential that he considers to be the gold standard in his industry , Daigle said that he also takes hours of continuing education courses every year to stay up on changes in the tax laws.

“One of the most important and difficult documents that one will ever encounter in life is the income tax return,” he said. “I don’t see how any commercial tax software can give the client this kind of value and concern. Do you get hand holding and tax consulting?”

Daigle, whose practice includes high net-worth estates, trusts and partnerships, charges about $250 to $450 for an individual tax return. It’s money well spent, said Daigle, citing a new client who had gone the home-based software route.

“This individual has about 28 limited partnerships,” said Daigle. “I have found errors in carry-over amounts and amount of losses that were incorrectly calculated, because either questions weren’t asked or understood when asked.”

Daigle observed that it’s not wholly the software’s fault. “The questions that the software is asking have to be understood by the individual and sometimes they aren’t,” he said.

That said, Daigle figures that the cheaper home-based software has cost his boutique practice about 2 percent to 3 percent in lost clients.

“But we all lose clients every year,” he said. “Some die, some move, and some just leave. A small number decide to do it on their own.”

Bill Crosthwaite, who runs a solo tax practice on Adams Avenue in San Diego, said that only a handful of his clients in the past 15 years have tried home-based software.

“One was a financial planner, and you’d think he’d have known better,” said Crosthwaite. “It truly was garbage in and garbage out. It was a blooming nightmare.”

Like Daigle, Crosthwaite, who charges about $200 for tax preparation services, but charges students $25, believes in the value of proper credentials.

“Most of the good guys have degrees in accounting and finance,” he said. “I am still a little provincial. I would like to know that my tax guy has some accounting experience.”

As for the do-it-yourselfers, he mused, “If you were going to have heart surgery, would you do it yourself? Why do you think you’re qualified to do your own taxes , that you will be getting it right and knowing that the IRS isn’t going to knock at your door?”

On The Rise

But home-based tax software is growing in popularity, according to Raphael Tulino, spokesman for the IRS in Southern California and Nevada. About three out of five returns are done by tax professionals, he said, but taxpayers who are preparing their own returns are edging up , by about 11 percent for the 2006 tax year.

The IRS also has seen a significant growth in e-filings from taxpayers who prepare their own returns: from 1.3 percent in 1996 to 28.2 percent in 2007.

Tulino doesn’t agree with the popular wisdom that only those with relatively uncomplicated tax returns should use the software.

“I am not aware of any taxpayer who can’t e-file,” he said. “It doesn’t matter how complicated it is. The software is ready to take anybody’s return. It is much easier to file electronically.”

Major Life Changes

That’s the sentiment expressed by some of the big guns, including Intuit Inc.’s TurboTax, which reports that 20 million federal and state tax returns were filed electronically through its service for the tax year 2006, up from 18.5 million the previous year.

The software, which costs from $30 to $100, offers several versions that range from the basic return to the more complex, designed for home-based businesses, investors and those with rental properties, among others.

TurboTax’s customers have average incomes of about $75,000, said Scott Gulbransen, the company’s San Diego-based senior manager of corporate communications.

The desktop software tends to attract middle-aged males, while TurboTax’s online service skews toward women with an average age of 35.

“The early adopters of technology were skewed male,” he said. “Now there are more women in the workplace and younger women managing finances for the household.”

Every year, TurboTax revamps its software to reflect not only changes in the tax laws, but the feedback it gets from customers.

“We spend a lot of time in the homes of our customers, watching them use our products,” said Gulbransen. “Intuit pioneered that. We have labs to watch consumer behavior, but people do use products differently in the space of their own homes.”

This year, for instance, taxpayers want more guidance on their major life changes, he said.

“People every year get married, they have kids, get a new job, and these all have tax impacts,” said Gulbransen. “We’ve made part of the product to customize a person’s experience to address these situations.”

Another concern is a perennial in tax land.

” & #8201;’I don’t want to be audited,’ ” said Gulbransen. “We’ve made more robust changes and added more audit support, and an audit-risk meter. Based on the information you told us, your risk of audit is in this range, and it will tell you why. They want to know before they file a return.”

But, for those who do get audited, TurboTax now offers a free downloadable audit tool, designed to help users understand what the IRS wants and how to comply.

Kansas City, Mo.-based H & R; Block, another e-file pioneer, also is a hybrid of bricks-and-mortar and software services.

“Most people know our bricks-and-mortar operation, but they are not as familiar with our digital component,” said Denise Sposato, the company’s manager of digital communications. “If you have a child, get married, move or buy a house, big things that happen to us, you can migrate , go in front of a tax pro or go back to a digital solution. It’s pretty seamless.”

While H & R; Block has its share of business clients, most of its clients are individual taxpayers, who can get their returns done at local offices for about $165, she said.

H & R; Block also offers an online service, as well as a variety of software for homes and businesses, ranging from $19.99 to $89.99, including the new $70 Tango software, due out in January that will offer tax assistance “24/7,” among other services, said Sposato.

Taxpayers who e-file, using any of its software or online programs, get free audit support, said Sposato.

“If you get a letter from the IRS, questioning something, or you get a dreaded letter for an audit, H & R; Block will help you prepare for the audit, and an enrolled agent will go with you,” she said.

Marketing To The Masses

Liberty Tax’s demographics show customers typically earn less than $75,000 a year.

“When you get to a certain amount of income, you think you need a CPA (certified public accountant),” said Hewitt. “I learned in business a long time ago that you are more successful if you give customers what they want, rather than try to change perceptions. The top 15 to 20 percent of the country will go primarily to CPAs. We’re looking for customers who go to McDonald’s, Burger King, Wal-Mart or Target. We are after the masses.”

Liberty Tax’s average fee varies, depending on the particular region’s cost-of-living index, and can be as low as $39, all the way up to $1,000, with the average return costing about $145, he said.

The business has grown 35 percent from 2005 to 2006, said Hewitt, who added, “We plan to open new offices.”


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