2011 Review of Tax Document Automation Utilities

Tax Document Automation Tools Come of Age.

This is our first annual review of tax document automation tools. While we have presented feature articles on this topic in the past, this category is rapidly maturing to include some common feature sets. Internal estimates from vendors based on data provided to CPA Practice Advisor suggest that around 1% of all individual income tax returns will use some kind of tax document automation tool to assist the preparer with the organization of the documents associated with a tax return. Some vendors report that they scanned and organized millions of pages for their customers in the most recent tax season, and many firms report significant time savings by junior staff members. The strong capabilities of the current crop of tools, along with the variety of pricing plans (including per-return pricing for some tools), make it possible for firms to try tools before they implement them across all clients. If your firm has not evaluated any of these tools in the past, we strongly recommend that you perform your own due diligence. The tools have truly evolved to a new level in the last few years.

>> From the July 2011 issue. <<

The reviewed products can be used in a variety of methods. The four major product types are as follows:

• Scan & Organize – The product uses Optical Character Recognition (OCR) to create an organized and bookmarked PDF file, and data is keyed in by a preparer or administrative team member.
• Scan, Organize & Populate – The product creates a bookmarked PDF, as in Scan & Organize above, but also extracts the data needed for return preparation. The data can then be imported into the tax application, although some applications require the data to be validated by a person before it is available for import.
• Scan, Organize & Extract Trades – These solutions will Scan & Organize taxpayer data, but will also create a Microsoft Excel file listing securities trades reported on Form 1099-B, which can be imported into most tax applications.
• Indirect Download – Clients are asked either in person or via e-mail to enter their passwords to their investment accounts from a secure website operated by the tax document automation vendor. The vendor takes this information and securely gathers investment information from investment firms and downloads it directly into the tax application. Only two tax document automation products offer this service (Copanion GruntWorx Gather and Intuit’s ProLine Tax Import), but anecdotal evidence indicates that most of the providers are considering offering this service in the future.

Most of the products can be used as standalone tools for scanning and organizing documents, and almost all will extract data on securities trades from consolidated 1099 statements and put these transactions into an importable Microsoft Excel file. Data other than 1099-B information, however, can only be imported into a single or, at most, three or four tax packages. For the 2011 tax season (which ended on April 18), many popular tax applications such as TaxWorks, TaxSlayer and Drake Tax could not import data (other than securities trades) extracted from scanned tax documents using the available Scan, Organize & Populate tools. (If you are a user of these packages, remember that a solution could be only a strategic alliance away.)

While the indirect import of investment information approach used by GruntWorx Gather and Intuit’s 1099DropOff.com appears to offer significantly more accurate results than those extracted using OCR, some products support fewer than 15 investment firms, which represents, by their own estimate, approximately 70% of the individual investment accounts held by taxpayers. Other providers recommend that practitioners ask their clients to download their investment transactions from their online brokerage accounts and upload them to the practitioner’s client portal solution. Although this can be done by technologically savvy clients, some clients may call the practitioner asking for help with investment firm websites and client portal solutions. The demand for tech support may cause client and practitioner frustration, and for a client with a small number of securities trades, it may actually take longer to facilitate this download than would be required to manually input the information on the trades.