2012 Review of Professional Tax Preparation Systems (Traditional Compliance)

Over the past few years, some tax and accounting professionals, and even some thought leaders, have started to openly wonder about the profitability of tax preparation services. While tax compliance for individuals remains a major revenue center for most small and mid-sized practices, other services have been taking some of the spotlight off of taxes.

Editor's Note: This review section focuses on traditional tax compliance systems for small and mid-sized firms. This year’s review of “advanced workflow” systems is at www.CPAPracticeAdvisor.com/10668560. Our definitions of these categories is at the end of this article.

Most notably, virtual CFO and business consulting have taken off among full-service accounting practices, particularly among those who have adopted the value pricing model, instead of the old standby of hourly billing. These services offer year-round, steady revenue streams, whereas individual and business tax compliance is very seasonal, and sometimes painfully so. Other firms also see consulting as more profitable and less tedious.

I think there’s somewhat of a parallel with what happened to payroll services a couple of decades ago. What had once been a mainstay of accounting firms, started being looked at with disdain because it was tedious, time consuming, wasn’t using a professional’s expertise efficiently and wasn’t as profitable as other services. So, professionals started pointing their clients toward national payroll service providers.

Then about a decade ago, especially in the last five years, web-based technologies caught up and made it so that providing payroll services to business clients could be much more automated and, therefore, profitable for firms. It also returned a core aspect of the relationship to the accounting practice, giving them more frequent interaction with their clients.

I am not suggesting that there will be a widespread exodus away from providing tax services, but some firms are moving it down their priorities list. And yes, a few like my friends at Deep Sky Accounting don’t do taxes at all. But that won’t become a mass movement because, unlike the payroll dilemma, the technologies for improving tax preparation efficiency arrived in time to prevent it.

Over the past several years, the most significant advances in tax preparation systems have come through what has been collectively called “tax document automation.”

Originally, these tools were only available in the most advanced and expensive tax programs, but they have now been added to several systems for small and mid-sized firms. The key components among them are “scan and organize” tools, which allow preparers to simply scan in all of a 1040 clients source documents, and then automatically organizes them into a bookmarked and linked PDF set of properly organized digital workpapers. These systems, which use optical character recognition (OCR), can identify which document is which, such as W-2s, 1099s, 1098s, K-1s and even brokerage statements.

The next step, available in some tax programs, is automated population. Simply put, if the system can use OCR to identify a form, it can also identify the information on the client’s documents and pull it out and add it to their return. The programs on the market that include this feature offer a review process that helps ensure that data is properly scanned and put into the proper area of a client return.