Tax Software Buyer’s Guide

Tax preparation software products are like comfortable old shoes: Even if theyre a little dated, youd prefer to keep them rather than go through the discomfort of breaking in new ones. But, like it or not, because the number of tax software vendors continues to shrink, many CPAs are left tax software orphans, forced to buy new brands next year and to invest significant time learning them—and then possibly going through the whole routine again the following year if the new brands get the ax.

Professional tax preparers dont buy tax products—unlike most software—from their local Egghead retailers. These are professional products and theyre complex, which is why most CPAs tend to stick with what theyre used to. When they have no choice but to spend considerable time checking out new products, they often put evaluation copies through severe testing before deciding to buy.

HELP ON THE WAY
This article is designed to help accountants make that chore a little easier. We reviewed the 12 leading tax software programs, examining their features, their strengths—and their shortfalls. We also put each program through a stress test—challenging each product to calculate a complex tax scenario for a fictitious family with a self-employed, high-income taxpayer. We devised the tax test case to evoke a wide assortment of issues. For details on the test case, see the sidebar, The Tax Test Case .

Since tax software for the 1997 tax year is not yet ready—but relatively few basic changes are made from year to year—we performed our tests on the 1996 tax year products, inviting the vendors to tell us what, if anything, will be changed or new for next year. Two of the programs handled the scenario pretty well. Others stumbled a bit. In some cases, the stumbles were minor; for example, data failed to flow to the correct forms or schedules. Other times, the software made tax judgment errors and we had to override the program to correct the return. And at times we had to enter false data that, in effect, fooled the program to produce the correct answer. We itemize each problem in the reviews.

ORPHAN PROTECTION

Before we get to the reviews, lets examine the problems being created by the continuing consolidations in the tax software industry. Why, you may ask, is the number of products shrinking? And how can tax preparers protect themselves against the danger of becoming tax software orphans? The answer has as much to do with business as with technology.

Just a few years ago, when DOS was king and Windows was still an evolving technology, anyone with moderate programming skills and tax knowledge could get into the tax software business. In fact, in those days about 100 tax products were on the market—although most were niche-market programs that could handle only the most popular parts of the federal returns and just a few states and had a small number of devoted customers.

Today, most of those products are history. Some just faded way—leaving hardly a memory: They were too small even to be desirable takeover candidates, and their former customers migrated to more mainstream products. The slightly larger vendors were acquired by better-heeled competitors, the old brands junked and their customers given the option of converting to the buyers products, often at a steep first-year price discount as an inducement. Out of those 100 or so products, fewer than a quarter are still around. And by next year, that number will probably dwindle further.

Whats going on? Is there just no room these days for niche-market products? Is the competition just too hot? The answer to both questions is yes, but those are not the major reasons for the high death rate. The major reason is spelled W-I-N-D-O-W-S.

Although various versions of Microsoft Windows have been around for years, few tax software vendors—or their customers—gave them serious attention until recently because most 16-bit programming applications written for Windows were generally slow and all of the Windows 3.x operating systems were considered too unstable for mission-critical tax work. But two years ago, Windows 95 debuted, and the objections began to fade: Windows 95 is stable and applications written specifically for it—in 32-bit code—for the most part are fast and powerful. As a result, now some of even the most outspoken Windows naysayers have begun migrating to Windows 95. Of course, its not as if they had much choice: All new personal computers come preloaded with Windows 95.

Even so, for tax software, DOS still reigns supreme. As of last tax season, its estimated that more than half of the preparers were still using DOS products.

For tax software publishers, however, the signs are clear: The move to Windows (and now that means Windows 95, not Windows 3.x) applications is inevitable and accelerating. For vendors with both DOS and Windows products, most of their new customers opt for the Windows versions, but a significant number of old-timers still cling to DOS. Theyre quite comfortable working in that old format, which is fast, easy to use and very stable—and, more important—like old comfortable shoes, no break-in is necessary.

DEATH OF DOS

No one doubts that the death of DOS tax software is both inevitable and near, but no one really knows how near. Industry insiders speculate the wake will be held in from two to five years. Such near-death predictions, however, are not new: DOSs demise has been confidently forecast for the past four years—leading some computer industry observers to conclude that only the death of the PC as we know it will finally kill DOS.

In the meantime, its equally clear that vendors must develop a Windows 95 product if they are to survive, but doing so is a costly venture. Writing programming code for DOS was relatively easy, so the cost of market entry was low. Writing 32-bit Windows 95 code is heavy-duty programming and requires a major investment in time and money—far more than many tax software publishers have or are willing to risk in this highly competitive market.

As an indication of how price competitive this market is, consider this: The prices listed by most, if not all, tax software vendors are considered by many customers to be simply a starting point for negotiations. Ask any two customers of the same vendor how much they paid for the product and youre likely to be told widely divergent figures.

With such a hotly contested market, a vendor has to be pretty confident before sinking millions into developing a 32-bit Windows 95 product. Those vendors with a sizable customer base who are unable or not anxious to handle a Windows 95 investment are either trying to sell their customer list to a better capitalized competitor or just milking their DOS products for as long as they remain profitable.

Of the dozen brands we review here, five offer a Windows 95-formatted product (which can run only on the Windows 95 operating system). The rest are either DOS (which can run on DOS or Windows 3.x or 95) or Windows 3.x products (which can run on Windows 3.x or Windows 95).

Until recently, it was mostly the smaller vendors that fell victim to the consolidation waves. But with the acquisition of SCS/Compute by RIA and the subsequent retirement of SCSs flagship products, LMS/Tax and Tax Machine, it appears that size may no longer offer orphan protection. One industry insider even speculates that the next buyout will result in the demise of one of the larger tax software brands.

Having your tax software buried in a buyout is a major headache—even after you finally select a new product and learn how to use it. A critical step is to convert your clients historical files and import them into the new application. To be sure, conversion techniques have gotten quite good, but any time huge amounts of complex data are exported from one application, converted and imported into another, the danger of errors is present; even the possibility of damaged data is traumatic for tax professionals.

In addition, as the number of competitors decreases, the threat of price boosts increases. Higher prices are not forecast for the coming tax year. If anything, the competition is still so keen that price cutting probably will continue at least for another year. Later, though, when the marketplace may have fewer players, prices could spiral upward.

Last years crop of tax software was, for the most part, free of major operating bugs. Thats partly due to the maturing of the industry and the fact that there have been no major tax law revisions that require extensive rewriting of the programming code. However, as you will see in our more detailed product reviews, that does not mean the products are without glitches.

And now on to the product reviews:

AM-Tax Pro

AM Software

Overview
AM-Tax Pro may not have the prettiest screen appearance (an old menu-driven, monochromatic DOS inter- face), but what it lacks in good looks it makes up in clarity, performance and stability.

The vendor has no plans to develop a Windows product. As long as Windows can run our DOS program, well stick with our DOS product, a spokesman says. He adds that although a few of our customers are interested in a Windows upgrade, theres not enough demand for us to make such a move.

In the meantime, AM-Tax Pro users—mostly smaller tax preparers—have a well-tuned product. Thanks to a 20-minute how-to demo, even someone new to the product can be up and running quickly.

Put to the test

However, despite all its good features, we uncovered a few trouble areas with AM-Tax Pro. We fed the program our tax scenario and got some questionable results dealing with the treatment of suspended passive activity losses, the computation of the foreign tax credit and the calculation of tax on an excess individual retirement account (IRA) contribution. AM-Tax didnt allow us to fully deduct suspended passive losses, which related to two passive activities, when passive income from the disposition of a third activity generated enough passive income to absorb these losses. A call to customer support confirmed that AM-Tax is not capable of handling these types of situations.

To get around the problem, we had to fool the program with misinformation in order to get the right tax answer. We checked boxes indicating that all three passive activities had been disposed of during the year.

In dealing with a foreign tax credit calculation, AM-Tax understated gross income from all sources, resulting in a foreign tax credit slightly smaller than it should have been.

Finally, AM-Tax failed to generate a $105 tax on an excess IRA contribution of $1,750. While sufficient information to calculate the tax had been entered, we had to manually type in the excess contribution to get the tax to calculate.

A&bullPlus&bullTax for Windows

Arthur Andersen LLP

Overview
A&bullPlus&bullTax is a Windows 3.x-based program with a wide range of capabilities. While any size firm can use it, its clearly designed for the medium-size and large CPA firm.

Its processes are logical and easy to understand. Input screens resemble the actual federal tax forms and each line item has a colored symbol next to it: Depending on the symbol and its color, the user knows whether the information on the line is independent of all other items, whether the data come from another form or schedule, whether the field can be overridden, whether a separate schedule needs to be created and so forth. Each time a form or schedule is used, an identifying tab appears at the bottom of the screen (they look like tabs on spreadsheet programs), providing quick access to the form.

Context-sensitive help is available throughout, a valuable feature for understanding certain line items as well as what information is being requested for different fields.

Put to the test
In our test case, the taxpayers elected to report their childrens investment income on their return, and A&bullPlus&bullTax correctly produced form 8814 (Parents Election to Report Childs Interest and Dividends), but it failed to include the childrens investment income in their parents other income on line 21 of form 1040. Also, while the program correctly determined the taxpayers gross income from foreign sources and from all sources on a supporting schedule, we were unable to generate form 1116 to compute the foreign tax credit owed the taxpayers from their international mutual fund investments.

Finally, the tax case included an excess spousal IRA contribution. Though the information we entered should have been sufficient for the software to automatically generate form 5329 to determine the additional tax due on the excess contribution, we had to specifically request this form.

GoSystem for Windows

CLR

Overview
CLR offers two products: one for DOS and one for Windows 95. We reviewed the Windows product, which is designed for medium-size to large firms.

Although the tax preparer can enter data directly on the Internal Revenue Service form screens, the program strongly suggests that all data entry occur on the organizer screens. As a test, we ignored the programs advice and found out why we should have been more obedient: Data failed to flow correctly to related forms or schedules. In fact, when such errors did occur, we had to delete the data from the IRS form screen and reenter them on the organizer screen. This is true with Ultra Tax as well (see below) because the two programs are very similar.

The tax preparer navigates the organizer screens by first selecting a folder, which is displayed as an icon. Each folder relates to a unique tax subject, such as wages and salary, for example. On occasion, when we had difficulty finding the right folder for entering data, we turned to GoSystems drill-down facility: On the IRS forms screen, a right click on a field takes you directly to the appropriate place in the organizer—a very handy aid.

Put to the test
The only glitch we uncovered with GoSystem related to the foreign tax credit. The program understated the ratio of foreign source income to gross income from all sources—an integral part of the foreign tax credit computation. By understating the allowable foreign tax credit, it overstated the overall tax liability by approximately $500. We corrected the problem by inserting the correct ratio as an override. Lacerte Tax Software

Lacerte Software

Overview
Lacerte has all its bases covered: It has a DOS, a Windows 3.x and a Windows 95 product. All three fit on one CD-ROM, and since all share the same database, users can do a return for a client or access client data using any of the three products. We reviewed the Windows 95 product.

The program, targeted for a wide audience, can handle complex returns and is easy to learn, so its not a frustrating challenge for the less-experienced tax preparer. The preparer enters the tax information from a series of input screens grouped into six general areas: general information, income, expenses, taxes, credits and other information. A tab that resembles the tabs in spreadsheet programs is created for each input screen in which data are entered. Initially, we found it difficult to find where to input some information; its a lot easier to learn a program that accepts data into the familiar IRS forms on the screen. But with a little experience, we got up to speed.

However, clicking on a tab to go from the input screens to the IRS forms on screen was a bit sluggish on a 486, 20 megabyte, 133 megahertz computer (which, while not a Pentium, is reasonably fast).

Put to the test
As we input the test data, a few problems emerged. The tax case included rental income from a vacation home that was rented for fewer than 14 days. Although the vacation home input screen requested the information to properly exclude this rental income from the taxpayers return, the software nevertheless included it in taxable income. Also, the program allowed three exemptions for the taxpayer and spouse which, given the facts in the tax case, should have been two. Finally, the taxpayers IRA contribution information had to be entered in two separate input locations before the additional tax on the excess spousal IRA contribution was calculated and the appropriate form produced. Professional Tax System

Tax and Accounting Software Corp. TaascFORCE

Overview
Like Lacerte, TaascFORCE is covering all its bases by offering its product in DOS, Windows 3.x and Windows 95 formats.

The Windows program has an unusual but effective presentation screen. The backgrounds of the input screens, which take up about a third of the display, show the related IRS tax form and the continual calculations as the data are entered. Thus, tax preparers can easily see whether the information is going to the right places; if an entry is wrong, its easy to change. While the process works well for making corrections, it does slow the initial data entry. To ameliorate this problem, the input screens can be made large enough to hide the background forms. Further, if for some reason the tax preparers are not comfortable with the input screens, they can “print to screen” the IRS form and type the information directly on the form—an awkward tactic but useful in unusual situations. Having a flexible data-entry method is especially helpful when input comes in diverse forms, as it often does—from loose papers in a shoebox to an organizer filled out by the client.

While more help could be available on tax issues, the F1 (help) key clarifies the information sought in some of the input fields. Also, the depreciation schedules are difficult to deal with.

Put to the test
We encountered two problems when we entered the tax scenario. Like several of the other programs reviewed here, the program erred in its foreign tax credit calculation by understating the taxpayers gross income from all sources. Also, an apparent error in the way the program determined the taxpayers business usage percentage caused the depreciation for the home office deduction to be understated; moreover, the program resisted our efforts to overwrite this error. ProSystem fx

CCH

Overview
For the upcoming tax season, CCH expects to offer its ProSystem fx in three formats: DOS, Windows 3.x and Windows 95. However, since the Windows 95 version was not available for review, we examined the Windows 3.x version.

ProSystem fx is a comprehensive program that uses detailed interview screens for data input. Once entered, data flow to the appropriate IRS forms. In addition, the program contains a well-designed management organizer for scheduling different levels of work in a large, busy office—from work groups to individual staff people. One of the especially handy features of ProSystem fx is the way depreciation sheets are linked directly to the forms they correspond with. Although the DOS and Windows versions use different databases, preparers can still switch from one to the other and access any tax return because the system has a built-in conversion program.

The product has some negatives. Its relatively difficult to learn, but, once mastered, its easy to use. Also, because the program doesnt calculate in real time, a user has to wait a few moments for the recalculation to proceed each time a return is accessed. Thus, data entered after the last calculation do not appear on the forms until recalculation. This slows the correction process. For example, if a preparer notices a mistake, he or she must go back to the input form, make the correction, recalculate and then view the return again to confirm the correction. If the number still isnt correct, the process must be repeated.

Also, changing schedules is not easy. And while numbers can be entered directly on the IRS form screens, the preparer must override the entry field each time.

Put to the test
Unlike most of the other products, ProSystem fx correctly handled all parts of the test case—including the tricky foreign tax credit calculation. Tax/Pack Professional

Alpine Data

Overview
Tax/Pack Professional is a DOS-based program and one of the least expensive professional packages on the market.

The program requires all data to be keyed into input screens; from there the numbers flow to the appropriate IRS forms. To view the forms, however, the user has to manually order the program to calculate the return and then call up the filled-out IRS forms screen, which is essentially a print to screen. While the program handles the calculations speedily, the whole operation smacks of yesterdays technology. Also, maneuvering around the screens is awkward.

Put to the test
Several problems surfaced during our test. The first relates to the self-employed health insurance deduction. When we entered the taxpayers cost for health insurance, we were prompted to enter business income from schedule C. This seemed redundant, given that most other programs reviewed here were able to generate this information from schedule C automatically. In addition, once the appropriate information was entered, Tax/Pack correctly calculated the self-employed health insurance deduction, but then it failed to carry over part of the health insurance cost to schedule A as a medical expense.

Like several other packages, Tax/Pack had difficulty dealing with the passive loss rules and the foreign tax credit computation. After speaking with technical support, we discovered a way to override the program to force it to deal correctly with the passive investments. However, practitioners unfamiliar with the issues in our tax case or those who implicitly trust their software could get burned.

The last problem was the computation of the alternative minimum tax (AMT). Although the software correctly computed regular tax depreciation on the home office, we couldnt coax it into calculating the depreciation adjustment for the AMT computation.

Tax Relief-Windows

Micro Vision

Overview
Tax Relief-Windows is well thought out, making maneuvering through the program easy and intuitive.

Data are entered either through input screens or IRS forms screens. The input screens are tabbed for the various types of data: income, expenses, etc. Both views (input screen and IRS form) can be kept open at the same time, and since the program does its calculation in real time, its simple to check data. Corrections are easy to make—both on the input screen or overridden on the IRS forms screen.

The program has some nice touches. For example, amounts entered on form 8829 (Expenses for Business Use of Your Home) that exceed the home office limitation are automatically carried to schedule A. Also, car expense and asset entry are easy, even though in asset entry the user must key in the class life; fortunately, a help list is provided. Depreciation also is handled well.

Put to the test
The program evidenced some shortcomings. First, as with other programs, suspended passive losses from two passive activities were not allowed even though the disposition of a third passive activity generated sufficient passive income to absorb these losses. Technical support confirmed this omission and to correct the problem, we were advised to enter the allowable suspended losses as active losses on the current return.

Also, Tax Relief did not use the information we entered on gross IRA contributions to automatically compute the tax on an excess IRA contribution of $105. To get the tax to compute, we had to manually open the form and key in the numbers.

Finally, as with some other programs, Tax Relief understated the allowable foreign tax credit, thus overstating the taxpayers tax liability.

Tax$imple

Tax$imple

Overview
Tax$imple offers two versions of its program—DOS and Windows 3.x—and we tested both. Both versions are nearly identical. Very little of the Windows interface is used in the Windows version. It appears that only the underlying code was rewritten for the Windows version, while the appearance and workings of the new product follow the DOS format.

We had trouble loading the Windows version on a Windows 95 computer—a problem the vendor will have to solve before next tax year. We finally ran the Windows program on a computer loaded with Windows 3.1.

The program takes some time getting used to, but once learned, its easy to use—with some exceptions noted later. Input is fast and the numbers carry over to the appropriate forms. Also, asset entry requires the user to put in all the basic data: asset type, class life, method for depreciation. The only automatic calculation is the depreciation number itself. Users must manually enter class lives for both regular and AMT purposes.

Although some forms are generated automatically and dont require manual entry on the forms themselves, we had to enter each form at least once in order for the numbers on that form to carry to other places in the return. For example, a capital gain flowed to schedule D from another input form, but in order for that gain to flow to the 1040 we had to look at schedule D.

The help module in Tax$imple has limitations. For example, in the DOS version, if you enter help and find the answer you need on the first screen, there may be many more screens you have to page through before you can exit help: You cant simply enter and exit from any screen. In both versions, the context-specific help is limited.

Technical support is toll free. The technical people were able to answer questions on tax issues, but when asked about a printer problem, it took them several minutes to determine that the DOS version did not support most inkjet printers.

Put to the test
We discovered a few problems with Tax$imple. The ceiling amount for form 8814 (Parents Election to Report Childs Interest and Dividends) was not correct; the program erroneously used the ceiling for 1995 ($5,000) instead of the higher ceiling amount applicable to 1996 ($6,500). Consequently, the program would not allow us to make the election to include one of the childrens investment income in his parents return.

As with other packages, the program had difficulty handling the foreign tax credit. We tried to determine the nature of this error but could not drill down to supporting schedules.

Finally, when we entered rental income from the vacation home on schedule E, the program included the rental income in taxable income even though there were fewer than 14 rental days. Of course, under the circumstances, a competent tax adviser would never have entered the rental in the first place.

TaxWorks

Laser Systems

Overview
TaxWorks introduced a Windows-based program last year but withdrew it when problems with the product surfaced. The company plans to reintroduce the Windows version for the coming tax season. As a result, we had only the DOS version for testing.

The program allows the user to maneuver easily. Once a client is selected, the user chooses the type of return (federal, state, individual, business) and the program displays a list of all applicable forms. No actual IRS form appears on the screen during data entry, only the line items that need data entered or carried from another form. To view the return, you must first command it to calculate and then to display the return.

Put to the test
Several glitches surfaced. For example, when the total amount of health insurance expense was entered on form 1040, all of it was taken to schedule A, apparently because the program failed to recognize that our taxpayer was self-employed. This assumption was substantiated by the fact that schedule SE was not produced. As a result, both the self-employment tax and the self-employed health insurance deduction were omitted from the return.

This program experienced the same difficulties with the passive activity losses and the foreign tax credit as some of the other packages. However, after contacting technical support, we were able to finesse the problem by overriding the programs internal logic.

This program also erred in computing the AMT. The depreciation adjustment necessitated by the taxpayers home office use was omitted from the AMT computation.

TurboTax ProSeries

Intuit

Overview
We tested only the Windows version of TurboTax ProSeries. The program is comprehensive and easy to use, and it correctly handled the test scenario.

TurboTax has two entry modes. The first is the IRS forms mode, in which information is entered on the virtual IRS forms. The second is the quick entry mode, in which information is entered in an organizer. Both modes are easy to use.

TurboTax has a file cabinet feature that lists all types of income and expenses. Look up the type of income or expense you want to enter, select the item and the program jumps to that form. When entering assets, the depreciation methods for regular tax and AMT purposes are automatically selected by the program. The user simply chooses the type of asset from a pull-down menu. The program then selects the appropriate class life and computes the depreciation based on the year the asset was placed in service. If the user wants a different method of depreciation, overrides are available. This is an efficient method for asset entry: The user does not have to look up the class life and proper depreciation percentage for the current period.

The program also has a handy quick zoom feature, which allows the user to drill down to the source of any line item on the tax return. The icon for this feature appears on each applicable line. TurboTaxs outstanding help features include program help, context-sensitive IRS instructions and cross references.

One of the handiest features is the right-click menu. Press the right mouse button and a menu pops up that includes such items as cross reference, override and help. It also has an excellent Internet site that includes a tax guide for individuals and businesses.

However, the program produces some small irritations. Installation is somewhat clumsy. Although the process is straightforward, its tedious because only one part of the program can be installed at a time. For example, if the user wishes to prepare 1040s and state returns for five different states, six separate installations are required: one for the 1040 and one for each individual state. On the positive side, because of this feature, its therefore easy to customize the installation, loading only modules that are actually needed—saving disk space.

TurboTax is good for both the individual filer and for up to medium-size CPA firms. However, its not for large firms because it lacks some organizational features for setting up office work groups.

Put to the test
TurboTax handled the tax scenario without problems. Ultra Tax

Creative Solutions

Overview
Ultra Tax is a one-flavor tax program: Windows-based. It uses the full Windows interface, which makes maneuvering around the program easy for those who are comfortable in Windows. Much of the program is icon-driven: Click on one icon to start a new client, another to get help, another to print and so forth.

Its interface is very similar to CLRs GoSystem, and like GoSystem, data can be entered in one of two ways—by organizer or through the IRS forms screens. And like GoSystem, Ultra Tax suggests that all data entry be done via the organizer screens to ensure proper program execution. We didnt have to be warned twice, having experienced the consequences of failing to follow the advice in GoSystem.

The organizer screens are easy to use. They resemble the Explorer in Windows 95, with little folders representing places to enter data. Each folder relates to a unique tax subject such as income—wages, interest, dividends or capital gains. To enter data, the tax preparer first selects a folder, then picks an appropriate tab inside the folder, such as the W-2 income or interest/dividends (the tabs look like worksheet tabs in Excel) and inputs the data into the appropriate fields, which are automatically displayed.

However, the organizer screens do have a downside: If youre not sure which folder to access, you can find yourself clicking through all of the folder icons searching for the right one. However, after a user is familiar with the program, this problem would probably not resurface. Fortunately, the program also contains a tax subject index: Once you find the tax subject and click on it, you are delivered to the appropriate organizer screen.

Ultra Tax is designed for use by moderate-to-large CPA offices. Its not for the tax preparer who would be intimidated by Windows, since so much of the program uses that interface.

Put to the test
Ultra Tax was able to appropriately handle the passive activity loss calculations. However, to get the program to run properly, we needed to ask technical support for advice on exactly which boxes to check; the selection was not intuitive.

As with other programs, Ultra Tax did not automatically compute the $1,750 excess IRA contribution and the corresponding $105 tax. Although information sufficient for the calculation was provided when the total IRA contributions were entered, we had to enter $17,750 as an excess contribution manually to process the data correctly.