Users Size Up Tax Software

Product ratings gain, but vendor support slips.

lthough AICPA tax practitioners rated this year’s crop of tax-preparation software superior to the products they used last year, they gave lower grades to vendors’ technical support. But for many tax practitioners, the bigger story was that the number of tax-software products continued to decline, forcing newly orphaned customers to go through the agony of selecting a new package and converting their client tax files to make them compatible. Such were the highlights of the Journal of Accountancy’s spring 2004 survey of 2,010 AICPA tax-department members.

The average satisfaction rating for the nine professional products included in the survey was 4.09—out of a possible 5.00—up from last year’s average of 3.61, with Intuit’s Lacerte posting the highest overall ratings with a score of 4.43 (see exhibit 2 ). Three products tied for third place with a score of 4.35: Drake Software, Thomson Creative Solutions’ UltraTax and CCH Tax and Accounting’s ProSystem fx Tax.

The average cumulative rating for technical support slipped sharply to 2.44 from 3.50 last year, although respondents reported an improvement in the way their software ran on their networks—4.09, up from 3.50.

For a list of the vendors included in the survey, see exhibit 1 .

The survey also revealed that not only is the field of vendors dwindling, but the existing market is becoming more concentrated, with four products appearing to lead the field with the most customers: Intuit’s Lacerte and ProSeries, CCH’s ProSystem fx Tax and Thomson Creative Solutions’ UltraTax.

Evidence of the growing concentration can be deduced from the data in exhibit 2 . Although more than twice as many tax practitioners responded this year than last (2,010 vs. 993), making the 2004 data more statistically reliable, only nine products received the 10 or more responses needed to qualify for inclusion in the survey. That’s down from 12 last year.

In addition, tax year 2004 will see at least three fewer tax software products on the market. Thomson Creative Solutions, which owns UltraTax and RIA’s GoSystem Tax RS , acquired the customer lists of Tax Relief and Exact Tax, both of which withdrew from the market. Also, Best Software sold its CPA Software Visual Tax customer list to CCH, which will be attempting to migrate those customers to its ProSystem fx Tax.

Caveat: The lopsided response in favor of just four products makes the individual scores of the remaining five products statistically unreliable. GoSystem Tax RS received just 50 responses, Max Plus 44, TaxWorks 29, Drake 17 and TaxWise 12. However, we believe the cumulative average of all nine product scores in exhibit 2 is statistically reliable.

Currently, there are only 16 tax software products on the market that provide all the necessary federal forms and can calculate taxes for every state with an income tax. That’s down about 20% in the past decade. Aside from the packages reviewed in this survey, other products on the market include GreatTax, Orrtax, Dunphy, Taxslayer, Petz Crosslink, TaxSimple and TaxAct.

When a software publisher acquires a competitor, it usually just wants the customer list; the acquired product usually becomes defunct and the buyer seeks to convert the orphaned customers to its brand. But when Intuit acquired Lacerte a few years ago, it took a different tack: Because both the Lacerte brand name and product were so popular, Intuit decided to continue the package under a joint name.

The current turnover rate—the percentage of customers voluntarily moving to a new product or being forced to switch because their current product was being withdrawn—ran at about 13% last year (see exhibit 3 ).

Most tax practitioners are not happy about market consolidation—and for good reason. Switching tax packages is no small matter. First of all the CPA firm has to install the new product on its network, praying its computer system is sufficiently robust to handle the change; if it isn’t, the customer must go through the often difficult and expensive process of upgrading the hardware.

Then, since each tax package operates differently, the firm’s tax professionals must learn to run the new software and become familiar with all its unique technical nuances. And finally, the firm has to put all its client tax data through the new vendor’s conversion software to make the returns compatible with the new package—all the while worrying whether the conversion process will leave it with hours of work tracing for evidence of errors.

Confirming the difficulty and frustration with conversion software, the survey showed it is nearly universally disliked. With but one exception—Intuit’s Lacerte—tax practitioners generally gave low grades (2.33) to these converters. Lacerte received a 4.17 ( exhibit 3 ).

As evidence of the intense competition to acquire orphaned customers, of the nine products assessed here, all but one—GoSystem Tax RS —provided free conversion software ( exhibit 3 ). GoSystem, which charges $2 a return for conversions, is owned by RIA, which in turn is owned by Thomson, the publisher of UltraTax.

Mention the words technical support to a tax practitioner and often you’ll get an earful of complaints about bad service and long hours of holding on the telephone for a tech-support representative. After all, the last thing CPAs want to hear when they call with questions during the critical days before April 15 is a busy signal, a recording or an ineffective response to a question. The average cumulative rating for technical support fell to just 2.44 from last year’s 3.50 ( exhibit 2 ).

Preparers electronically filed a larger number of both federal and state tax returns: 39.4% of federal returns were e-filed this year, up from 24.5% last year. The state statistics were similar: 35.6%, up from 19.4% (see exhibit 4 ).

Six of the nine vendors charged tax preparers extra for e-filing, with fees as high as $1,350 for an unlimited number of e-filings (see exhibit 6 ). The three that didn’t charge were Drake Software, GoSystem Tax RS and Max Plus.

Only three vendors—Thomson for GoSystem Tax RS , Intuit for ProSeries and CCH for ProSystem fx Tax—charged tax practitioners a fee for the software used in e-filing. GoSystem charged for e-filing but didn’t charge for each return filed. An average of 31.5% of the practitioners passed this fee along to clients, and 37% said they planned to add such a charge next year ( exhibit 6 ).

The software package with the most loyal customers appears to be ProSystem fx Tax ( exhibit 3 ); 97.8% of its users said they planned to buy the product again next year. Hot on the leader’s heels was UltraTax, with 97.2% reporting they planned to remain customers. For all nine products, 89% of respondents said they planned to stay with their vendor—showing an apparent 11% voluntary turnover rate. Once again we suggest you not read too much into the individual ratings for those products with fewer than 100 responses.

We had hoped the survey data would reveal which products were gaining customers and which were losing them. Unfortunately, since only about 11% of respondents voluntarily switched alliances, it was evident the resulting switching population (11% of 2,010 and divided among nine vendors) was too small to provide reliable individual results.

However, one statistic on product switching did stand out: When asked for the major reason they switched products, 32% of the respondents cited price.

We were surprised to discover that online organizers—those software add-ons that make compiling raw tax data relatively painless for taxpayers and a labor saver for the tax preparer—were not very popular with either tax practitioners or their clients. Although all of the nine products in the survey contained such organizers, only 19.1% of the responders offered them to clients (see exhibit 5 ), and when they did, only 16% of their clients used them.

Tax-refund advances remained a minor marketing feature. Only 5.1% of the tax practitioners said they offered refund advances, and growth in the service will be about 10% next year: 5.6% said they planned to offer it.

Of the 2,010 AICPA tax-department members who filled out the survey, 12% were sole practitioners and 80.3% were from local, one-location firms (see exhibit 7 ).

We had hoped to correlate the type and size of firm with the software used, but again we were stymied by the fact that some packages received very few responses. However, four packages—Lacerte, ProSeries, ProSystem fx Tax and UltraTax—received enough responses to provide at least a conditional analysis. It appears the leading software used by sole practitioners was ProSeries and the leading local-firm package was ProSystem fx Tax. There were too few responses from regional, national or Big Four firms to provide reliable conclusions.

Because of the continued intense competition in the tax-software market—and if history is any guide—further consolidation is likely to continue. And as the number of products shrinks, it’s evident the market will see still more concentration.

STANLEY ZAROWIN, a former JofA senior editor, now is a contributing editor to the magazine. His e-mail address is .

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