A Hard Look at Tax Software

By Susan B. Anders and Carol M. Fischer

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Respondents to the annual survey of New York State CPAs preparing tax returns continue to embrace technology, generally indicating satisfaction with available products and demonstrating some increases in their use of these resources over the last few years. Survey participants reflect national shifts toward the use of integrated software packages, as well as an increased use of e-filing. On the other hand, they still express a lack of interest in online client organizers and in processing returns via application service providers.

The tax software industry continued to consolidate over the past year. CCH purchased the CPA Software tax products. Creative Solutions recently acquired Accountware; its parent, Thomson, also owns RIA and PPC. Intuit claims ProSeries and Lacerte Software. Kleinrock merged with ATX, and TaxWise joined forces with CCH and BNA, as well as with the Volunteer Income Tax Assistance (VITA) program. Respondents to this survey have consistently selected these “Big Four” vendors, which have come to dominate the field.

The 2005 survey asked the same questions as in previous years, as well as whether respondents currently use a tax preparation software product that is integrated (packaged) with other applications, such as accounting, payroll, financial planning, or document management software, or plan to do so within the next five years. This question provides some insight into the extent to which the tax software decision is independent of other accounting and business software decisions. Satisfaction with a particular tax software program may also provide an incentive to use the vendor’s other products.

The survey was mailed to approximately 500 New York State CPAs, selected from online yellow pages and CPA directories. A total of 136 usable surveys (27% response rate) were returned and analyzed. Although this response rate represents a decrease relative to the previous year, it is consistent with the 2003 survey. The participants represent a relatively diverse group and provided ratings of many different tax software packages, similar to prior years’ responses. A profile of respondents (Exhibit 1) indicates that the 2005 survey respondents resemble the 2004 survey respondents. In fact, 109 participants (80%) in the 2005 survey have responded to the survey in at least one of the three previous years.

Individual Tax Preparation Software

Consistent with past years, survey respondents rated favorably the individual tax preparation software used in their practices. Users ranked the vendors on a scale from 1 (very dissatisfied) to 5 (very satisfied). Important considerations in choosing a tax software package or an online service included cost, ease of use, customer support, available features, timely updates, availability of state tax software, company reliability, and user familiarity. The survey instrument listed 21 of the most commonly used commercial tax return software vendors, based on a review of print and electronic media. Participants were asked to write in the name of any package that was not listed on the survey. Most respondents indicated having used at least one individual tax preparation software package; some had used more than one. Respondents reported using 10 of the 21 tax return software companies; Exhibit 2 summarizes the ratings for these 10 vendors.

On average, respondents had been using their software package for more than nine years; while there is considerable variation among the packages rated, the number of years used is longer than average for the two packages rated by the largest number of respondents. The mean overall satisfaction rating for the 10 software packages rated by this year’s participants was 4.24, slightly higher than the 4.21 in 2004. The average respondents were highly satisfied with the tax preparation software that they have been using. Accounting Technology’s October 2004 “Tax Software Special” reported very little change in prices across the market, although our survey shows that cost continues to be the least satisfactory category, and its mean rating declined from the prior year.

More than 60% of the ratings received were for two software packages: CCH ProSystem fx (44 ratings) and Lacerte Software (47). Similar to last year, three other vendors received more than 10 ratings: Creative Solutions (17), Intuit ProSeries (17), and RIA GoSystem (12). Together, these five packages represent 92.5% of the ratings received. Discussion of specific ratings and features will focus on these five packages. ATX Forms, CPA Software, Drake Software, TaxWise, and TaxWorks were each evaluated by six or fewer users; thus, the ratings for these vendors are presented for completeness, but should be interpreted with caution.

The most highly rated packages overall were also those with the most users among respondents. CCH ProSystem fx and Lacerte earned overall ratings of 4.40 and 4.35, respectively. RIA GoSystem’s overall rating (4.33) was close behind, followed by Creative Solutions (4.00) and Intuit ProSeries (3.82). The software packages with the top three overall ratings are also the packages with the longest reported number of years used by respondents, undoubtedly reflecting both higher satisfaction with a software package over time and a tendency to stay with a product that is satisfactory.

The high overall ratings are reflected in the ratings of individual features, also provided in Exhibit 2, which suggests that respondents were generally satisfied with all aspects of their tax preparation software. Users were on the whole very satisfied with features such as ease of use and customer support, although some users were dissatisfied with cost. Importantly, for the five packages rated by more than 10 respondents, the ratings of individual dimensions and overall satisfaction are very similar to the ratings for these packages in previous years, suggesting a relatively high and stable level of satisfaction with these packages. The customer support rating for Lacerte Software improved, while timely updates declined for Intuit ProSeries and Lacerte Software, both of which are owned by Intuit. RIA GoSystem’s ratings improved for ease of use and customer support.

Exhibit 3 provides descriptive information about the tax preparation software users for the packages rated by more than 10 participants. Similar to prior years, CCH ProSystem fx, Lacerte Software, and RIA GoSystem were used by firms in all size categories, although some of the largest firms in the sample used them. Intuit ProSeries continued to be used by firms preparing fewer returns, with fewer full-time tax preparers, and with 25% or more of their practice in tax. Creative Solutions was used by relatively more mid-sized firms than in prior years.

Entity Tax Preparation Software

Survey respondents also rated the entity tax preparation software used by their firms. The survey instrument listed 22 of the most commonly used tax return software vendors, and participants were asked to write in the name of any package not listed. Most respondents indicated having used at least one entity tax preparation software package, and, similar to last year, approximately 87% used the same vendor for both individual and entity software. The respondents reported using 11 different packages, some more than one; Exhibit 4 summarizes the ratings for these vendors. The following discussion focuses on the five packages rated by 10 or more respondents. Ratings for packages with fewer than 10 users are reported for completeness, but should be interpreted with caution.

Ratings for entity tax preparation software are very similar to those for the individual tax return software, suggesting equivalent levels of user satisfaction. The overall satisfaction rating of 4.22 is virtually identical to that reported for the individual tax preparation software. Similar to the individual tax preparation software, respondents had used the package for an average of 9.3 years and generally rated themselves as being quite familiar with the entity software.

More than 10 ratings were received for five different packages: CCH ProSystem fx (46 ratings), Lacerte Software (41), Creative Solutions (15), RIA GoSystem (14), and Intuit ProSeries (13). The top-rated vendors were Lacerte Software, with an overall rating of 4.39, closely followed by CCH ProSystem fx, with a rating of 4.30. Only one of the top five had an overall rating below 4.0, Intuit ProSeries (3.85). Respondents continue to express the least satisfaction with the software’s cost, while other dimensions are generally quite favorable. Similar to the individual tax preparation software ratings, Lacerte Software improved on customer support, but declined on ease of use. Ratings for its sister software, Intuit ProSeries, reflect just the opposite. RIA GoSystem’s ratings again improved for ease of use and for customer support.

Creative Solutions, Lacerte Software, and Intuit ProSeries entity software were almost exclusively used by firms preparing fewer than 500 entity returns and with few full-time tax preparers. CCH ProSystem and RIA GoSystem are more frequently used by larger firms with more entity returns to prepare and more full-time tax preparers.

Tax Research Software

The study asked about the use of tax research software. The survey instrument listed nine of the most commonly used tax research software vendors, based on a review of print and electronic media, and participants could write in the name of any package not listed. Most respondents have used at least one tax research software package; about 38% have used more than one.

Exhibit 5 summarizes the ratings for the six vendors mentioned. CCH had the most users, at 53, followed by RIA (51), BNA (40), Kleinrock (39), and PPC (21). Only six users provided ratings for Tax Analysts; thus, readers should interpret these ratings with caution. Respondents ranked the vendors on a scale from 1 (very dissatisfied) to 5 (very satisfied). The average overall rating for all nine vendors was 3.82, very similar to the overall ratings in past years.

The overall ratings for the vendors used by more than 10 respondents were very close, ranging from 3.94 for Kleinrock to 3.62 for BNA. Unlike ratings for the individual and entity software, the order of the overall ratings for the tax research software has fluctuated from year to year, suggesting that tax professionals are not as settled in their use of tax research software. Using multiple tax research software packages gives practitioners a better opportunity to make direct comparisons of the different features. Use of multiple products may also reflect users’ dissatisfaction with any single tax research software package.

All of the tax research software packages are used by firms in all size categories; however, BNA and CCH were used relatively more often by larger firms, while Kleinrock, PPC, and RIA were more predominant among smaller firms.

Other Technology Solutions

The 2005 survey results point to some important trends in technology use compared to previous years. Vendor websites (Exhibit 6) promote tax preparation packages integrated with tax research software, as well as with accounting, payroll, financial planning, and document management resources. In a new question for 2005, Exhibit 7 shows that 46% of survey participants use tax preparation software bundled with other applications; 30% plan to do so within the next five years.

Respondents demonstrated a substantial increase in e-filing after two stagnant years, with 72% indicating use of this technology. The IRS has increased incentives for the use of e-filing, such as the availability of power of attorney, transcript delivery system, and electronic resolution (see www.irs.gov/taxpros/providers/index.html; also see “E-Filing Update for New York, New Jersey, and Connecticut” by Mark Levin on page 44.) Tax professionals are now automatically accepted for New York State’s e-filing program if they are authorized to e-file federal returns. Preliminary data for the 2005 filing season indicate that 63% of all returns were e-filed, up from 58% for 2004. Tax professionals were responsible for 70% of the e-filed tax returns in both 2004 and 2005. All of the surviving software vendors listed in Exhibits 2 and 4 have been accepted to participate in the IRS’s federal/state e-file program for 2005.

Although a significant percentage of respondents indicate that they plan to use an online client organizer within the next five years (40% in 2004; 39% in 2005), actual use of an online organizer has decreased to only 11%. Fewer tax practitioners express an interest in processing returns via an application service provider, and only 12% took advantage of this technology in 2004 and 2005. While many vendors have expanded their web-based products, survey respondents, of which a large proportion have their own websites as reported in Exhibit 8, do not appear particularly interested in or may have unresolved concerns about Internet security. The percentage of participants who have developed their own websites, and the purposes for which participants use their websites, has been very stable over the four years of this survey.

Although web-based tax compliance products have not gained in popularity, an increased percentage of respondents conducted tax research via a proprietary Internet site in 2005, and the use of CD-ROM–based tax research software declined slightly.

Analysis

The 2005 survey found a high level of satisfaction with both individual and entity tax preparation software. Over 90% of respondents continue to use one of the top five tax return packages. Ratings of tax research software have increased slightly, with respondents generally expressing satisfaction with these products. The respondents continued to show a relatively high percentage of firm websites and also indicated a reliance on the Internet in their tax practices. Online client organizers and tax return processing via application service providers are used by only a small minority of respondents.

The survey results reflected national trends regarding the use of tax software combined with integrated packages that provide other applications, such as accounting, payroll, financial planning, or document management. Survey participants also indicated a 12.5% increase in e-filing, ahead of the national practitioner increase of 11% reported by the IRS.