A Hard Look at Tax Software: 2006 Annual Survey of New York State Practitioners

By Susan B. Anders and Carol M. Fischer

Methodology

The 2006 survey asked most of the same questions that were addressed in the previous years, as well as new questions directed toward hiring patterns, outsourcing of tax preparation work, e-filing for New York State and federal returns, and integrated software packages.

The survey was mailed to approximately 500 New York State practitioners selected from online yellow pages and CPA directories. A total of 140 surveys were returned, a 28% response rate, consistent with prior years. In fact, 95 participants (68%) in the 2006 survey have responded to the survey in at least one of the four previous years.

In recent years, several tax software providers have developed lower-cost, minimum-feature versions of their packages, aimed at small tax practitioners. In light of this, an effort was made this year to expand the number of smaller firms the survey was sent to. The current participants represent a relatively diverse group of tax practitioners and provided ratings of many different tax software packages; the results are similar to prior years’ responses, but also reflect the industry initiatives toward smaller tax offices. A profile of respondents in 2006, as compared to those in 2005, reveals that the median number of individual returns has declined (from 545 to 450), the median number of entity returns has fallen (from 205 to 150), and the median number of tax practitioners per firm has dropped (from 5 to 4).

Tax Preparation Software

For the two prior years in which respondents were asked to separately rate their business-entity tax software, the ratings were very similar to those for the individual tax return software, suggesting equivalent levels of user satisfaction. The overall satisfaction ratings and the average number of years used were virtually the same as reported for the individual tax preparation software. Many respondents also used the same provider for both individual and entity software, and thus this distinction was eliminated on the 2006 survey.

Important considerations in choosing a tax software package or an online service include cost, ease of use, customer support, available features, updates, state tax software, company reliability, and user familiarity. Overall, the ratings for the tax preparation software were favorable, consistent with prior years. One indicator of the level of satisfaction is the desire to change tax software products. The percent of respondents planning to switch tax compliance software dropped from 7% in 2005 to 4% in 2006. Similarly, the percent that planned to change tax research software products declined from 17% in 2005 to 11% in 2006. These figures suggest a high level of satisfaction with existing products.

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 wrote in the name of two packages that were not listed on the survey. Almost 99% of the 140 respondents indicated that they used at least one individual tax preparation software package, and 10% used more than one product. Users ranked the vendors on each factor, using a scale from 1 (very dissatisfied) to 5 (very satisfied). In total, 160 ratings were analyzed for 13 software vendors; these results are summarized in Exhibit 1.

On average, respondents had been using their software package for over nine years. The products receiving the largest number of ratings, CCH ProSystem fx and Lacerte software, had been used longer than average. The longest-used tax preparation software, RIA GoSystem, suffered a serious decline in its overall rating from the responses of newer users. An analysis of the individual responses revealed that users with one to three years of product experience rated RIA GoSystem substantially lower than did more-experienced users. ATX’s rating was similarly reduced by new users. Conversely, an analysis of individual responses for CCH ProSystem fx and Creative Solutions showed that they appeared to be better regarded by newcomers than were ATX or RIA GoSystem.

The mean overall satisfaction rating for the 13 software packages rated by this year’s participants was 4.12, as compared to the prior year’s weighted average ratings of 4.23 and 4.19 for individual and entity tax software, respectively. The average respondents were highly satisfied with the tax preparation software that they have been using, although smaller firms appear to be less satisfied than larger firms. This may correspond to a trend reported in the Accounting Technology “Tax Software Special” (October 2005). Software providers have focused on attracting smaller preparers by offering lower-end products with reduced features. Users want the cost savings, but may miss some of the higher-end features.

Interestingly, Accounting Technology also reported that ATX had been successful in reducing its prices for lower-end products; however, survey respondents actually rated cost satisfaction with ATX slightly lower than in prior years. On the other hand, Intuit ProSeries’ three-year price freeze appears to be responsible for a substantial increase in its cost satisfaction rating. Across the industry, prices for higher-end products increased slightly, although our survey shows that the mean cost rating remained similar to prior years. Cost continues to be the feature respondents are least satisfied with.

Over 53% of the ratings received were for just two software packages: CCH ProSystem fx (43 ratings) and Lacerte Software (42). There were three other vendors with more than 10 ratings: Creative Solutions (25), Intuit ProSeries (19), and ATX (13). RIA GoSystem received fewer ratings than in the past (seven ratings), and its user demographics moved toward larger firms. Together, these six packages represent 89% of the ratings received from respondents. The following discussion of specific ratings and features will focus on these top six packages. Drake Software, H&R Block TaxCut, Intuit TurboTax, TaxACT, Tax$imple, TaxWise, and TaxWorks were each evaluated by only one or two users; the ratings for these vendors are presented for completeness, but should be interpreted with caution.

The software packages with the most respondents also received the highest overall ratings. CCH ProSystem fx and Lacerte Software earned overall ratings of 4.22 and 4.15, respectively. Creative Solutions’ overall rating of 4.14 was close behind, followed by Intuit ProSeries’ 4.05. RIA GoSystem and ATX had the lowest overall ratings of the most popular products, at 3.71 and 3.69. Creative Solutions and Intuit ProSeries had strong increases in their overall ratings from prior years, while the ratings for ATX, CCH ProSystem fx, and Lacerte Software declined, apparently influenced by the perceptions of smaller users. RIA GoSystem suffered the greatest drop in the overall rating, driven by new users rather than smaller firms.

The ratings of individual features, also provided in Exhibit 1, reflected mixed results. Satisfaction with timely updates and familiarity increased, while satisfaction with ease of use, customer support, available features, state availability, and company reliability decreased slightly. Users were on the whole very satisfied, although cost continued to be the greatest source of dissatisfaction. Importantly, for the five packages rated by more than 10 survey respondents, the ratings of individual dimensions and overall satisfaction are similar to ratings in previous years. The ease-of-use rating increased for ATX, while the customer-support rating increased for Creative Solutions. For RIA GoSystem, timely updates increased, reliability was constant, and all other ratings declined.

Exhibit 2 provides descriptive information about the tax preparation software users for the packages rated by more than five participants. Respondents rating CCH ProSystem fx, Lacerte Software, and RIA GoSystem represent some of the larger firms in the sample, although the companies’ software was used by firms in all size categories. As noted above, RIA GoSystem was used by fewer small firms than in prior years. 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.

Tax Research Software

Practitioners were also asked to rate any of the nine most commonly used tax research software vendors (chosen based on a review of print and electronic media) with which they had experience. Respondents could also write in the name of any package not listed on the original survey instrument. Almost 84% of the respondents indicated that they used at least one tax research software package, and 39% used more than one package. Use of multiple products may reflect users’ dissatisfaction with any single tax research software package, or may reflect preferences for features that are not available in one product alone.

The ratings for these vendors are summarized in Exhibit 3. A total of 200 ratings were received for seven vendors. RIA had the most users (47 ratings), followed by Kleinrock (44), CCH (42), BNA (40), and PPC (20). Only four users provided ratings for LexisNexis, and three for Tax Analysts; these ratings are presented for completeness, but should be interpreted with caution. Similar to the tax preparation software ratings, the average ratings on the tax research software declined slightly, with the exception of customer support. This may be due to the inclusion of a larger proportion of smaller firms in the participant pool. The mean number of years used increased, and an analysis of the individual responses revealed that only Kleinrock and PPC seemed less satisfactory to new users than to experienced users.

Respondents ranked the vendors on a scale from 1 (very dissatisfied) to 5 (very satisfied). The average overall rating for all seven vendors was 3.77, very similar to the overall ratings in past years. The overall ratings for the vendors used by more than five respondents were very similar, ranging from the highest rated, Kleinrock at 3.99, to PPC at 3.55. The order of the overall ratings for the tax research software has fluctuated from year to year, with Kleinrock and CCH taking first and second place, respectively, in the past two years.

An analysis of respondents revealed that, in general, BNA and CCH were used more often by larger firms. Use of Kleinrock, PPC, and RIA shifted toward smaller firms. Kleinrock and Tax Analysts received the best cost-satisfaction ratings, which may be reflected in a preference for these less-expensive products by smaller firms.

Other Technology Solutions

Respondents continue to demonstrate an increase in e-filing, with 74% indicating use of this technology for federal returns and 76% for New York State returns (an increase from 72% for all individual returns last year). Preliminary IRS data for the 2006 filing season indicate that 68% of all returns were e-filed, up from 63% for 2005. Tax professionals were responsible for 70% of the e-filed tax returns. All of the software vendors listed in Exhibit 1 were accepted to participate in the Internal Revenue Service’s federal/state e-file program.

According to a June 2005 Federation of Tax Administrators report, “Electronic Filing Mandates: Lessons Learned”
(www.taxadmin.org/fta/ftapub.html), 13 states require e-filing by practitioners who prepare more than a given number of tax returns. Exhibit 4 summarizes the thresholds for 2005 through 2007.

Many tax software vendor websites (Exhibit 5) promote tax preparation packages integrated with tax research software, as well as with accounting, payroll, financial planning, and document-management resources. Of all survey participants, 44% indicated that they used tax preparation software bundled with other applications. Almost 61% of these respondents reported that the tax software component was more important than the other applications, and another 33% stated that it was of equal importance. This suggests that the tax preparation component of integrated software packages may be driving the software selection process. Perhaps this would change if users were not so highly satisfied with the tax software available. Interestingly, although some tax compliance providers are bundling their products with another vendor’s tax research resources, such as ATX with Kleinrock, Drake and TaxWise with CCH Master Tax Guide, and Creative Solutions with RIA Checkpoint, almost 83% of respondents did not purchase their tax research software in connection with their tax preparation software.

The use of an online organizer increased slightly, to 14%, following a lack of movement in this direction in prior years. The percentage of tax practitioners expressing an interest in processing returns via an application service provider continued to decline, and only 9% used this technology in 2006. Although tax software providers promote the development of their web-based products, the percentage of respondents that subscribed to a proprietary Internet site to conduct tax research, used CD-ROM–based tax research software, or maintained firm websites declined from prior years. The significant decline in the percentage of firms with a website (from 71% to 63%) may have been attributable to the inclusion of smaller firms in the sample. Of the firms that did have a website, the survey found modest increases across the board in terms of the functions the website was used for. For example, 87% of respondents used their website to market to new clients (up from 84% in 2005), 57% used it to market new services to existing clients (up from 53%), 47% used it to provide a client newsletter (up from 41%), and 18% used it to provide an online tax organizer (up from 11% in 2005).

Over 96% of respondents indicated that they have not outsourced any of their tax return preparation work, while only 4% said that they have done so. Less than 1% of those who did not outsource were considering it. The reasons given for outsourcing in accounting and technology literature are a lack of staff accountants in the U.S., time savings (returns can be processed overnight), and cost savings (overseas accountants’ salaries are a fraction of those received by U.S. staff). Interestingly, 50% of participants plan to increase their number of full-time tax professionals over the next two years, while only 1% expect the number to decrease. These findings would indicate that the demand for new accountants will remain strong.

Analysis

The 2006 tax software survey respondents reported a high level of satisfaction with both tax preparation and tax research software. Although ratings of tax software have decreased slightly, respondents generally express satisfaction with all of the features offered by these products. New York State practitioners report a high propensity to use tax software combined with integrated packages that provide other applications, such as accounting, payroll, financial planning, or document management. Furthermore, tax preparation software appears to drive the package choice in most cases. Participants in this study indicated increased use of e-filing, both for New York and federal returns. Finally, 96% of respondents complete all of their tax preparation work in-house, and half of them expect the number of full-time tax practitioners on staff over the next two years to increase, while only 1% were considering outsourcing the preparation of tax returns.

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