Prep Work: New Software Will Streamline Tax Services

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1 Month Follow on head on Master page A August 2013 Prep Work: New Software Will Streamline Tax Services By Caitlin Newsom Tax software development will ultimately benefit both accountants and tax preparers, allowing them to focus on more premium services New software will benefit both accountants and tax preparers, but accountants existing product offerings will provide an edge As part of a calculated strategy over the next five years, the Accounting Services industry is expected to leverage growth in competing industries, such as tax software and tax preparers, to its own benefit by adopting improved tax software and reaping the benefits of consumers increasing awareness of tax services. For example, as more consumers turn to less expensive software to complete their taxes, the Tax Preparation Software Developers industry is expected to grow, seemingly cutting into demand for accountants tax services. Another competitor, the Tax Preparation Services industry is also expected to grow over the next five years as industry operators expand their financial products and services and offer more free services, attracting more customers and reducing demand for accountants. However, the Accounting Services industry is expected to use growth in both industries to its advantage, by implementing new technology and taking advantage of a better-informed customer base. Improved tax software will increase accountants efficiency at preparing taxes and allow them to focus on more premium services, such as advising and consulting. As tax preparers grow, increased awareness of tax services will also help boost demand for accountants tax preparations. SaaS will dominate tax preparation software offerings Comprised of companies that provide software that helps users file state and federal tax returns, the Tax Preparation Software Developers industry is expected to experience continued slow growth during the next five years due to the proliferation of free online tax filing programs. Through 2018, industry revenue is expected to grow gradually at an average rate of 0.7% annually to $2.5 billion, including 0.9% growth in This growth can be attributed, in part, to accelerated growth in the number of households (the total potential market for tax preparation software) over the next five years as economic growth leads to new household formation. In addition, a steadily increasing share of the US population will own at least one computer, a necessary prerequisite to using tax preparation software. Slow growth in this industry will slightly offset demand for accountants tax preparation services. And as more consumers turn to less expensive tax software to file their taxes over the next five years, they will decrease their demand for accountants info@ibisworld.com

2 August The success of major player Intuit, which accounts for about two-thirds of total industry revenue, will drive profit margin growth for the industry, as it did during the past five-year period. On the other hand, smaller firms will continue to struggle, as their profitability is expected to decline during the period due to competition over contracts from tax preparation firms and accountants. Furthermore, the delivery model of industry software will continue to shift to a software-as-a-service (SaaS) model. The SaaS model charges users a subscription fee to access software installed on the publisher s servers, rather than charging a one-time purchase fee to install the software onto the customer s computer. Consumers are notoriously hesitant to purchase a new version of tax preparation software once they have become used to one version. But the SaaS model will allow operators to make incremental updates to their software, which will both smooth the transition to updated software for consumers and allow the publishers to generate a constant revenue stream. The SaaS model will also discourage existing software purchasers from switching to free tax preparation software because companies will be able to directly advertise the improvements on new versions. While this new model will create greater consumer demand for tax software over tax preparation services from accountants, it will actually help accountants with their tax offerings as it will improve their efficiency when preparing their clients taxes. Accountants will benefit from the shift to SaaS because it will make using professional-level tax software easier. Many accountants use tax software to increase their efficiency when preparing their clients taxes. Professionals are increasingly using this software for its adeptness at extensive automated calculations and organization, as well as its reliable security measures. Additionally, accountants may differentiate their offerings from those of competitors by playing up software advantages. Accountants will also benefit as the percentage of households earning more than $100,000 increases at a faster rate, due to the rebounding economy. On the other hand, this trend will actually have a negative effect on revenue for the Tax Preparation Software Developers industry, because these households are less likely to use do-it-yourself tax preparation software, instead opting for the services of a personal accountant. Accountants are also most likely to serve consumers who have complex tax needs and medium-size and large businesses. Additionally, the total number of businesses is estimated to grow at an annualized rate of 1.6% over the next five years as the economy continues to rebound. This growth is expected to increase the amount of business for accountants, requiring increased efficiency in all aspects of business, including tax preparation. Overall, the growing Tax Preparation Software Developers industry will help accountants with their tax preparations. Number of Households Year Million Growth SOURCE:

3 August As tax software allows more consumers to save money and do their own taxes from the comfort of their own homes, demand for accountants will begin to falter. Ironically, because of its efficiency the SaaS model of tax software will also help accountants take on more clients. Additionally, as disposable income levels rise, consumers will have more money to spend on an accountant to ensure that they are filing their taxes correctly and getting a maximum return. Tax preparers will grow their personalized services As the economy recovers, improvements in the labor market will increase the number of Americans who need to file taxes, boosting demand for tax preparation services. Consequently, in the five years to 2018, revenue for the Tax Preparation Services industry is projected to grow at an average annual rate of 1.3% to $10.0 billion. Furthermore, rising disposable income will enable more consumers to hire professional tax preparers or purchase tax preparation services from accountants, helping to drive industry growth. After growth of 1.4% in 2013, IBISWorld expects industry revenue to grow a further 1.1% in Despite this growth, industry operators will continue to face challenging competition. While disposable income growth in the United States will enable many Americans to afford professional services once again, consumers will continue to seek tools that help them prepare their own taxes as free tax software becomes more readily available and widespread. Consequently, increasing competition from computer software companies will stifle demand for tax preparers and accountants alike. Thus, as the Software Publishing industry increases its share of the tax preparation market, the Tax Preparation Services industry will focus on cutting costs and increasing competitive strengths, including service-orientation and tax-related financial products. In turn, this will further cut into demand for tax preparation from accountants, as tax preparers will be able to offer more products and improved services. Many operators will cut costs to improve profit, particularly as they provide more services free of charge in an effort to pull in new clients. Additionally, tax preparers are expected to pursue growth by expanding marketing efforts to include different demographics. In particular, tax preparers will likely begin marketing their personalized services to improve perceived value, a level on which software publishers cannot compete. Additionally, tax preparation firms are expected to increase the number of services that they provide for free, such as electronic state income tax filing, in order to get more clients in the door. Firms can do this because they know that many consumers who use tax preparers will upgrade to fee-based services after being lured in by free offers. This will put pressure on Households Earning More Than $100,000 Year Households Growth SOURCE:

4 August accountants to offer more extensive free and value-added tax preparation services in order to retain their customers. Profit margins will increase as demand improves for tax preparers, especially for financial products like refund anticipation loans (RALs). While profit is projected to grow to 24.0% in 2018, up from 22.8% in 2013, margins are not expected to increase to prerecession levels as more consumers take advantage of online filing solutions. As tax preparers become more profitable, their operations will be able to expand and offer more free services, further cutting into demand for accountants. Financial reform laws offer a mixed bag of challenges and benefits Because financial reform laws are expected to inhibit growth for both tax preparers and accountants over the next five years, development of new products will be especially important. Following the credit crisis, an increasing number of limits were placed on companies offering financial products, including the RALs that some tax preparation firms and accountants offer. These products have become an increasingly important source of revenue for tax preparation companies. Consequently, further sales growth of financial products is expected over the next five years while tax preparers try to find alternatives to RALs as regulations increase. The Tax Preparation Services industry and the Accounting Services industry have the potential to benefit from at least one form of government action. A new IRS regulation requiring paid tax preparers to have a preparer tax identification number (PTIN) may also contribute to revenue growth. The PTIN requirement, which went into effect for the 2011 tax season, limits the number of firms operating in these industries, easing pricing pressures. In the next five years, all tax preparers will likely need to pass a competency test in order to register for a PTIN. More specifically, this new regulation is causing greater restrictions for tax preparers than it does for accountants who can more easily obtain a PTIN. This is expected to drive revenue for Tax Preparation Services as well as for Accounting Services. However, the increased ease that accountants can receive a PTIN over a tax preparer is expected to help boost revenue even further for accountants as some tax preparers are forced out of the industry. More value-added services Despite this challenging landscape, demand for accountants tax preparation services is expected to increase over the five years to IBISWorld estimates that revenue for the Accounting Services industry will grow at an average annual rate of 3.4% to $117.4 billion in Part of this growth will be due to enhanced tax preparation software, which will help increase accountants efficiency in preparing their clients taxes. Additionally, as other tax preparers are expected to expand their operations and revenue, accountants will likely adopt similar measures in order to Per Capita Disposable Income Year $ Growth , , , , , , , , , , , SOURCE:

5 August About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call expand their own operations and revenue. Accountants are expected to increasingly adopt tax preparation software as more tax software switches over to a SaaS model, which will make it easier for accountants to update the software and make sure their product is up to date. Tax software will increase accountants efficiency and accuracy when preparing their clients taxes, boosting demand for their services. Tax software will additionally allow accountants to focus on higher prices advisory services. Tax preparers are expected to begin offering more free financial services and expand their product offerings in order to attract customers. As tax preparers expand their free services this is expected to temper accountants revenue growth over the next five years. Consequently, IBISWorld expects this trend will put pressure on accountants to offer more free services as well. But unlike many tax preparers, accountants already have a wide range of products, giving them an edge in this market. Contact: Savannah Haspel VP, Public Relations IBISWorld Phone: savannahh@ibisworld.com

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