Undertakers and those in the funeral and burial business will always be able to rely on a steady stream of customers. And because taxes are, of course, the other inescapable element of life, income tax preparers have enjoyed a similar level of job security for the past several decades. But changes in the demographics of both those in the industry as well as their clientele have created an element of uncertainty regarding the future of this profession. Taxpayers now have more options than ever when it comes to filing their returns, and preparers have been forced to offer an ever-wider array of products and services in order to maintain their business.

A Changing Marketplace

In 2012 there were about 160 million households that filed tax returns in America. And despite all of the recent changes, taxpayers still have three basic avenues to choose from when they file. About three-fifths of filers went to a Certified Public Accountant (CPA) or a tax preparation franchise such as H&R Block or Jackson Hewitt to have their taxes prepared. Filers with complex returns, such as those who have business-related income or deductions from corporations, partnerships or oil and gas leases, or day traders who will require complicated basis calculations will continue to use trained professionals to prepare their returns. But the majority of filers with simpler returns are being presented with more and more options that make it possible for them to accomplish this task on their own. Another 30% of filers used computer programs such as Turbotax and Quicken. Of course, these software programs have been available for years to allow even those with moderately difficult returns, such as someone who runs a side business out of his or her home and itemizes deductions, to file their returns electronically.

The market has become even more competitive with cheaper web-based programs such as TaxAct and TaxSlayer that are now available through the IRS Free File program. The recent introduction of free electronic filing of state returns through state tax websites provides many filers with a no-cost alternative for state filing, which usually comes with a charge even with IRS Free File programs. The demise of refund anticipation loans (RALs) has also significantly diminished the bottom lines of many smaller preparation firms, as well as the major franchises. Preparers who own or work for small firms that previously depended upon return preparation fees as their primary source of revenue have seen a major reduction in their incomes as a result of this change.

The Digital Age

The tax preparation process itself has steadily become faster and more efficient as more and more information is now available in digital format. A growing number of preparers can now import much or all of their client data from personal finance websites, such as Mint.com or bookkeeping programs such as Quicken, directly onto their tax returns with a single click instead of entering all of those numbers manually. And electronic signatures that are entered with the client’s verbal permission often make it unnecessary for clients to physically appear in the preparer’s office. Mobile apps now allow taxpayers who file short forms to bypass computer preparation altogether.

Value-Added Services

Smart tax preparers know that preparing a client’s tax return is also an extremely effective form of prospecting for other types of business. One of the key reasons for this is that most clients do not view their preparers as salespersons but rather as professionals or advisors. This strategic advantage allows those with the proper training, licensure and experience to quickly ascertain a client’s overall financial situation and offer insurance or investment products, or other services that may be needed, such as auditing, bookkeeping or even comprehensive financial plans. The additional revenue that can be generated from this approach can be substantial in many cases. For example, a preparer who carries a life and health insurance license could do a $150 standard return for a customer who is retiring and needs to roll over the $200,000 that he or she has accumulated in his or her company retirement plan. The preparer could move this money into an indexed annuity and reap an additional $10,000 if the carrier that is used pays a 5% gross commission. The client has reaped an important additional benefit at no additional out-of-pocket cost and the preparer has received additional revenue that would otherwise require the preparation of approximately another 67 returns at that cost on a pretax basis. Practitioners who can successfully integrate their tax business with other aspects of financial planning can gain an edge by offering free or discounted returns for clients who use their more profitable services.

The Affordable Care Act has provided prepares with yet another opportunity to offer additional services to their customers. Jackson Hewitt and H&R Block have integrated enrollment into Obamacare directly into the interview process, and smaller preparers may soon be able to follow suit. This can greatly simplify the enrollment process for customers by allowing them to use the proceeds from their tax returns to pay for health care coverage. Other tax providers such as TaxAct also allow filers who must pay educational expenses for either themselves or their dependents to use the information on their returns to generate a FAFSA form.

Regulatory Changes

Another key development in the tax industry occurred in 2011 when the IRS finally began requiring all paid tax preparers who were not already CPAs, enrolled agents or tax attorneys to pass an annual competency test and complete 15 hours of continuing education. This provision will also likely hit small firms the hardest, as the major franchises already have tax schools and other resources in place to meet this obligation. The franchises have argued that this law will reduce the number of incompetent preparers who work for small firms, while opponents maintain that it will merely reduce their competition from these firms by forcing many of them out of business.

The Bottom Line

Although the tax preparation industry is likely to survive, and perhaps even to thrive for the foreseeable future, preparers at both large and small firms can expect their competition to increase and will need to continue to find ways to differentiate themselves from their peers in order to maintain profitability. Customers will be offered an ever-widening array of choices for preparation in not only how they can file, but also of additional financial and accounting services that they might need. For more information on the future of tax preparation, consult your tax preparer or financial advisor.

Related Articles
  1. Taxes

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  2. Taxes

    Six Ways Your Tax Preparer Knows You're Lying

    An experienced tax preparer can usually sense when a customer is providing fraudulent information to them. Find out what sets off a tax preparer's lie detector.
  3. Taxes

    How Powerful Is The IRS?

    The IRS has considerable power to enforce tax collection and reporting. But does it have too much power?
  4. Taxes

    Need To Enroll In Obamacare? File Your Taxes

    Taxpayers who need to obtain health coverage under the Affordable Care Act can now do so easily and conveniently when they file their taxes through an eligible preparer.
  5. Taxes

    What To Do When You Can’t Pay Your Taxes

    Falling behind on your tax obligations is the financial equivalent of a root canal. Take the pain away by following these tips, and get square with Uncle Sam.
  6. Taxes

    Why Do So Many People Fall Behind On Their Taxes?

    Despite the threat of owing thousands of dollars to possibly the most feared organization in the U.S., millions of Americans continue to fall behind on their taxes.
  7. Taxes

    Free 2016 Tax Preparation! Top Online Services

    A place that fills out and files your taxes free of charge? It's no myth, as long as you have a simple return. Read on to find the top preparers.
  8. Investing News

    Hillary Clinton's Liberal Orthodoxy

    Clinton's economic agenda laid out in July is divided into three broad groups: strong growth, fair growth and long-term growth. And her overarching goal is to "give working families a raise."
  9. Investing News

    Bernie Sanders: Socialist or Liberal?

    Sanders' pitch centers on economic inequality in the U.S., which is both more severe than it is in other developed countries and, if current trends continue, projected to worsen.
  10. Professionals

    Is A Stockbroker Career For You?

    Becoming a stockbroker requires a broad skill set and the willingness to put in long hours. But the rewards can be enormous.
  1. When should my tax refund arrive?

    More than 90% of income-tax refunds arrive in less than three weeks, according to the Internal Revenue Service (IRS). However, ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. Are Flexible Spending Account (FSA) items tax deductible?

    Flexible Spending Accounts (FSAs) are employer-sponsored, tax-favored savings plans expressly for the future reimbursement ... Read Full Answer >>
  4. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  5. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  6. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
Trading Center