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 2017 there were about 152 million individual returns filed in America. And despite all of the recent changes, taxpayers still have three basic avenues to choose from when they file. About half 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. 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 their 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.
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 they have accumulated in their 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.
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.