Tax Preparation Industry Profile
Tax preparation is unusual in that even more so than almost any other industry, it provides a service which assists with a process that legally every adult American is required to do – submit an income tax return. Because of that, tax preparation is big business – 38,287 firms operated in the field last year, generating 7.7 billion in annual revenue. Because it is required, tax preparation tends to be recession resistant. Of the 82 million returns prepared by paid preparers, franchises handled 23% of them.
Tax Preparation Industry Background
The vast, vast majority or tax preparers are small – 37% were run by a single person, while 53% were operated by less than ten. There were128,393 total employees in the field last year. There were plenty of tax returns to go around – approximately,144 million individuals filed returns as did 2.4 million corporations.
One of the most notable aspects of the tax preparation industry is how seasonal it is – the industry only comes into being for essentially the four months beforeApril 15, the day on which income tax returns are due for individuals. Because of this reality, those interested in a tax preparation franchise such as Liberty should be those looking for a part-time opportunity. It will not provide year round business, and this can be a unique benefit for those looking for extra work for a couple of months, but a detriment to those looking for more of a full time franchise. One approach some tax preparation businesses take to avoid the stark seasonality of the tax preparation business is to diversify and enter other related fields. Some such as Listo, provide additional accounting and payroll services. Others, like FedUSA are involved in the insurance industry as well as tax preparation.
RALs, or refund anticipation loans have been a recent controversial issue in the tax preparation business. These loans, which have been around since the 1980s, but have become increasingly popular with electronic filing, give a short-term loan to consumers secured by their eventual tax refund. Generally this is done through the tax preparer, and the bank who issues the loan and hosts the account in which the loan is deposited charges a fee. In 2008, 7.2 million people received RALs. This practice has become controversial because these are high interest, low risk loans which are geared toward poorer people, and there have been several lawsuits brought by government entities charging tax preparer firms with predatory lending practices regarding these loans. To address this, the IRS in 2011 decided to stop providing tax preparers with the information they needed to issue these loans, at least temporarily ending RALs, and putting some smaller tax preparation firms, which relied on RALs for much of their revenue, out of business.
New Licensing Rules
Another aspect of tax preparation that is not present in many other franchises in the need for licensing. Until this year, only Oregon and California required tax preparers to be registered and licensed. However, the IRS very recently passed new regulations. Starting in 2011, all tax preparers must provide a PTIN, or preparer tax identification number, with every return. Preparers must submit an online or paper application and pay a fee to acquire a PTIN, and they must take one of two competency exams offered by the IRS, either in person or online, and pass it, before the end of 2013; the tests are just coming available now. They must also keep up with continuing education classes. In addition, those wishing to electronically file must also apply for an EFIN, or an electronic filing identification number. Preparers who reasonably expect to file 100 or more returns are required to e-file and thus apply for an EFIN.
The new regulations were put into place to prevent both fraud and preparers who simply make errors too frequently, particularly in regard to smaller firms and individuals. Between 2006 and 2008, the IRS began 600 investigations into the fraudulent actions of tax preparers, which led to 356 convictions, many of these resulting in prison sentences. In 2006, the Government Accountability Office investigated tax preparers by posing as taxpayers needing returns filed, and out of 19 cases, found five that made significant errors, some involving not paying enough, and some involving costing the taxpayer too much. These new procedures have the potential danger to lead to higher costs, as it could be more difficult and costly to pay licensed preparers.
The Future of the Tax Preparation Industry
The main competitor for tax preparation industry is personal finance software, such as Quicken and TurboTax, which allows people to file tax returns by themselves from their homes. Fifty million people used these products in 2010 – Intuit, the company which makes these leading software programs, made over 3 billion dollars last year and remains poised as a serious competitor to professional tax preparers for years. It is also now possible to file taxes through the websites for Turbo Tax and other programs. In order to counter that, tax preparers have begun to operate their own websites. These generally contain web forms which consumers fill out and the preparer files electronically, and they offer a middle ground between paying a tax preparer to file by hand, and computing their own taxes at home. In order to accommodate this growing online practice, tax preparers must focus on data security, which is extremely important, by making sure their computer and network security is appropriately beefed up. In addition, because of constant changes to the tax code and regulations, tax preparers must make sure their software is up to date. Also, many taxpayers have complex returns which often lead to their being more likely to go to professionals. The other potential competition for seasonal tax firms is from full-service accounting firms which might provide other services in addition to filing tax returns, though most individuals are unlikely to need other services throughout the year, so this is more of an issue regarding businesses and higher net worth individuals.
Despite vociferous politicians occasionally clamoring for a flat tax, income taxes remain as complicated as ever. Because of this complication, there will always be a demand for tax preparers, even as computer software becomes more complex and sophisticated. The industry, including other accounting services, is expected to grow by 4 percent compounded annually from 2010 to 2015.
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Andrew Weber is an Analyst for FranchiseHelp.com and is a graduate of New York University and New York University School of Law.