Tax Preparation Industry in 2016 at a Glance
Tax preparation is BIG business – there were 300k people employed at 109k firms in 2012 - generating $9 billion in revenue in 2012. The industry grew over 2% from 2010-2015, and is expected to speed up the pace of growth. Revenues of $11 billion are forecast for 2018. Tax preparation is unusual in that it provides a service to assist with a process that legally every American is required to do: submit an income tax return. Because it is required, tax preparation tends to be recession resistant.
Tax Preparation Industry Background
The vast majority of tax preparers are small businesses – 37% are run by a single person, while 53% employ less than ten people. There were plenty of tax returns to go around – the IRS estimates that there will be over 250 million filed by 2018 .
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 before April 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 Tax Serviceor Opportunity Tax Service 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 business is to diversify into other related fields. Others, like Siempre Tax+ are focused on specific markets, like the Hispanic population.
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, 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. These are high interest, low risk loans which are geared toward poor people, and there have been several lawsuits brought by government entities charging tax preparer firms with predatory lending practices. 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.
The Future of the Tax Preparation Industry
The main competitor for the tax preparation industry is personal finance software such as Quicken and TurboTax, which allow people to file tax returns for themselves. For tax year 2014, over fifty million taxpayers prepared and e-filed their federal tax returns.
In order to counter this trend, tax preparers have begun to offer online services of their own. These generally contain web forms which consumers fill out and the preparer files electronically, offering 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, by making sure their computer and networks are appropriately protected. In addition, because of constant changes to the tax code and regulations, tax preparers must make sure their software is up to date.
Additional competition for seasonal tax franchises comes from full-service accounting firms offering other accounting services in addition to filing tax returns. Since most individuals are unlikely to need these other services this is more of an issue regarding business clients and higher net worth individuals.
Despite politicians occasionally clamoring for a flat tax, income taxes remain as complicated as ever. It is very likely there will always be a demand for tax preparers, even as tax prep computer software becomes more user friendly and accessible.
The industry, including other accounting services, is expected to grow by 4 percent per year through at least 2018.
Matt Sena is a writer and researcher, a co-founder, a former portfolio manager, a rider and a dad. He earned his MBA in Finance from Kellstadt Graduate School of Business while working at Goldman, Sachs & Co.