The Changing face of personal income tax preparation and filing

The process of filing personal tax returns has evolved over many years. It recently seems to be moving into a new method, potentially going full circle. The launch of Intuit’s TurboTax Live in 2017 could have started the process. Prior to the launch, do-it-yourself (DIY) consumer tax software was used by individuals, with phone support for fundamental questions. With the launch of the TurboTax Live service, Intuit set professionals up – CPAs, Enrolled Agents (EAs), and Attorneys - with the systems and technology to fully prepare personal returns for anyone, anywhere, in a digital/virtual manner. In that model, the Intuit preparers sign the returns as paid preparers. That might throw the IRS statistics off, as they report consumer tax as Do-It-Yourself (DIY), or professionally prepared. Many Intuit TurboTax returns would now be reported as professionally prepared if they were done with the live service.

The service got off to a slow start like many new concepts do for existing businesses. But then covid hit and many of us became accustomed to different ways of doing things.?The concept of the virtual professional matched precisely to a prospects’ needs is one that is very attractive and is now in use in many industries and professions, fueled by the pandemic and technology advances in general. Suddenly, the live service is extremely hot, and Intuit is currently marketing it very heavily.

H&R Block, who has had a DIY tax software product for many years, has a similar capability to Intuit given that they have an army of preparers available, and they can offer them through their Pro Service, “virtually”. They also have physical offices, providing additional options to clients or prospects. Intuit likely has a higher level of preparer though; as they as tap into their Pro Advisor base for the live service.

And I’m wondering if the November ’22 acquisition of Tax Act, primarily known as a consumer software company by Cinven, the UK based Private Equity firm that “invested substantially” in Drake Software in 2021, is a sign that changes in how consumers get their tax returns done are accelerating.

Tax Act consumer does have an “Xpert Assist” service as most consumer tax compliance products do, but they don’t currently sign as the professional preparer even with the consumer use of their “Xpert Assist” help. Now with Drake, with their large professional base, and a consumer base with Tax Act, Cinven has a variety of strategic options, including recruiting preparers from the Drake base to serve the Tax Act base and following the Intuit playbook.

A few things are obvious in the professional tax preparation market:

1. The market for opportunities to service consumers and small businesses with professional services is enormous and rapidly growing, and way beyond just “doing a tax return”.
2. Consumer DIY tax software has been steadily taking share from professional preparers for years. It started slowly with consumer products like Chipsoft and Parson’s Technology’s Personal Tax Edge the 80’s, got a good bump when Intuit acquired Chipsoft in 1993 and started to market the product more aggressively. To compare how consumer software has done lately,?in 2014 professional preparers produced 62% of personal tax returns. In 2022 they produced only 56%.

How big a player is Intuit’s TurboTax?

They own the market. They produce close to 70% of DIY tax returns, with H&R Block owning another 15-20%. The rest of those in the business are just bit players. (H&R Block does still have a very large storefront tax return base)

This year the IRS started accepting personal tax returns on January 23rd. The last few years have been untraditional due to Covid so it's been difficult to compare the data year to year. This year and last year will be easier to compare though, as both years will have a traditional tax season, and other than a few provisions that expired it has been a fairly stable year. What will be interesting will be how the professional versus DIY market breaks down at the end of the year. Currently, the most recent report shows that electronic filing of personal returns by paid professionals is up 11%, and DIY up 3.4%. (See the table above.) My belief is that much of the 11% rise is attributable to TurboTax live.

I will put out periodic reports throughout?the year and show the Professional/DIY breakdown comparing 2023 to 2022, 2018 to 2017, and 2015 to 2014. I selected those years for comparison as they had less noise from major law change years than many others. Last year for the full year, tax professionals did 56% of electronic personal returns and DIY did 44%. Another data point, is that the IRS is expecting about 168 Million personal returns this year compared to receiving about 166 million last year.