Monday, October 25, 2010

The Death of Professional Tax Preparation

This past week Jeff and I discussed the future of the tax profession. Jeff was very concerned as I laid out where I think the industry is headed, mostly for job security reasons. The conversation started as I updated the stats for the past tax season ended October 15th, the extension due date, and the new reporting requirements and costs the IRS has imposed on tax professionals.

H&R Block is closing over 300 offices in 2010 due to fewer tax returns lost to online filing and the increased costs imposed by Revenue. Additional requirements will be rolled out over the next several years further reducing the number of tax professionals that wish to remain in the industry.

To better understand why I think the industry is headed in the direction it is requires a step back in time.

30 Years of Tax Prep History

As every child needs to hear how things were when mom and dad were growing up, so to should you hear how things were when I entered the tax profession. It all started in 1982. I worked for my dad in his agriculture repair related business. My dear old dad was/is a great salesman, but a terrible bookkeeper. He hated taxes, payroll reporting, and bookkeeping with a passion. Therefore, after a 12 hour work day in the silo room I was required to fulfill my additional office duties. It was tough back then with a major recession dug in deep in 1982. The family business was in its infancy after generations spent as dairy farmers.

Money was tight so my duties were great, my income weak. The only way to turn a few extra dollars was to moonlight preparing taxes. So I did: for employees of the family business, suppliers, and a few neighbors. I charged $20 for most returns. In 1982 this was big money for a country boy working the family business circuit. And so it goes.

I hated working in agricultural repair with a passion. My eyes were open for any way out. In 1987 I met my bride; in 1988 we married. I quit the family business and spent 9 months working as a janitor, keeping my side gig preparing taxes in 1987. Once we married, I dumped the job and went both feet into tax preparation. I had 48 small clients as I took the plunge.

Forty-eight clients paying $20 each is not enough to start a family. I needed a hitch to jump-start the tax business. In 1988 electronic filing was just starting to become a big thing. The IRS wanted more people to file electronically and encouraged taxpayers to efile and jawboned tax preparers to offer the service. Most firms charged $15 to efile a tax return. I researched every tax software program I could which included all the major players and an armload of minor players. Drake Software allowed me to efile for only $1 a return; therefore, I offered free electronic filing, the first in my area.

The IRS loved the idea and promoted firms that provided free efiling. I put a business card sized ad in the local paper and went from 48 clients to 379 in one year. I had a real business that paid some of the bills now. I say this because I charged a very low price to build my client list. My gross revenue in 1988 was just under $10,000. When I look back I sometimes question my sanity.

In 1989 I continued to offer free efiling and expanded my promotional efforts to include flyers to the nearest 2,000 homes. My bride and I hand delivered flyers evenings over several days. More clients graced my services. I remodeled the basement of my home and hired more staff. By the mid 1990's I moved into my current commercial location and prepared 1500+ individual tax returns plus businesses.

Over the next decade and a half I transformed the company from a predominately individual tax preparation house to a stronger business services firm. Business tax returns now make up over 30% of the work we do with accompanying payroll, bookkeeping, consulting, and audit services.

Back to the Present

Looking back to how I started in the 1980's is nostalgic, but no longer a viable business plan. When I placed an ad in the local paper I competed with several pages of ads from other tax preparers'. Today, no one puts an ad in the newspaper. The local shoppers are gone, the newspaper read by few. The local newspaper has not had a tax preparation ad for years. Back then an ad brought in new clients: today, nobody notices.

Running flyers to the nearest 2000 homes might still work today. Bringing in crowds with the promise of free efiling is history. Everyone offers free efiling today.

If I were starting out today I would not make it. Most of the folks that started a tax prep business back then have failed by now. Several national firms sucked up a lot of tax prep work and now they are failing too. The national firms have lost ground for several years.

H&R Block's bread and butter was refund anticipation loans (RAL). The fees were large and covered the large prep fees they charged. This year the IRS will no longer provide a debt indicator to electronic filers. This means the banks have no way of knowing if the IRS will pay the refund, hence the loan. Anticipating massive fraud, the banks are refusing to offer RALs. As of this writing, H&R Block still does not have a bank to underwrite their RAL business. If this remains unresolved, Block will take a major hit to earnings. They will lose clients.

Tax Prep & Accounting Services, Inc. is lucky. We never relied on RALs. Instead, I focused on business returns. Businesses do need professional tax services and probably always will. (I better hope so if I plan on working this industry till retirement age.)

The average age of accountants is approaching retirement age. Around 80% will be retirement age within 10 years. Still, I would not recommend a career in accounting or tax preparation. The hours are long and stressful while the accountant's paycheck is under pressure. The future is uncertain for the industry.

The small guy is gone. I am one of the last survivors. The big guys are gobbling up little guys at a furious pace. If you enjoy working for a big firm or in government, then consider the accounting field; if you want your own community practice, think long and hard before taking the plunge.

The Future

The future is always clear after we get there. The national tax prep chains will continue their decline as will small firms like Tax Prep & Accounting Services, Inc. My business model will replace lost individual returns with more business services, consulting, and audits. As more folks prepare their own return they still need help with audits and other snarly tax issues.

The easy tax prep work is gone. What is left will require experienced professionals. Small firms will continue for a while, especially in small towns where the big guys don't have pull... yet.

One of the H&R Block offices closing is down the road from me. I guess I win this round. For now. The winds of change blow hard and I am not immune.

If you prepare your own return, consider using my online service. The program is run by Drake Software, a professional tax program used by over 30,000 tax offices. If you get an IRS letter or audit, let us to help you resolve the issue. Or at least read up on it.

If all else fails I can go into the shredding business. I know a lot of firms that need paper turned into fluff for security purposes.

Wednesday, October 20, 2010

Free Tax Audit Protection

Did you know that if you have a professional tax preparer prepare your tax return that you get automatic audit protection? If you get an IRS audit the preparer must defend you at no cost all the way to the Supreme Court. Since it costs you nothing you may as well go the distance. If you do owe additional tax from an audit the preparer must pay the tax. In fact, you should withhold information from your accountant and let him pay the tax if you get caught. You should also encourage your tax pro to take an aggressive stance since you have no risk. All this for a couple hundred dollars in prep fees.

The above paragraph is not true, but many people think it is. I pick up several clients each year from other accounting firms because the client expected free audit protection. The real kicker is when they expect the accountant to pay their taxes for them. So it goes.

I am lucky. My clients get audited at a lower rate than average. But audits still pop up from time to time. And every couple of years I get a client that thinks I should pay their audit costs and taxes. Today is the day.

When you win 99% of the audit, have zero penalties and only $40 in interest you should be happy. Unfortunately, this is not the case. It is even worse. The client wants me to pay him for his time. It does not work that way, folks. Not in this fantasy world.

This post is about how I handle the client that thinks a tax preparation fee includes audit protection and payment of their taxes. In a simple phrase: I fire them. Sound mean? Not really. I do not want to serve a client that expects me to pay their taxes. No one is really so dumb as to think anyone will pay their tax bill for them.

Let me make this clear. Tax preparation fess pay for tax preparation services. Audits cost extra. Your taxes are your responsibility under all circumstances.

I am writing this early Monday morning but will post this Wednesday. Thursday I will fire a client for wasting my time, expecting me to pay taxes he never owed, including costs of the audit. Too bad, really. I liked the guy. But if trust is lost why waste time. He will be served better elsewhere.

And just so you know, you can purchase audit insurance where some or all of these costs are covered.

Monday, October 18, 2010

There are Two Sides to the Paper

Once a year I clear out files that are out of statuette. Our office went paperless several years ago, but the hangover from pre-paperless days fills several rooms of filing cabinets. Slowly the old documents get shredded and recycled and the paper mound declines.

Going paperless does not mean we use no paper. We keep many documents in electronic format with certain working papers and signature pages kept in hardcopy. Some would say we are not fully paperless as a result. Still, if we scanned these documents into the computer and shredded the originals immediately we would still have used the original piece of paper.

Our paper usage has declined 48% from 10 years ago. We still provide a paper copy of tax returns to clients. Few ask for a pdf copy of their return and the few that do also want a paper copy and we are happy to oblige.

The shredding of old documents is spread out over several weeks. The process for this year is nearly finished. As I feed the hungry maw of the shredder I am taken aback by the amount of white I see. So many pages have only a small amount used and only one side of the page.  What a waste. The frugal accountant hates waste. Actually, it makes my blood boil.

If both sides of the paper were used I could cut paper usage by about half from current reduced levels. Paper drains the coffers by thousands each year and pushes up prices to handle this additional cost. In the past I checked into getting a printer that automatically uses both sides of the page. The cost was prohibitive and would not save much as the tax software does not support this conservative approach to paper use. At least in the past.

With new vigor I am revisiting this possibility of reducing paper usage and hence, cost. The tax software supports printing on both sides of the page now and printers that duplex print have come down in cost. I bet the cost of a duplex printer is paid for in a year. Tax returns will look smaller, but I have never been about impressing clients with thick tax returns; I am about preparing an accurate return.

Most tax offices still leave the back side of the page blank, wasting half the paper. This is a phenomenon of the wasteful United States. Americans have a habit of wasting too much. This lowers our lifestyle without any benefit. Plus we have the effort and cost of disposal. I am turning back this wasteful habit and using the whole page from now on. The investment is small and will save money.

The printer will cost several hundred dollars I estimate. With paper running over $30 a case the savings add up quick. No matter how frugal I am I always seem to find ways to reduce waste/costs more.

The effort to simplify life, reduce costs and wastes, minimize environmental impact is ongoing. The effort is small. It only requires and open mind and ready eye to spot opportunities. Besides, the landfill is full enough.

Thursday, October 7, 2010

Morning Rituals

It amazes me how often people want to know more about my personal life. I can understand the desire to know something about famous people like actors or politicians, but accountants? Why would anyone want to dig deeper into the lifestyle of an accountant?

On a daily basis during tax season and at least weekly during the rest of the year I am asked questions that dig deeper than I feel comfortable answering. Frequently asked questions include inquiries about how I raise my children, am I married (yes!), what do I do in my free time, hobbies, where I live, where I grew up, who I dated in high school (who cares?), when do I get up in the morning, what I read, etc. Uncomfortable inquiries into my private life are one thing, but sometimes folks ask me how to cheat on taxes. Those conversations are short. And the answer is no.

I am willing to open up on a few personal items of my life. Since lifestyle seems to be the biggest area of interest, I thought I would lay out my morning routine in print.

My pedigree derives from agricultural stock. In other words, I was raised a farm boy. Got up every morning at 4 a.m. in high school and milked cows till 6:30 when I showered and ate breakfast before hopping on the bus. Still have a farm. Nothing fancy mind you, and no milking cows for me anymore. A few chickens and steers are enough to keep me satisfied. Clients that see me the first time dressed in farm clothes have a double-take. I guess it is difficult visualizing a bean counter in farm clothes shoveling the brown stuff, the real brown stuff.

So here goes. My morning routine:
  • 4 a.m. Yes, I still get up at 4 a.m. Sometimes earlier. The good news (for me at least) is that I no longer milk cows when I get up. Start coffee. Most mornings I read or write until 5:30 when my daughter gets up. My other daughter gets up at 6.
  • 6 a.m. The added activity of the kids preparing for school disrupts my reading/writing so I spend time with the girls. We pack a lunch for the girls (The school lunch is more expensive and less healthy. Sad. I know.)
  • 6:30 a.m. Sue takes the girls to the bus stop about a mile down the road. I head out and feed the steers. (Or is that steer. I use steer as a plural, but got chewed out by a grammar fanatic, so "steers" it is. But I still say "steer."
  • 7:00 a.m. Shower (remember, I was just out in the barn), breakfast, brush teeth, and any other family matters that need attention.
  • 8:30 a.m. Off to work I go. By now I may have logged into the office from home and planned out part of my day.
  • 9: a.m. I arrive at the office. The phone rings. My plans for the day are shattered. (Only kidding. I plan time for phone calls and emergency work.)
There are times I get the feeling folks ask about my rituals is so they can emulate them. They think I have some sort of gilded life they want to be a part of. In reality, I am not all that exciting. Is any accountant's/tax preparer's life exciting? You should not use my morning routine as a guide to your life. For one, I change things up often. Sometimes I watch the sunrise with a cup of coffee in hand or meditate for an hour. I always take a few moments for quiet time. Four a.m. is a good time to get quiet and think.

I started writing this at 5 a.m. after reading a back issue of National Geographic. It is a little after six and I need to do a quick review and then post. I plan on reading until seven or so and then preparing for work. See you there.