Tax preparation software: an invaluable tool that should be in every practitioner's future.

• Author: Waters, Terese

Tax preparation software has come a long way since the days of the remote service center. In the 1990s tax preparation software is more user friendly, providing both tax return preparation aids and tax law reference aids. Tax preparation software has expanded so far that some preparation programs include on-line tax reference guides (such as CCH's Master Tax Guide), IRS instructions, and special interactive worksheets designed to lead even a novice through a complicated tax transaction. Still, some tax advisers are not using tax software.

This article will review the reasons for using tax preparation software; discuss the differences between various tax preparation software packages and their vendors; examine some of the issues relating to the decision to change software vendors; propose firm policies that should be in place if tax software is used, and offer sources of information and decision tools that can help practitioners choose the right software.

The article will not recommend specific software packages. Rather, its goal is to convince practitioners that tax preparation software is an invaluable tool in a tax practice. Falling short of that goal, the article should at least offer a sound basis on which to determine that automated tax preparation is in every practitioner's future.

Why Automate Tax Preparation?

Automation of a tax practice should be undertaken to enhance its operations. In a tax practice, automation may allow a practitioner to accomplish the following.

* Perform work more quickly: This means that analytical work will be completed faster using automation than if manual methods were employed. Schedules and reports that took hours or days to produce can be completed by a computer and a laser printer in minutes or hours.

* Produce accurate work. in less time: Because tax programs can examine more fact combinations, and will not fail to examine criteria properly programmed, the overall quality of the work product can improve. Since time is always a factor, and clients rarely give their CPAs "blank checks," reducing the time spent or increasing the quality of the product will translate directly into more fees and easier billing. Human arithmetic errors are minimized by allowing the computer to perform most arithmetic functions.

* Consider more alternatives: For complex situations, the possible courses of action may be so great that all cannot be considered without automation. Using computers will allow a practitioner to examine a broader range of possibilities, and often allow the output to be organized for better understanding.

* Produce a better looking work product: High quality printers, graphics, desktop publishing and the like are exciting tools to make the final work product look great. Frequently, this means that graphics are integrated into reports, or that the reports themselves are more organized and more easily understood.

* Maintain consistency: Tax software programs offer a consistent approach to solving a tax need and produce consistent reports.

* Recycle: Tax software programs "remember" client information from year to year or case to case. Also, once the client information is in a computerized format it can be used in many other ways. Some examples are electronic filing, client databases, mailing labels, tax processing to planning and tax planning to processing.

Other advantages of automating a tax practice include:

* The saving of professional preparation time after the initial year by using computer-prepared proformas.

* The ease of reprocessing a tax return with multiple schedules or forms that may be affected by changing one item.

* A more consistent tax preparation approach by all preparers within a firm by using uniform and structured methods and forms.

* The elimination of many arithmetic functions, resulting in fewer errors.

* The elimination of considerable repetitive handwriting (such as heading information).

* The increased efficiency of collecting and recording client tax information by using standardized input procedures.

* A more rapid production of K-Is for partnership, S corporation and fiduciary returns, which usually includes the automatic allocation of tax return items.

* The tax information database, once in a computerized format, may be used for various types of tax planning and analysis.

* Client data is in a form that can be converted to conform to the IRS electronic filing requirements.

Some disadvantages include:

* Unrecoverable costs (for example, caused by reruns) resulting from input errors.

* Capital costs of hardware, software and training.

* Dependence on the accuracy of the vendor's program.

While it is difficult to specifically quantify these. benefits, any saving reflected in reduced time for a repetitive task will yield real benefits.

Tax Preparation

When most people think of automating a tax practice they think of using tax preparation software to complete their tax returns. Levels of automation vary from using a service to file tax returns electronically with the IRS to preparation of 100% of an office's returns using tax preparation software. As more firms automate their practices, the number of automated services and their sophistication increases.

The current levels of automation are defined as:

* Manual or computer-aided tax calculation: Returns are generally prepared manually but certain calculations for those returns may be done on the computer using a spreadsheet or another tool.

* Service bureaus: Returns are processed off-site. Client data is either entered at the practitioner,s office and sent electronically to a processing center, or input sheets are sent to be keyed at the processing center. Processed returns are either sent back electronically to be printed in the tax practitioner's office or printed at the processing center and sent to the preparer. Client data is usually stored by the service bureau. There is usually a per return processing fee.

* "In-house" systems: Returns are entered, processed and printed within the practitioner's office. Client data files are stored and maintained in the office or, alternatively, at the vendor's location. Client organizers are printed and sent out from the office or by the vendor. Typically, software is purchased for a fixed sum with no restrictions on the number of returns that can be processed, although some vendors charge a fee for each return processed.

The decision as to which level of automation is right must be based on an analysis of the particular tax practice. There are advantages and disadvantages to each. But for practices in the first level, strong consideration should be given to increasing the level of automation if more than a handful of returns are completed or the complexity of returns requires large investments of time in computations. * Service bureaus A service bureau is a company that provides data processing services. A variety of service arrangements are available, including the conversion of input data to machine-readable form, processing the data and physically delivering the output to the customer. In addition, to meet special requirements, a service center may offer system design and programming support.

Service bureaus have a long track record and typically offer a complete processing system. The larger service bureaus process returns from all states and almost all the forms. They can take much of the administrative headache out of tax season by offering data entry, printing and client data storage services. They also usually have a large support staff that can provide training and support throughout the tax season.

The major disadvantages to the service bureau approach are cost and lack of control. Service bureaus typically charge an initial processing fee, as well as a fee for reruns, and these charges can add up. With a service bureau, the practitioner is also at the center's discretion concerning when a return is processed. Turnaround is often slow and much time is wasted trying to track down or expedite returns. An often overlooked disadvantage to the service bureau approach is the time preparers or reviewers waste on refamiliarizing themselves with the return when it comes back from the service bureau. When compared to in-house systems, this can be a distinct disadvantage.

One way service bureaus have tried to mitigate this delay is by adding a feature that allows firms to complete their data entry and send client tax information to processing in its electronic form. A companion service to this is the ability to transfer the data back to the office electronically and print the returns on office printers. These features, while expediting the turnaround time, add some of the same administrative burdens as in-house preparation, such as data entry, printing and collating.

Most service bureaus offer off-site storage of client data files, which can be a boon should an office be hit with a disaster. However, a possible disadvantage to off-site storage and processing is less data security.

* In-house systems

In-house systems are becoming more mature with every tax season. Most states and forms are offered by the major in-house packages. An in-house package that does most of the required states, forms and calculations offers many advantages.

A major advantage offered by in-house systems is the control given the return preparation cycle. A firm can assign priorities to returns and enter...