Software Is Helping, Not Displacing, Tax Preparers

Joseph Heidelman, an Upland-based accountant, figured the growth of tax-filing software threatened the ranks of tax preparers like him with a permanent deduction. So back in the 1980s he got out of the business.

The programs for personal computers coming on the market back then were “designed to replace the tax preparer,” Heidelman said, “and they do a good job.”But not a perfect job. While the use of software to electronically self-file tax returns has soared nearly 100-fold in the last decade, according to the Internal Revenue Service, the use of human tax preparers to file returns has climbed about 20%.

Like television sets and movie theaters, tax software and tax preparers wound up complementing one another despite predictions that the newer technology would put the human preparers out of business.

Software companies advise customers to use their products to file their Form 1040s but to see experts for planning and strategy.

“The software is really about filing your return,” said Julie Miller, a spokeswoman for Mountain View, Calif.-based Intuit Inc., which makes TurboTax. “If you need tax advice, or a long-term strategy, the software is not going to provide that for you. For that you need a tax professional.”

For their part, many tax preparers advise clients who are on a budget to work out their taxes with a software program first and then bring it in for review.

“If you have the inclination to do it, it’s the most cost-effective option,” Santa Monica tax attorney Phil Holthouse said. “The cost to review a return is generally a quarter or a third of doing it from scratch.”

San Francisco photographer Stewart Bloom is among the many who take the belt-and-suspenders route. He raves about TurboTax but also pays a tax preparer. He and his wife are self-employed, and there are too many tricky issues in their return to feel audit-proof without a professional double-check, he said.

“What she does is clarify and verify that what I am doing is right,” Bloom said about his tax preparer. “The great fear is doing something really wrong -- and getting challenged by the IRS.”

In fact, tax preparers say software users come to them for a variety of reasons, but mostly to make sure that they haven’t made costly mistakes. “The software does a lot for you, but it’s not dummy-proof,” said Jeffrey Kelson, partner at BDO Seidman in New York. “You have to have a certain level of tax knowledge to know what to look out for.”

In Robynn Takayama’s case, she failed to include the amount of state income taxes she paid when she filled out her federal return. After Oakland accountant Jan Zobel added the state figure and made a few other changes, Takayama’s $1,500 liability turned into a $4 refund.

“I don’t know how I missed it,” said Takayama, 31. “I really like preparing my own return. I really like the software, but the software didn’t say, ‘Hey, you don’t have anything in this box. Are you sure?’ I would have ended up just sending a check.”

The dual-approach trend is illustrated by H&R; Block Inc., which sells tax software and is also the nation’s biggest tax preparation firm. The company recently launched a series of options for people who buy its TaxCut computer program.

For $19.95, “Ask a Tax Advisor” will allow customers to talk with a person by phone about specific issues, such as what costs are deductible when buying a home. Or for $29.95, software users can get “Professional Review,” in which a preparer looks over taxpayer-prepared electronic returns for mistakes.

“We are enabling the do-it-yourselfer to enjoy the convenience of self-preparation, but the confidence of working with a tax pro,” company spokesman Tom Linafelt said.

H&R; Block won’t reveal what percentage of its software clients use personal tax advice or how many of its tax preparation clients have already used software. But the company’s chief operating officer told analysts in February that use of its professional-advice services by software users had jumped 200% last year.

Tax accountants, of course, rely on preparation software too -- saying the tax code is too complex to do anything else.

“When I started in this business, we used to do this by hand. We even had special erasers, so we wouldn’t rip through the forms,” said Holthouse in Santa Monica. “Now? I almost had to have the paramedics revive me once I realized that you were serious [asking] whether we could do this by hand. I cringe at the thought. We just pray over certain portions of the tax code, hoping that the software has it right.”

For the most part, professional tax preparers use specialized software programs that can handle the complex credits and deductions needed by businesses, as well as IRS forms for esoteric tax breaks claimed by big-time investors.

The last decade has brought dozens of new tax laws that have nearly doubled the size of the tax code, tax experts note. Some of the complications affect only businesses, but a remarkable number now affect individual filers too.

“Fifteen years ago, you could do a return by hand -- even a complicated return,” Kelson said. “Now with the different sets of rules and phaseouts and different tax rates and limitations, you just couldn’t do it. You would need the better part of a week alone in your room with a calculator.”

That complexity is also why tax preparers think software won’t put them out of business, no matter how good it gets.

“When the tax law got increasingly complicated, it wasn’t the math that you needed -- it was the judgment,” Holthouse said. “Having someone who understands the rules help you with planning became really important.”