The Fundamentals: Tax prep software

September 6, 2024 9:00 AM

With all the software solutions now offered on the market, choosing the right fit for your firm can be highly intimidating, even for those who are technologically inclined. This is why Accounting Today has launched a new series we call The Fundamentals, where we explore the basics of selecting different kinds of software.

Our latest entry in the series looks at tax prep software, which people use to fill out tax forms and file them with the appropriate authorities. This can range from the simplest of 1040s to the most complex of 5741s. Considering the stakes involved, specifically the sums of money on the line for the client, selecting the right software is crucial for any successful firm.

We talked to firms that do a heavy amount of work in tax preparation and filing to ask how they evaluate the good and bad of these solutions and how accountants can filter the vast array of options out there. They include:

Guy Carl, chief financial officer of California-based BDCO;
John Roman, chief information officer of The Bonadio Group;
Kim Saenz, digital tax director with Alvarez and Marsal; and,
Rob Backus, chief technology officer with KSM

These experts shared their thoughts on what to look for, and what to stay away from, when evaluating tax prep software.

The Differentiators

Parradee - stock.adobe.com

What exactly makes tax prep software packages different from one another? What should firms be looking for when evaluating what solution to use? All tax prep software, by definition, can fill out forms and file them, so what else should leaders look for?

User-friendliness was one key factor mentioned by multiple experts, to the point where ease of use should be a given today with any tax prep package worth its salt. This encompasses not just core features but integrations, implementations and maintenance as well. Users would prefer to spend time actually doing tax work rather than wrestling with the interface or parsing an error message. The extent and availability of support, as well as system performance, were other differentiators mentioned by more than one expert — similarly, no one wants to wait for a clunky system to do its job, and no one wants to spend all afternoon on hold when it breaks.

Other differentiators include:

Development approach and release frequency: How has the software evolved over the years, and how often has it been updated?
Cross-functionality and integration support: Does it communicate well with your other solutions? Does it work across various platforms? Does it have API support?
Cloud support: Is the solution cloud-based or desktop?
Service costs: What's the long-term spend on this product?
Native functionality: How does the solution function out of the box without any modification or customization?
Licensing policies: Does the product require a license for use, and how will it be deployed on company devices?
Privacy and security: What data privacy measures does the vendor take, and how secure is the solution overall?
Data import/export: How does it handle moving data from one place to another?
Data set capacity: How big a dataset can this solution handle? Can it process large amounts of data easily?
Automation capacities: What's automated and what's still manual?

The Have-to-Haves

Artur Szczybylo/Artur - stock.adobe.com

First, obviously, tax prep software needs to actually work: It needs to have the capacities for the specific forms an accountants' clients need, and the product's output needs to be accepted by the relevant authorities. With this comes a demand that the solution can e-file returns as well.

Beyond that, more than one expert stressed the importance of cloud versus on-premise solutions for cost, security, scalability and accessibility. Further, cloud support is often vital for the integrations with other systems that are so important in this space.

Other must-haves for tax prep software include:

Custom fields and open APIs to facilitate data accessibility and both standard and customized reports.
A proven track record of reliability (i.e., 99.999% uptime).
Security features like two-factor authentication, data protection and different access levels.
Backup and recovery features.
Integration with other systems.
AI capabilities.

The Nice-to-Haves

Picasa/thinglass - stock.adobe.com

Mobile app availability was the most common "nice-to-have" feature for tax prep software. Other than that, there were a wide variety of answers as to the kinds of things professionals would like to see in their tax prep software, but it isn't the end of the world if they're missing:

A clear update schedule, plus training and notifications of enhancements.
A simple sign-on process.
Alerts and triggers inside all applications to be more proactive in managing internal progress.
Direct workflow integration.
Advanced data insights that allow for deeper strategic planning.
Customizable configurations to allow the software to be tailored to a firm's needs.

The Red Flags

erenalkis - stock.adobe.com

When it comes to the red flags, our experts cited a number of different factors, ranging from poor customer service to poor design to poor security and more.

One specific point mentioned, though, was to look at the vendor's update schedule. An excessive backlog of enhancements with no expected date of completion is a bad sign, as well as repeated answers of, "We have it on our roadmap." Also mentioned by our experts was lack of integrations, which will only serve to silo data and processes outside the normal workflow.

Other warning signs named by our experts include:

Being desktop-based.
A closed API, which is a sign of an old database.
Inexperienced sales or pre-sale staff who cannot answer basic functionality questions.
Poor reviews from other accounting firms, or no reviews at all.
A poorly designed user interface that is clunky and slow to perform.
Poor customer support and service.
Weak user and data protection.
Seeing only the same one or two people through the entire sales and demo process.

The Green Flags

Jaelynn - stock.adobe.com

When it comes to the green flags, the sorts of signals that say a solution can be trusted, experts said it's all about the expertise and confidence of the sales staff. When it comes to tax prep solutions, experts said to look for a deep knowledge of the industry as a whole and the needs of firms like yours. It's an encouraging sign if the sales and pre-sale staff are clearly very experienced and well-versed in their software. Other positive signs include:

Live support resources, especially during crunch times, versus trying to work with a chatbot.
Positive feedback from other accounting firms.
An active community of users who can provide case studies and support as well.
A strong list of other customers.
Speed and consistency in delivering meaningful functionality.

The Common Mistakes

Jon Anders Wiken/stock.adobe.com

When it comes to common mistakes on tax prep solution purchases, one cited by several of our experts is thinking solely about it in terms of the software and not the people who will ultimately be using it. Neglecting or underestimating how much training team members will need means it won't matter how powerful your software actually is, as your team won't know how to use it effectively and may even resent having to use it at all.

Similarly, our experts have seen firms buy the software but not pay attention to how it can be integrated into their processes. Without proper integration, firms face inefficiencies, data silos and increased complexity.

Other common mistakes include:

Not having needs clearly defined, or rigidly seeking to replicate what a firm already has in a new system.
Relying too much on the IT department as the sole experts in a given solution.
Neglecting where the solution fits into your firm's larger tech stack.
Not considering how to work the solution into the firm's general workflow.
Not prioritizing a unified data strategy.

Budgets

lekkimly_simborin/kimly - stock.adobe.com

There is an astoundingly wide price range for various solutions depending on the size of the firm, which returns are supported, how many of them are filed, and other factors, and can range anywhere from a few thousand to almost half a million dollars. While some experts tried to name precise figures, they said it really depends on the specific circumstance.

John Roman from Bonadio said a firm can expect to pay anywhere from a few thousand dollars to, in certain cases, more than a million.
Kim Saenz from Alvarez and Marsal said specialized direct, indirect and international tax software has license costs ranging from $200,000 to $300,000 per year. Going for a premium option with advanced features might add another $200,000 to $300,000 on top of that.
Rob Backus from KSM said bargain software might average around $250 per user per year; average solutions cost about $500 per user per year; luxury solutions can exceed $1,000 per user per year. But many platforms also bill by engagement, which can add further costs.

Other Recommendations

Beyond the guidance already offered, our experts made the following recommendations to firm leaders:

Guy Carl, BDCO: "Make sure to fully vet the software provider's implementation process and team. Maybe even interview someone on the implementation team to get a feel for how it will go. You'll be working closely with them for weeks (or months for more comprehensive packages), so having a good rapport with them will be key to a good implementation experience."
John Roman, Bonadio: "For firms with tens of thousands of tax returns to prepare, there are only two major providers to be considered — Thomson and CCH. There are, however, more options available to small and midsized firms with less tax return volumes — such as Intuit ProConnect Tax, Lacerte Tax, and Drake Tax, to name a few."
Kim Saenz, Alvarez and Marsal: "Are they fully utilizing software that they currently have? Avoid redundancy and identify gaps and critical features they are currently missing. Understand that the acquisition of tax software is the ﬁrst step in the process. Your team will need to be trained and change processes to accommodate the new tools. This will be the biggest hurdle."
Rob Backus, KSM: "Prioritize strong security measures, seamless integration capabilities, and a cloud and API-first approach. Evaluate the vendor's commitment to technical execution and client success by looking for a robust team throughout the process. Consider user reviews, especially from larger firms, and ensure the vendor has a commitment to consistent delivery of meaningful functionality. Additionally, ensure your firm has a team committed to executing, training and championing the software internally."