Tax Preparation Outlook for 2016
A key component of strategic planning for any company is an understanding of the analytics for the industries in which they participate. For tax preparations services, that can be a problem.
Much of the available industry data is old; the industry is fragmented enough that it is difficult to get specific numbers for specific industry segments; and a series of regulatory and economic conditions have acted on the industry over the past five years, rendering simple forecasts void. Nonetheless, it is essential to have a quantified view of the industry for purposes of planning, firm valuation, financing of new and existing operations, pricing of services, and salaries for permanent and temporary staff.
To that end, we have gathered the best validated industry definitions, analytics, and forecasts for the tax preparation market in the United States.
The Tax Preparer Market
- Definition. Tax preparation is, as its name infers, the process of preparing state, federal and local tax returns, usually for compensation. Tax preparation may also include auxiliary services that include filing of taxes, tax planning, payroll tax processing, and enrollment in health care programs mandated by the federal government. Tax preparers who are compensated for preparing and filing tax returns are required to register and obtain a Preparer Tax Identification Number and an Electronic Filing Identification Number, as appropriate. The tax preparation industry includes attorneys, certified public accountants, enrolled agents and licensed or unlicensed tax preparers.
- Three general segments comprise the industry, and can be identified by their registration for a Preparer Tax Identification Number (PTIN):
|Number of Individuals with Current Preparer Tax Identification Numbers (PTINs) for 2015||706,141|
|Certified Public Accountants||212,105|
|Enrolled Retirement Plan Agents||697|
|Annual Filing Season Program
Records of Completion Issued
Data current as of 8/1/2015
It should be noted that this number – perhaps the most reliable – appears to be at odds with both the employment statistics of the Bureau of Labor Statistics number of 68,590 and the industry estimate of 120,000-plus tax preparers. The discrepancy may be explained by the fact that the BLS data does not include CPAs and other licensed professionals.
- The average hourly wage for the tax preparation industry is $20.95 and the annual mean wage is $43,580.
- According to the National Society of Accountants, the average cost of a Form 1040 and Schedule A, plus one state return, was $273 this year. The fees varied by region:
National Society of Accountants
The survey also reported average fees for preparing additional tax forms. They include:
- $174 for Schedule C (business)
- $115 for Schedule D (investment gains and losses)
- $126 for Schedule E (rental income)
- $158 for Schedule F (farm)
- $634 for Form 1065 (partnership)
- $817 for Form 1120 (corporation)
- $778 for Form 1120S (S corporation)
According to the survey, many tax preparers offer prospective clients a free consultation that could be worth $100 or more—but they also charge an average fee of $114 for dealing with disorganized or incomplete records. The average fee for expediting a return is $88, and there’s often a charge the client does not provide information by an agreed-upon deadline. The average hourly rate to handle an Internal Revenue Service audit is $144.
- Industry Growth. The tax preparation industry generated $9 billion in revenues in 2012 while employing 302,931 people at 109,758 firms. It presented a growth rate of 2.3 percent from 2010 to 2015. However, that growth rate is expected to grow to the pre-2008 level of 4 percent per year, generating revenues of $11 billion by 2018.
Challenges to Growth
While there are a number of reasons to be optimistic about future growth in tax preparation, there are also some notable challenges.
The industry is made up of small companies. Some 57 percent are operated by sole practitioners, with another 53 percent operated by firms of 10 persons or less. This puts the firms at a competitive disadvantage, as they do not have the resources to mount the same level of marketing as the industry leaders.
Tax preparers who are not presently licensed or regulated are under a continuing threat of such regulation. This would increase the cost of operations for classes, examinations and licensure, with no obvious ways to recover these costs without further raising prices.
Economic conditions are also of great concern. The recession of 2008 – 2011 forced many smaller preparers out of business and reduced the number of returns prepared as individual taxpayers were laid off. Small businesses were also impacted, providing less of a cushion through performance of corporate returns. With only a weak recovery underway and employment still not at pre-recession levels, there may be less tax work available for several years to come.
Competition for tax return clients remains substantial. Some of this is generated by Internal Revenue Service programs to promote free filing, and another is the growth of web-based do-it-yourself tax preparation. As more individuals make use of these tools for tax preparation and filing, it will be increasingly difficult to attract new clients and retain current ones.
The Bright Side
Counter-balancing the challenges are substantial factors in favor of growth and prosperity for the tax preparation firms that are able to make effective use of available advantages.
- The Affordable Care Act (ACA) has created a new potential for revenue generation in helping clients to understand and comply with the health care laws. Among the possible revenue streams are assisting with completing and indexing the necessary forms; validating health compliance for tax purposes; and helping both individual and corporate clients understand the ever-more-complicated rules and regulations – some of which do not yet exist.
- Hiring is up. The American Institute of CPAs says more accounting students were hired after graduation than any time in the history of the profession. The AICPA recently released the results of the Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits, which showed a record 42,252 accounting graduates hired by public accounting firms in 2014. Though a small decline from the all-time high in 2012, it is a continuation of strong growth in hiring from previous years.
- Tax preparation remains community and loyalty based. Clients still tend to use a tax preparation firm located within five miles of their homes, and tend to use the same firms year after year. It is also an intensely personal business, so that knowing the preparer builds trust over time.
- Tax preparation grows year after year. In revenues, returns per preparer and in staff, the industry shows compound growth. It has, to date, never shown a decline in revenues.
Tax preparation is and should remain a successful and profitable business for the foreseeable future, with compound annual growth at four percent or better and opportunities to expand beyond basic tax forms and filing into other, more lucrative financial services.
Sources: AICPA, Bureau of Labor Statistics, FranchiseHelp.com, Geometrix.com, Internal Revenue Service