CERCA Practitioner Survey Report FTA FedState E-File Symposium May 3, 2000

Agenda Survey Methodology Executive Summary Profiles Factors Influencing E-filing Future Trends Recommendations

Survey Methodology September 1999, CERCA commissioned Mellman Group to survey 579 tax practitioners by telephone Sample was obtained using an IRS listing of tax preparers Selection criteria of tax practitioners –Prepared and filed tax returns in TY98 –Used tax software to prepare the majority of tax returns –Must be aware of the e-filing program

Objectives Examine current and future e-file market & ways to increase tax practitioner e-file –Profile e-filers to assess current and future market –Understand how and why practitioners’ use e- file –Explore incentives, barriers, and other factors that could impact future of e-file

Executive Summary E-file market significant and can be expected to grow significantly next tax year –33% e-filed in TY98 –28% expect to join in TY99 E-filers believe in the program –97% of 1998 filers plan to e- file again in 1999 –Also plan to file more returns than last year

Executive Summary Great potential to expand the market –33% currently e- file less than 50% their returns  Customer demand and cost-benefit analysis driving practitioners’ decisions on e-filing  Don’t e-file because clients are not interested and benefit not worth the additional effort

Executive Summary Some current e-filers put off by transmission fees, time investment, and cumbersome application process But 37% would e-file business returns Key benefits as incentives to e-file –Tax credits for clients –Ability to electronically access client account status at IRS

Market Definition Almost all practitioners aware of e-filing (1% unaware) Nearly 60% of e-filers are “heavy” filers -- using e-filing for over half of their returns About 25% e-filers file over 80% of eligible federal returns electronically Average e-filer filed 45% of their eligible federal returns electronically

Market Definition Fewer state returns e-filed –Typical e-filer files 29% of eligible state returns Compared to the 45% of federal returns –15% e-file over 80% of their state returns –72% e-file less than half of eligible state returns

E-file Profiles More likely to be tax preparers than CPAs –Over 40% of e-filers were tax preparers –30% of e-filers were CPAs vs. 50% non-e-filers  Segments who e-file more than 50% eligible returns:  56% practitioners <10 years experience –38% with years experience –27% with over 20 years experience

E-filer Profiles More likely to work for large firms and file 2-3 more returns than non-filers Average e-filer firm has 9 tax preparers –Average 3 preparers at non-e-file firms –Over 60% of non-e-filers are the only tax preparer in their firm Both E-filers and non-filers offer a broad range of services such as bookkeeping, payroll and business consulting

Heavy E-filers Heavy e-filers tend to focus more on individual tax returns –26% filed more than ’s in TY98 –50% filed more than ’s Only 5% non-e-filers filed > ’s Heavy e-filers tend to –Not charge a separate fee (20%) and include the fee in their tax prep charge (44%) –Offer RALS (66%) and, –Offer other bank refund products

Market Definition

E-file Services

To E-File or Not -- Key Factors

Education is Key Reasons given for not e-filing point to the need for a campaign to educate taxpayers and practitioners about electronic filing process –Highlight possible improvements in the program

Value Proposition? Non-e-filers cite insufficient value for clients compared to the increased cost in time and effort to the practitioner and clients’ lack of interest as their top two reasons for not filing –Cited by over 50% non-filers

Information Crucial Lack of information and discomfort with security issues are significant barriers –~40% non-e-filers unsure of participation criteria –~40% uncomfortable sending taxpayer data electronically

Costs & Cumbersome Procedures E-file transmission fees were the second most frequently cited reason not to e-file by e-filers Similar numbers of both e-filers and non-e- filers agree that the ERO application process and procedures are too cumbersome

Key Factors

State e-file Not e-filing state returns focused more on an understanding of the program and costs –#1: Practitioners not sure how the program works (39%) –#2: Practitioners not wanting to pay software fee (27%). Additional reasons: –Requires too much staff time (23%) –Can’t e-file part-year or non-resident state returns (23%) –Can’t file multiple state returns (19%) –Concerns about e-filing state and federal returns at the same time (15%)

E-file Increase is Coming

Significant e-file increase for TY99 Over 60% likely to e-file for TY99 –>40% “almost certain” to do so Significant increase over 30% currently filing –42% who did not e-file in TY98 likely to e-file in TY99

Current e-filers will file more 97% will e-file again in 1999 –90% responded “almost certain” –61% plan file more returns –38% will file the same number –None plan to file fewer returns

Why e-file more? Customer demand is the leading reason current e-filers plan to e-file more –>50% indicated e-file increase cited increased customer demand as reason –25% cited increase in their own base of clients –>10% cited increased comfort with the process –2% expect to file more refund due returns.

Influencers E-filers are more influenced than non e- filers in incentives Tested 8 incentives 3 out of 8 incentives would influence >50% of current e-filers to file more returns 4 out of 8 incentives would be the best motivator for >30% of non-e-filers

Incentives to e-file

Frequent e-file Program of Interest 33% overall practitioners interested –11% of those “very” interested –Marginally rises to 38% if criteria is % eligible returns e-filed 45% overall practitioners very disinterested 53% e-filers interested in such a program –26% of those are “very” interested –33% of e-filers “very” disinterested

Business e-file Important Overall, 37% who currently prepare business returns would e-file them –60% would not, including 49% not at all likely 55% current e-filers would e-file –58% heavy e-filers say they would e-file, including 49% of those with < 10 years experience 43% of tax preparers

Recommendations Continue and increase information to practitioners of e-file ease and benefits Continue and increase taxpayer education of e-file ease and benefits Reduce procedural barriers Provide incentive structure