Tax practitioners had reason to celebrate this year: Their software, as assessed in the annual Journal of Accountancy survey of tax-preparation software, performed better than it did last year. Adding to the joy, they're no longer threatened with the possible need to convert to a new software package to replace orphan products that competitors acquired and then folded. With the number of vendors down to fewer than 20, from a high of 110 a decade ago, hardly any products seem susceptible to takeover.

When asked to rate their overall satisfaction with the 13 tax software products in the survey this year, the 3,156 AICPA Tax Section members who responded to the survey came up with a combined average score of 4.23 (out of a perfect 5.00), a significant gain from last year's 4.03. In addition to the eight packages rated last year, three new products received the minimum required 10 responses from our CPA respondents. (For details about all the vendors in the survey, see exhibit 1, page 49; for a complete scorecard on the satisfaction grades, see exhibit 2, page 50; and for technical details about the products, see exhibit 6, page 54.)

Tied for first place in the overall-satisfaction category, with ratings of 4.46, were Intuit's highly popular Lacerte and the much smaller Dunphy System's Tax Software for the Professional. Lacerte inched up from last year's 4.32 rating; since Dunphy was not in last year's survey, it has no year-ago rating. Tied for second place with 4.44 were Drake Software and Taxware System's Taxware Tax Preparation; both are new to the survey this year.

BIG GAINS

The area that posted the biggest improvement was technical support, scoring 4.22, compared with a woeful 2.93 last year. At that time tax preparers complained bitterly that most vendors failed to meet their emergency needs: Vendor staffs were overwhelmed with questions and had too few experts available to respond with effective answers.

The support services of Drake and Creative Solutions' UltraTax tied for first place with 4.47 each. UltraTax, which scored only 2.18 last year, clearly undertook a major overhaul of its tech-support operation for this year.

Also heartening to CPA firms, which are making more use of networks to link their offices' computers, were improvements in the way their tax software operates on those networks. That average rating rose sharply to 4.30 this year from 4.02 a year ago.

THREAT PAUSE

While the immediate threat of continued vendor consolidation appears to have subsided, the market may not have reached a state of equilibrium with a settled number of vendors. The next few years may see yet another kind of transformation in the tax software market. As reliable high-speed--and eventually ultra-high-speed--Internet connections become widespread, vendors probably will begin redesigning the way they make their products available to customers. Currently most customers either download the software or are mailed a set of compact disks, with last-minute upgrades usually transmitted via the Internet. But reliable, fast Internet connections offer the possibility of speedier and more economical and reliable tax preparation. Instead of loading the software on their own computers and working on their local networks, most customers likely will access a central tax software utility.

A similar type of central utility service--this one for accounting--is slowly gaining ground, though obstacles remain. One big issue is whether the data, which are calculated and stored at the remote utility, are secure--not just from loss but also from hackers and industrial spies. The recent thefts of bank and credit card data undermine CPAs' confidence in such a system. In time, however, it's likely that security techniques will eliminate such dangers.

However, setting up a utility for tax preparation requires both sizable capital and new technical skills--an open invitation for new entries and partnerships in the existing software market. The bottom line: The next few years may bring significant changes in the tax software field, with smaller firms either partnering with high-tech organizations or being bought out by one of the better-capitalized tax software vendors.

WHY CPAs SWITCHED

Despite the lessening of the vendor consolidation threat, CPA firms continue to meander from one software product to another. Last year 11% said they were moving to another package because of dissatisfaction with their current product; this year nearly 16% reported such unhappiness and planned to order different software for 2006 (see exhibit 3, page 50). Some 3.8% of users cited price as the major reason to switch, while 2.2% cited poor customer support.

Meanwhile, the percentage of e-filings continues to rise. Accountants who responded to the survey e-filed an average 42.8% of their federal returns, up from 32.2% last year. State e-filing rose to 31.3%, up from 24.5% (see exhibit 4, page 52). In addition, 26.4% of respondents charged clients for e-filing services, and next year that percentage will rise to 33.8%. Exhibit 4 also shows the average percentage breakdown between tax preparations for businesses/non-profits (64.9%) and for individuals (25.8%) for each brand of software.