Tax preparation software: an invaluable tool that should be in every practitioner's future.

Tax preparation software has come a long way since the days of the remote service center. In the 1990s tax preparation software is more user friendly, providing both tax return preparation aids and tax law reference aids. Tax preparation software has expanded so far that some preparation programs include on-line tax reference guides (such as CCH's Master Tax Guide), IRS instructions, and special interactive worksheets designed to lead even a novice through a complicated tax transaction. Still, some tax advisers are not using tax software.

This article will review the reasons for using tax preparation software; discuss the differences between various tax preparation software packages and their vendors; examine some of the issues relating to the decision to change software vendors; propose firm policies that should be in place if tax software is used, and offer sources of information and decision tools that can help practitioners choose the right software.

The article will not recommend specific software packages. Rather, its goal is to convince practitioners that tax preparation software is an invaluable tool in a tax practice. Falling short of that goal, the article should at least offer a sound basis on which to determine that automated tax preparation is in every practitioner's future.

Why Automate Tax Preparation?

Automation of a tax practice should be undertaken to enhance its operations. In a tax practice, automation may allow a practitioner to accomplish the following.

* Perform work more quickly: This means that analytical work will be completed faster using automation than if manual methods were employed. Schedules and reports that took hours or days to produce can be completed by a computer and a laser printer in minutes or hours.

* Produce accurate work. in less time: Because tax programs can examine more fact combinations, and will not fail to examine criteria properly programmed, the overall quality of the work product can improve. Since time is always a factor, and clients rarely give their CPAs "blank checks," reducing the time spent or increasing the quality of the product will translate directly into more fees and easier billing. Human arithmetic errors are minimized by allowing the computer to perform most arithmetic functions.

* Consider more alternatives: For complex situations, the possible courses of action may be so great that all cannot be considered without automation. Using computers will allow a practitioner to examine a broader range of possibilities, and often allow the output to be organized for better understanding.

* Produce a better looking work product: High quality printers, graphics, desktop publishing and the like are exciting tools to make the final work product look great. Frequently, this means that graphics are integrated into reports, or that the reports themselves are more organized and more easily understood.

* Maintain consistency: Tax software programs offer a consistent approach to solving a tax need and produce consistent reports.

* Recycle: Tax software programs "remember" client information from year to year or case to case. Also, once the client information is in a computerized format it can be used in many other ways. Some examples are electronic filing, client databases, mailing labels, tax processing to planning and tax planning to processing.

Other advantages of automating a tax practice include:

* The saving of professional preparation time after the initial year by using computer-prepared proformas.

* The ease of reprocessing a tax return with multiple schedules or forms that may be affected by changing one item.

* A more consistent tax preparation approach by all preparers within a firm by using uniform and structured methods and forms.

* The elimination of many arithmetic functions, resulting in fewer errors.

* The elimination of considerable repetitive handwriting (such as heading information).

* The increased efficiency of collecting and recording client tax information by using standardized input procedures.

* A more rapid production of K-Is for partnership, S corporation and fiduciary returns, which usually includes the automatic allocation of tax return items.

* The tax information database, once in a computerized format, may be used for various types of tax planning and analysis.

* Client data is in a form that can be converted to conform to the IRS electronic filing requirements.

Some disadvantages include:

* Unrecoverable costs (for example, caused by reruns) resulting from input errors.

* Capital costs of hardware, software and training.

* Dependence on the accuracy of the vendor's program.

While it is difficult to specifically quantify these. benefits, any saving reflected in reduced time for a repetitive task will yield real benefits.

Tax Preparation

When most people think of automating a tax practice they think of using tax preparation software to complete their tax returns. Levels of automation vary from using a service to file tax returns electronically with the IRS to preparation of 100% of an office's returns using tax preparation software. As more firms automate their practices, the number of automated services and their sophistication increases.

The current levels of automation are defined as:

* Manual or computer-aided tax calculation: Returns are generally prepared manually but certain calculations for those returns may be done on the computer using a spreadsheet or another tool.

* Service bureaus: Returns are processed off-site. Client data is either entered at the practitioner,s office and sent electronically to a processing center, or input sheets are sent to be keyed at the processing center. Processed returns are either sent back electronically to be printed in the tax practitioner's office or printed at the processing center and sent to the preparer. Client data is usually stored by the service bureau. There is usually a per return processing fee.

* "In-house" systems: Returns are entered, processed and printed within the practitioner's office. Client data files are stored and maintained in the office or, alternatively, at the vendor's location. Client organizers are printed and sent out from the office or by the vendor. Typically, software is purchased for a fixed sum with no restrictions on the number of returns that can be processed, although some vendors charge a fee for each return processed.

The decision as to which level of automation is right must be based on an analysis of the particular tax practice. There are advantages and disadvantages to each. But for practices in the first level, strong consideration should be given to increasing the level of automation if more than a handful of returns are completed or the complexity of returns requires large investments of time in computations. * Service bureaus A service bureau is a company that provides data processing services. A variety of service arrangements are available, including the conversion of input data to machine-readable form, processing the data and physically delivering the output to the customer. In addition, to meet special requirements, a service center may offer system design and programming support.

Service bureaus have a long track record and typically offer a complete processing system. The larger service bureaus process returns from all states and almost all the forms. They can take much of the administrative headache out of tax season by offering data entry, printing and client data storage services. They also usually have a large support staff that can provide training and support throughout the tax season.

The major disadvantages to the service bureau approach are cost and lack of control. Service bureaus typically charge an initial processing fee, as well as a fee for reruns, and these charges can add up. With a service bureau, the practitioner is also at the center's discretion concerning when a return is processed. Turnaround is often slow and much time is wasted trying to track down or expedite returns. An often overlooked disadvantage to the service bureau approach is the time preparers or reviewers waste on refamiliarizing themselves with the return when it comes back from the service bureau. When compared to in-house systems, this can be a distinct disadvantage.

One way service bureaus have tried to mitigate this delay is by adding a feature that allows firms to complete their data entry and send client tax information to processing in its electronic form. A companion service to this is the ability to transfer the data back to the office electronically and print the returns on office printers. These features, while expediting the turnaround time, add some of the same administrative burdens as in-house preparation, such as data entry, printing and collating.

Most service bureaus offer off-site storage of client data files, which can be a boon should an office be hit with a disaster. However, a possible disadvantage to off-site storage and processing is less data security.

* In-house systems

In-house systems are becoming more mature with every tax season. Most states and forms are offered by the major in-house packages. An in-house package that does most of the required states, forms and calculations offers many advantages.

A major advantage offered by in-house systems is the control given the return preparation cycle. A firm can assign priorities to returns and enter, print, change, review, complete and send returns to clients at the practitioner's discretion. This allows for completion of a return while it is fresh in one's mind and eliminates the intermediate steps of sending a return to a service bureau to be processed. Clients who bring in their tax information at the last minute, but do not want to file an extension, can still be satisfied. Last minute changes can be accommodated with great ease. This increase in control and turnaround, coupled with reduced costs associated with in-house programs, adds up to sizable cost savings. Many firms have experienced increased realization of 20% and greater. These gains are not without costs, as there are disadvantages to in-house preparation.

Many in-house systems are not as complete and sophisticated as the larger service bureau systems. An in-house system may not have as many state return programs available. This may result in the separate manual preparation of state or city returns. In-house systems also may lack certain tax computations that may be present in service bureau systems. A particular system may not be able to generate or print certain forms that are necessary to a particular practice. If one of these systems were selected, missing forms and calculations would have to be completed either manually or with another computer system Ie.g., spreadsheets}.

Proper hardware must be purchased to run an in-house system..These systems run best on the newer, faster machines. It will also be necessary to purchase a laser printer (the alternative is to use overlays, but that is not recommended for volume production} and the accompanying supplies (paper, toner cartridges, and hard or soft fonts). Many firms have also found that the greatest efficiencies are gained running in-house systems in a shared resource environment.

There are some additional administrative burdens involved with in-house programs. If a batch entry type program is being used, a data entry person is needed. For a firm now using a service that prints and collates returns, moving in-house would mean taking on these responsibilities. In addition, firms that process in-house also have to handle any hardware or software problems, including bugs, breakdowns or malfunctions.

* Preparation method summary

The current trend is toward in-house preparation. Traditional service bureau processing methods are losing large percentages of the market every year to in-house systems. Many large service bureaus are moving their clients to in-house programs and dropping service bureau systems. However, the best preparation method is the one that best suits a firm's individual needs.

Hardware Considerations

Various systems and implementations have different hardware considerations and requirements. Some systems require only stand-alone machines with 8088 processors and 640K of memory. More complex systems may run best on a machine with a 386 processor or faster, with added memory running on a network. As in choosing preparation software, there is no "best choice" that is right for everyone. Each firm will have to evaluate what will work best in its own practice. However, when a group of people will be running the same software and sharing client files, a mulituser system such as a network has definite advantages.

Following is a list of common hardware requirements and a range of their use.

  Processing speed   8086 through 386
  Memory             512K through 4 megabytes
  Disk space         3 meg through 9.50 meg
  Network            Not usually required,
                     often recommended
  Color monitors     Sometimes required,
                     often recommended
  Math coprocessor   Sometimes required
  Modem              Sometimes required
  CD-ROM reader      Sometimes required
  Laser printer      Often required

When evaluating the cost of hardware components it is important to amortize them over the expected years of use. Also try to evaluate whether the benefits of the purchase are restricted to tax processing or whether they also accrue elsewhere. Perhaps the decision to use software that requires two megabytes of memory only sped up the necessity of a memory upgrade and enabled the use of software that makes staff members efficient in other ways.

Data Entry Methods

* Defining the methods

The traditional service bureau method was to use input sheets and batch entry. The new service bureau systems and the in-house systems vary in their data entry approach. Some allow only input sheet oriented, "batch" entry methods. Others allow only IRS forms-based, "interactive" data entry. Some offer both methods. Electronic data transfer of client information is also possible.

The "batch entry" method will be familiar to those now 'using the service bureau central processing approach. Data entry items are typically grouped with other related items that do not necessarily appear on the same IRS tax form. Each data entry field has a unique number or tax line code associated with it.

The standard procedure using the batch entry approach is for the tax practitioner to fill out input sheets manually and then for a data entry person to enter them into the computer. Calculations are done after all the data is entered for a particular client. Often several clients are processed at once. Documents available for review include the input sheets, diagnostics and a draft of the return printed after data entry and processing.

The "interactive entry" mode is designed to allow the preparer to enter taxpayer data directly into the computer from client records. Often the input screen looks much like an IRS form. Usually calculations are done as data is entered, and the preparer can see the results of his input almost instantly.

Many interactive entry programs allow the preparer to enter notes to the return from within the package. This procedure documents or draws attention to Certain aspects of the return. Many also allow the user to print reports showing the data entered for that client. Documents available for review are the diagnostics, a draft of the return and, optionally, any notes or data entry reports.

Electronic data transfer programs, commonly called "bridge" or "link" programs, are prevalent among business return packages, although some individual return programs also accept electronic data. These "bridge" programs convert data from accounting or trial balance programs into a format that can be read directly by a tax program. Very little information needs to be entered in the tax preparation program itself.

* Advantages and disadvantages

There are advantages and disadvantages to each method of data entry. The batch entry method is very production-oriented. Data entry personnel are usually faster at entering data than tax practitioners. This method also does not require as large an outlay of capital for computers since only the data entry personnel need to have computers. The batch entry method is also the most familiar to preparers who are accustomed to a service bureau.

The main disadvantage to the batch entry method is that the preparer cannot see the results until after the return is processed. Some batch entry programs will process as data is entered and allow the user to review the return on-screen. This means the reviewer needs to do the data entry. Since the preparers use input forms, many practitioners complain that tax staff learn how to fill out input forms, but not how to prepare tax returns. Conversely, tax practitioners who are familiar with tax return forms may be impaired in trying to enter correctly the required coding on an input sheet for a particular tax program. It is also less efficient for most preparers to write on paper, in this case an input sheet, and then have someone else enter the information, than to enter data directly themselves, even if the preparer is not a good typist.

Interactive entry methods allow preparers to review return forms or calculations as they enter the client information. The preparer can enter data directly onto the screen and avoid the time-consuming and costly steps of filling out input forms and keypunching data. The preparer can try different ways of entering client information to find the most correct or advantageous method and instantly see the results. Often the preparer has a ballpark idea of how certain parts of the return should look. The interactive method allows the preparer to spot potential data entry or other errors without going through a lengthy data entry and calculation process. This immediate feedback saves the preparer the time it takes in a more traditional approach of refamiliarizing himself with the return. An additional benefit can be realized from the easy access to clients' tax returns. If a client calls, and his return is stored on the computer, the tax adviser can simply bring up the client's return and answer any questions without having to leave the office.

Many people find the interactive approach more intuitive and easier to learn. instead of cryptic coding systems, some interactive programs present the preparer with tax return forms and online help. Practitioners using interactive programs in their offices say that their staff learn how to prepare tax returns, not input forms. This tax return orientation has an added benefit to users. Firms will find it much easier to convert user knowledge from one program to another if they decide to switch to another program that has a tax return orientation.

Offices using the interactive method tax programs will experience the greatest efficiency when every tax practitioner has a computer immediately available. This may require more of an outlay for hardware than the batch entry method requires. Another disadvantage that some offices find is a reduction in confidence in the audit trail. Some practitioners feel better about reviewing hand-prepared input sheets than reports regurgitating data entry and notes. Other practitioners think it is inappropriate for preparers to do data entry, although they are already doing manual data entry onto an input form.

Electronic data entry is a very efficient method of entering client data. It follows the maxim of using electronic data in as many efficient ways as possible. If the client data used in a tax return exists somewhere in an electronic form, it is to the practitioner's advantage to use it. Usually these systems have some sort of tax coding system for account balances that only needs to be set up once per client. After that is accomplished, it is simply a matter of updating the coding periodically.

The main problem with this method is finding a bridge program that works efficiently with the given data. This bridge program must be able to read the data the trial balance or accounting software produces and then write it to the firm's tax preparation program with a minimum of keystrokes and effort. A system under which the trial balance or accounting program writes directly to the tax program without requiring a third intermediary program is preferable.

* Choosing a data entry method

There are varying opinions in the profession concerning which data entry method, or combination of methods, is preferable. The trend is definitely toward interactive and electronic data entry methods. Improvements to these data entry methods as well as the addition of new methods are expected in the future.

Features: When selecting a data entry method, the following features should be considered.

* Calculations made by the program: Not every program does every tax calculation. State calculations are an important aspect to consider. There is no need to buy the most expensive with the most extensive capabilities if the practice does not require it.

* Reports available and their format: Consider the level of detail provided in the report and also the format of the report. If it provides a summary and a well-designed report format (such as a readable five-year format), the finished product can be given directly to the client as a record of what was discussed. This can be a big time saver. The more detail the user can get from the program, the better able he is to make the professional judgments that must accompany computerized tax planning;

* Efficient methods of data entry: Consider fullscreen editing with simple cursor movement so you can see many fields and records concurrently, rather than a one line at a time display. It is useful to import data from a tax preparation file or from another source, such as a trial balance package, a spreadsheet or financial planning program. The ability to bridge to and from a preparation package is a very valuable asset.

* Ease of use or "user friendliness": The program should be consistent and predictable, and always respond the same way to the same commands (that is, the same facts always give the same resuits ). Programs that are clearly written, have good understandable manuals, have on-line help capability and have references to the Code are particularly helpful. If the user has to stop to figure out what each question in the program means, he will have problems with the answers that are generated. The simple intuitive approach is usually the best.

* Author's technical tax qualifications: This is the most important area for consideration. The user wants assurance that the program was developed by someone who has the technical tax knowledge necessary for understanding and keeping up with the complexities of the tax law. This may also be difficult to determine. Some things to ask might be the size and qualifications of the development staff, and a list of satisfied customers with practices similar to one's own (i.e. same size, same states, similar clientele).

* Stability of the author and the publisher: Since "tax" is not a static area, the user must have assurance that the program will be updated at least annually. In some years the updates must be made more frequently. A program might be excellent in its initial version, but if the author or publisher cannot keep up with the changes that constantly happen in the tax environment, the program will soon become useless. It is important to understand up front what the author and publisher see as their responsibility for maintenance and update. Practitioners should not have to change programs frequently.

* Reviewer preview: For preparer-entered systems, the return preview feature allows the preparer to review a return on screen before printing.

After the user determines which programs he is most interested in, he should get demonstration copies. These should be available at low or no cost. Some of these evaluation copies are the prior year's version; some are the' current version, but in a crippled format so it can only do one type of scenario (e.g., tax filing status of single only). Often, crippled programs will not store data. By using the program with live data, when the user already knows the answer, he will find out quickly if this is the software that meets the firm's needs.

Minimum features: When choosing a tax preparation system there are some minimum features to look for.

* Proforma input forms or screens: Much of the data that appears on the current year's tax return is also applicable to future-period returns. Most tax preparation programs store this data from year to year. When the data is needed for a later year it is presented as proformas. The term proforma refers to input sheets or data entry screens on' which the computer has generated prior-period recurring information. By using the computer to generate proforma information, repetitive handwriting and data entry are eliminated.

Typically, the following types of information are produced on a proforma.

1. Taxpayer information (name, address, identification numbers, occupation, etc.).

2. Listings of sources from which dividends and interest are received.

3. Depreciation information.

The system should provide for storage of taxpayer information to enable the preparation of proformas for later tax periods.

* Schedules and forms: Tax preparation programs or services may not have all forms available that are necessary for one's practice. The tax return vendors determine those forms they will offer by reviewing their customers' demands and usage. As a minimum requirement for acceptability, any computer tax preparation system must provide the forms that are generally applicable to most of one's clients.

* State forms: The preparation of state and local tax returns may be considered a minimum requirement. The capability of preparing such retums is available in specific systems and should be considered in evaluating the applicability of computerized tax return preparation for a practice.

* Additional forms: While some services do not provide for all forms, they will allow for input of the results of a form so a complete tax computation can be made. If the system accepts only the results of a form, the preparer must complete the form in a way that will allow it to be included with the filed return.

Other minimum processing specifications: The following are the minimum processing characteristics considered acceptable for a computer tax return system.

* The calculations done by the system must reflect the present legislative, regulatory and administrative requirements of Federal, state and local taxing authorities.

* Every sheet of output must show the taxpayer's name and identification number. Not only is this particularly important for in-house processing to ease collating, but it is also important if pages are accidentally separated in the Service's processing centers.

* All supporting schedules must be identified and referenced to the corresponding form.

* All the currently published IRS specifications for forms must be met, especially for the sections applicable to preptinted or substitute forms.

* The system should calculate depreciation using proper methods.

* The system should allow the user to easily override calculations it does.

* The system should produce diagnostic reports that highlight possible errors or omissions from the client data.

Additional processing features: Certain features may be present in computerized tax preparation systems and should be considered when evaluating other systems of tax return preparation. Some of these features, which may be considered minimum specifications for a practice, include:

* A listing of the schedules and forms prepared for each taxpayer.

* A letter of transmittal to the client containing all filing instructions.

* Availability of forms (usually produced as a booklet designed to help the client to both collect and record the information needed in the preparation of the current year's return (for example, a listing of the prior year's information and amounts with space available to enter the corresponding data for the current period).

* Treatment of the sale of a group of assets at one price that enables the preparer to request automatic allocation among sections of that selling price.

* Preparation of fiscal year returns with required pro rata calculations.

* Limited cash flow statements that show income and itemized deductions with amounts and percentages.

* A worksheet comparing the various methods (for example, itemized deductions, standard deduction) used to calculate income tax.

* The automatic calculation of gains and losses, including ordinary income recapture, that results from the sale of depreciable assets.

* The capability of producing multiple copies of the return.

* The preparation of worksheets (for both tax and financial planning) that can include comparisons of current with prior years' data.

* The ability to produce practice management aids, including client billings, mailing labels, etc.

* The ability to link with other computer applications.

* A system that meets the requirements of electronic filing.

* Database search capabilities.

* The ability to contract on a per-client basis for states in which the firm does not prepare many returns.

* The ability to print the IRS-required supporting schedules in an acceptable format for inclusion in the return.

* The ability to print both individual returns and batches of returns.

* Control or hash totals.

* Input screens and/or input forms that mimic the tax forms to the greatest extent possible.

* A limit to the number of forms, entities and amounts that is greater than normal needs (e.g., more than 10 K-Is).

For situations in which data entry is accomplished, review is performed, calculation is made or output is printed on in-office systems, the following should be included.

* On-line system help.

* Pop-up calculator.

* User-friendly interface.

* Reasonable disk-space requirements for the program, accessories and client flies.

* Multi-user capabilities.

* Reasonable processing speed.

* Reasonable memory requirements.

* The ability to print to the printers that the firm owns or plans to own.

* Good use of color and contrast, including user-definability.

* On-screen error-checking.

* Good default information (e.g. FICA wages should default to the lesser of Federal wages or the FICA limit).

* Fast and simple summary tax results displayed on-screen.

* On-line tax help.

* The ability to add context-sensitive notes that can be viewed or printed as a group with the return,

* Administrative features including due date tracking, work responsibility assignments and return status.

* Audit trail that includes a complete history of changes for each data entry field, including who changed an item and when the change was made.

Evaluating and Changing Tax Processing/Methods or Vendors in a Firm

Once the decision has been made to reevaluate the firm's method of processing tax returns, either from manual tax preparation or from one tax vendor to another, the work really begins. First, the user(s) must decide which tax processing features are important. Then available programs must be evaluated to determine which best meet the criteria chosen. Finally, a decision must be made (based on this evaluation)and implemented.

Evaluating and changing tax software vendors is not an easy process. Some of the problems a practitioner will encounter are data conversions, training, office procedure changes and, most important, the human resistance to change. However, some advance planning and preparation can help to minimize the difficulties.

* Overcoming resistance to change

Accountants, who are often conservative by nature, may be more resistant to change than most people, so when a change in tax processing methods is proposed they may offer all kinds of objections. Common objections are:

* Things are working fine the way they are.

* New methods are too costly.

* The new method will not offer as complete an audit trail.

* Training staff on a new program is too difficult.

* "So-and-so" used the proposed program and he had nothing but trouble with it.

* Certain individuals in the firm will never give up their current processing method.

* The new program being proposed is not as good as a different program.

While each of these objections may be somewhat valid and should be given consideration, a well-thought-out conversion plan should be able to handle most of them, provided a switch is in fact warranted. Remember, accountants are very capable of digesting and implementing massive changes once they decide they are necessary. Adaptation to tax law changes is a case in point.

An important factor in a successful conversion from one preparation program to another is support from key individuals in the firm. Everyone should be informed that a change is being considered and allowed to have their input. A team should be chosen that will be responsible for completing the necessary testing and analysis. Make sure this team has the support of top management.

Many of the objections can be overcome with a complete tax preparation software evaluation and a cost benefit analysis. This evaluation should be tailored to the needs of the firm and should not include features that provide little or no benefit to the practice. Checklist 1, beginning on page 424, provides some assistance in this process. The cost benefit analysis needs to focus on both direct and indirect benefits of changing methods. Checklist 2, on pages 435436, outlines many of the items to consider in the analysis. In both the software evaluation and the cost benefit analysis, it is important to try to include programs that individuals in the firm offer as good alternatives. If their input or their favorite program is ignored, they may resist the final decision, or worse, do their best to prove it wrong.

Once both the evaluation and cost benefit analysis are complete, the results must be reviewed and a decision made. Although the recommendation may come from the team, the decision should be the responsibility of top management. Ideally, a meeting should be held to communicate the decision to everyone involved. The reasons for the decision should be clearly identified and any questions and reservations by those who were not directly involved in the decision should be covered.

At this point, and throughout the conversion process, it is very important to try to get everyone on board and as positive about the decision as possible. One way to do this is to make everyone responsible in some way for making the project a success. Meetings should be held periodically throughout the conversion process to discuss progress that has been made and any problems that have been encountered.

* Implementing the change

Once a decision has been made and communicated, some critical problems must be overcome. First, when and how will the new system be implemented. Second, how will client information be converted to the new system and how can its accuracy and integrity be insured? Third, how will the staff be trained on the new system? And, finally, what if the system does not work?

The answer to the question of when to implement the new system is easy, as soon as possible. The easiest conversions are those that begin early in the summer arid are completed well before busy season begins. Often new hardware is required and many firms will decide to install a network to gain the best productivity from their tax processing software. The installation of a network will inelude its own set of problems and this should probably not be undertaken late in the year. Make sure the network adviser is knowledgeable and always get a second opinion. (Hint: Try another CPA firm that has gone through a similar process. )

The implementation plan should also include obtaining the prior year's tax program for the vendor as early as possible. Install the program and run any remaining prior year returns through it. Unless the vendor has plans to completely overhaul the user interface before the new year, staff members can begin training on the prior year system. Consider assigning individuals the responsibility for investigating certain parts of the program. For example, one person could learn how the program handles the firm's home state while another person develops specialization in the passive loss area. These individuals should also be encouraged to establish reliable contacts with vendor personnel in their own area of expertise. This vendor contact will also give an indication of how the vendor support works and the extent to which it can be relied on (although this is best discovered before choosing a vendor}.

After developing some working knowledge of how the vendor's program works, it is time to draft some new office procedures. To make the conversion cost-effective, it is necessary to take advantage of the time savings offered by the new software. To do this, office procedures will have to be streamlined. For instance, if the firm is changing to an interactive input method program, it will gain the most benefit by having preparers enter directly onto the screen. Reviewers who might be in the habit of reviewing input sheets instead will review actual returns, either printed or on screen.

A major headache in the conversion process is the conversion of proforma client data from the old program to the new. These conversions are rarely perfect. Examples of things that can go wrong range from certain categories of missing data (such as state information, carry forward data or depreciation detail) to completely garbled information with one client's data on another's proforma.

It is nearly impossible to completely avoid data conversion problems. Discuss the limitations of the conversion program with the vendor before committing to purchasing the program. Get references from other firms who have converted from the old vendor to the new vendor. Be extremely wary of conversion programs that are being written just for the firm or that are in their first year. If the vendor does not offer conversion services, it may be wise to investigate a third-party data conversion vendor. Most tax software vendors can refer the user to these services.

Send a sample of prior year returns to test the data conversion program. While it is possible for the vendor to "cheat" and simply enter the client data into the prior year program, this is not likely. Get the conversions completed as early as possible and test them ! Although it sounds like a daunting task, it may be wise to consider entering the prior year data into the new program. This can be done during the summer or other off-peak times with more consistent results. Also, in most cases the data will be obtained sooner than if a vendor is contracted for the data conversions. An added benefit is the staff training that results from the use of the prior year program. Firms that have used this approach have reported favorable results.

For business returns the conversion from one vendor to another becomes a smaller problem when a trial balance package is used that bridges data into the selected tax program. These programs will simply "bridge" the necessary current and prior year data into the current return. Very little client information needs to be entered after bridging.

Training may seem like a bigger hurdle in the conversion process than it is. Typically, with the high turnover ratios in tax staff, tax law changes and the seasonality of tax work, much tax preparation training has to take place anyway. Training on the new package can be accomplished in a number of ways. Two have already been mentioned: get the package early and have people start learning it on their own, and have tax staff enter all of last year's returns as part of the data conversion process. Other methods include vendor-provided training, e.g., self-study, video tape, computer-based or instructor-based, or training by someone else familiar with the package, either someone from within the firm who has learned the package or an individual from another CPA firm. Good training can take a lot of the frustration out of tax preparation and should not be overlooked.

Keep in mind that despite one's best efforts, plans to change tax vendors or programs may fail. The current year program or converted client data may arrive too late to be useful, the vendor may prove unreliable in some other critical way; or the network that was counted on may never be properly implemented. There are many things that could go wrong, but usually do not. To insure the firm's continuing profitability, have a backup plan--either to return to the prior vendor or to use a third vendor. What is important is that a plan is in place. One way to mitigate some of the possible headaches with returning to a prior vendor is to run proformas from the prior year program on its system as a backup.

Changing tax processing methods or vendors is never easy, but proper planning can mitigate many of the problems and make the change worthwhile.

Tax Preparation in the Future

The technology of tax processing is changing rapidly. As with other software, practitioners may no longer have the benefit of three or more years to reap the benefits of the learning curve. Instead, they may need to expand training efforts to get staff members "up and running" faster.

Increased time pressures will probably also necessitate the use of streamlined input methods. Already many preparation packages allow for the importation of data through bridge programs. These programs read client data from files created in trial balance and general ledger packages directly into the tax preparation packages. Most likely, scanning or optical recognition methods will soon be employed to read standardized client documents. Voice and touch data entry systems and expert systems also may be used to collect client data. Better graphic user interfaces and "smarter" programs will make systems even easier to learn and use.

The IRS's current trend of asking for more and more data electronically probably will continue until most types of returns and forms will be filed electronically. Perhaps, in time, all taxable transactions will be-reported directly to the IRS from the transaction source with only exceptions required to be reported. This is not likely to occur for some time because of the current state of the IRS's systems.

With more and more client data on the computer, there will likely be a proliferation of programs to search, sort and analyze client data. It is already possible, with the right programs, to identify clients who match certain criteria by searching a firm's client base for very specific information, and to generate a mailing to those clients; for example, locating all clients who had luxury autos and incomes over $100,000 in a prior year to inform them of a new IRS position that applies to them. In the future these capabilities will become more sophisticated while also becoming easier to use.

Another advantage to having client data on the computer will be the availability of postpreparation analysis of client data. Currently there are planning programs available with most tax preparation programs. In the future, these will become more sophisticated and new types of analysis programs will be introduced (for example, one that compares prior year data to the current year and offers planning ideas for future years).