The impact of technology on tax practice in the 21st century.

Editor's note: Dr. Hicks and Mr.Rubenstein are members of the AICPA Tax Division Tax Computer Applications Committee.

The summer is a good time of year to reflect on the future, and for us, specifically the impact technology will have on the tax practice environment in the year 2000 and beyond. This discussion represents input gathered from tax advisers in a variety of firms, filtered through the authors' opinions and perspectives.

How Tax Compliance and Tax Planning Will Change

Tax practice is made up of tax compliance, tax advice and planning, and tax lobbying. Historically, the most significant portion has been compliance. Many tax advisers say that they cover all their basic operating costs with their tax compliance work, and that their profit comes from the tax planning work they do. While lobbying is an important part of a tax practice, it has been concentrated primarily in those firms with offices in Washington, D.C. One type of lobbying activity, being able to rationalize a client's (or its organization's) position, will be of increasing importance in an era of changing demographics and changing political parties. Much of lobbying activity involves the communication of information from the tax adviser to a tax legislator or the legislator's staff. With the vast improvement in electronic communication, the location of a firm involved in tax lobbying will become less important. Even so, for most firms, tax lobbying activities will be an added service and not the primary focus. Thus, the focus here is on how firms will practice tax compliance and tax planning.

Increasingly, firm profits have been generated by information systems activities conducted as consulting practices. The profitable consultant mode of operation has been duly noted and adopted by tax advisers as well. Thus, "whatever the client needs, we will do (or find someone who can do it for us)" drives the tax practice. The client's needs will be served. At the same time, tax advisers have formed alliances with information systems professionals to develop software that greatly simplifies and streamlines the compliance task. Increasingly, accounting software is being linked to tax preparation software so that clients have only to activate the tax preparation module of their accounting software to produce a tax return.

Tax compliance as the foundation of a tax accounting practice will end soon, although high-income taxpayers will still require some professional compliance assistance. Purchasers of personal computers for home use are also buying tax preparation software. The availability of personal computers has developed a market at the consumer level for easy-to-use preparation software sufficient for the average taxpayer. As evidence of the adequacy of the software designed for home use, note the number of tax preparers using the same tax preparation software that consumers use. Technology has simplified tax compliance to the point where the tax adviser's professional skills are not needed or are not perceived to be needed by the client. Thus, because the bread and butter of past tax practices will not be there, tax advisers need to look elsewhere for their future.

Tax planning must become the focus of the tax practices of the future. Significant changes in tax law lead to a growth in the need for tax professionals. Thus, as the law changes, the need to analyze the impact of new legislation also increases. There is a need for knowledgeable tax advisers to help keep clients informed about the changing tax environment. To succeed in that market, clients must believe that their tax advisers have something of value to offer. Thus, tax advisers will have to maintain a higher level of visibility with their clients in the future, which will require preparing well-thought-out plans in advance.

The Practice of the Future

The practice of the 21st century will consist primarily of tax practitioners doing research to develop a tax plan for a group of clients. Then, tax advisers (perhaps not the same ones who prepared the plan) will take these pro forma plans and sell them to their clients, tailoring the plans to their specific needs. Firms may well organize their practices into industry groups. Then the partner/manager (tax, audit or systems accountant) with client responsibility will monitor all firm services provided to that client, including tax needs. If the partner/manager is not a tax accountant, the firm's tax department will have to consistently engage in educational activities that inform not only the client, but also the partner who manages that client, of the impact of the changing tax law on their clients. The focus will shift from compliance with the tax law to writing tax plans for clients.

The need for tax planning has never been greater than it will be in the first part of the 21st century. The tool that will allow the tax accountant to keep pace is technology. The ability to store, search and retrieve pro forma tax plans will increase the tax accountant's ability to cope with the ever-increasing complexity of business and family plans. Software that accesses database and hypermedia (videos, sounds and text data) will drive the profession. Hypertext software allows tax advisers to store and retrieve files in a variety of formats (such as text, graphics, sound and videos, and whatever new comes down the pike). Truly, hypermedia is a wave of the future; accessing it will be the future of the tax adviser as well.

While (as has been discussed) the professional tax adviser is no longer needed to prepare the individual tax return, accounting services and business tax compliance will still be needed. If the tax law is modified to include a consumption tax component (a value added tax or national sales tax), business accounting systems will have to be modified to collect the necessary tax information. In fact, the modifications made to business information systems to correctly gather the information needed for tax compliance will be substantial. Other than system modifications, though, the tax accountant of 2000 and beyond will have little to do with tax compliance--tax technology will do the work.

Tax practitioners of the 21st century will have to be as knowledgeable about their clients as they are now--about their business, family plans and transactions, including investment activities. While avoiding the recommendation of specific stocks, the tax adviser must be available to provide advice on the mix of a family's portfolio of investments. Otherwise, there is a high risk of losing that client. The use of technology, specifically the data available over the Internet, will make it possible for the tax adviser to handle these client needs.

The tax adviser of the 21st century will be a source of information on investments, legal issues affecting the client, the impact of taxes on the client, and a sounding board for all business-related transactions. The skills needed by the tax accountant will include the use of computer technology to access whatever information is needed. Once the information is accessed, it must be disseminated to clients in terms they can understand. Thus, communications skills enhanced by the use of technology will become even more important. Tax experts, either inside or outside a firm, will create tax planning ideas. The tax adviser will then review these ideas, modify them to fit a client's situation, and present them to the client. Thus, tax advisers will have to combine a thorough tax knowledge with effective communication skills to ensure their clients will comprehend their increasingly complex situations.

How to Survive Change

Technology will be the key to survival in this new environment. Programs that filter data from the Internet are becoming common-place. Tax advisers will use these programs to design a database for their clients that includes the information the clients need to manage the impact of taxes on their business affairs. While clients in the year 2000 and beyond will have access to the same data as their tax advisers, the most successful tax advisers will be those who can best manage this explosion of data and give clients the relevant tax information needed, without overloading them with other easily obtainable data.

It is clear that communication will be the key technology skill of the year 2000 and beyond. The communication technologies of voice, video, sound and data over the Internet will be the technology that gives the tax adviser access to the databases being developed by governments, publishers and organizations. (Note: In the August issue of The Tax Adviser, Robert L. Black (a member of the Tax Computer Applications Committee) and Hugh Pforsich will present a comprehensive summary of the information available on the Internet as it relates to a tax practice and the related software.)

Of course, there are areas of tax practice in which the databases are not as widely available; for example, state and local tax issues still involve a great deal of paper research with knowledge in the hands of few. But the states are putting more and more information on the Internet and the competitive advantage of the tax adviser experienced in state and local issues will soon disappear. By developing the essential skills to effectively use the Internet and all the related communication technology including hardware, software and general people skills, tax advisers will ensure that their practice will add value to their clients in the year 2000 and beyond.