Filing Taxes Becomes High-Tech Task

The Internal Revenue Service (IRS) estimates that more than 35.3 million taxpayers will file online this year, which represents approximately one-third of all individual income tax filers.

E-filing also appears to be receiving favorable reviews, because 83 percent of previous e-filers say they are very likely to file online in the future. According to research by Gartner Group analysts, the average e-filer is a knowledgeable Internet user (online three or more days per week), is between the ages of 25 and 34, and is male.

“While there will be many former e-filers returning to do their taxes online this year, the IRS will have to prepare for many young e-filers who don’t have a lot of experience filing taxes, let alone filing them online,” said Christopher Baum, vice president and research director for Gartner. “Consequently, the cost of support will likely grow as more taxpayers switch to filing taxes electronically. The IRS will have to ensure that it has the support staff to handle inquiries and electronic forms that are filled out incorrectly.”

The credit for some of the success of e-filing goes to the IRS, which this year is allowing taxpayers to choose their own personal identification numbers (PINs). In the past it was necessary to preregister with the IRS to obtain a PIN. “This self-selection process requires less time, effort and planning by taxpayers and thus motivates more taxpayers to file online,” Baum said.

According to Gartner, the IRS would likely be more successful in encouraging e-filing by reducing or eliminating the average $13 fee that its third-party partners charge to e-file federal and state taxes. In addition, the 2.5 percent convenience fee added for paying with credit cards should be removed. Those fees are essentially taxes to pay taxes.

The do-it-yourself tax software category also continues to grow despite a rocky economy, according to NPD INTELECT Market Tracking. Unit sales through retail outlets during the current season (Dec. 2000 to Feb. 2001) are up 11 percent in year-over-year comparisons. Revenue dollars are also up, registering a 16 percent increase from last year. From December 2000 to February of 2001, 5.5 million units of tax software sold through retail compared with 5.0 million units the year prior. This translates to $150 million in revenue, compared with $130 million.

Intuit dominates the market with its Turbo Tax and Turbo Tax Deluxe titles. The company currently commands 70 percent of the market in terms of unit sales and 81 percent of revenues generated from tax software. Leading the charge is Turbo Tax Deluxe, which alone carries 29 percent of unit sales and 40 percent of revenue. Block Financial made gains on the market leader this year, boasting a lower average selling price.

“These results are very impressive, particularly in light of users’ ability to complete their taxes online and the push towards direct sales of software. Adding in these sales would show a very healthy market indeed. A market that is clearly lead by Intuit,” said Howard Dyckovsky, vice president of software tracking at NPD INTELECT.

According to a Jupiter Online Consumer survey, 38 percent of people online in the United States plan to use an accountant this year, 24 percent plan to prepare their own taxes by hand, 19 percent plan to use offline tax software and 5 percent plan to use a do-it-yourself solution on the Web (up from 4 percent last year).

“While do-it-yourself online tax prep is growing steadily, two-thirds of online users acknowledge they are reluctant to use these services for reasons such as security, privacy or reliability,” said Rob Sterling, senior Jupiter analyst. “The greatest potential for Internet tax solutions will be their use as collaborative hubs, benefiting financial institutions, CPAs, financial planners and their business and consumer clients.”

According to Media Metrix ratings data, unique visitors to tax sites increased 27 percent, from 12.9 million in February 2000 (last year’s peak month) to 16.4 million in February 2001. Meanwhile, the average time spent at these tax-related sites increased 42 percent, from 22.6 minutes per person in February 2000 to 32.1 in February 2001.

The greatest percent-increase in traffic and usage-intensity occurred among surfers at home. While unique visitors at work increased 19 percent, from 5.0 million to 5.9 million, visitors at home increased 30 percent, from 9.8 million in February 2000 to 12.7 in February 2001. And while surfers at work spent slightly less time at tax sites this year, 19.4 minutes on average in February 2001 versus 21.6 in February 2000, time spent by surfers at home soared 72 percent, from 18.9 average minutes to 32.6 over the same time period.

Top 10 Tax-Related Web Sites
February 2001, U.S. home and work users
Rank Site Feb. 2000 Feb. 2001 Percent
All Tax-Related Sites 12,892,000 16,412,000 27.3%
1. 4,089,000 6,704,000 64.0%
2. 4,251,000 4,802,000 13.0%
3. 3,377,000 4,603,000 36.3%
4. 3,476,000 4,489,000 29.1%
5. Turbo Tax Web Site 2,369,000 4,077,000 72.1%
6. 2,712,000 2,584,000 -4.7%
7. 1,243,000 1,593,000 28.2%
8. 674,000 1,592,000 136.2%
9. 650,000 1,427,000 119.5%
10. 544,000 683,000 25.6%
Source: Media Metrix

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