It is that time of year again taxes are due in the US. The only groups that like tax season are the ones that benefit – state, local, and federal government – and tax preparers that earn their keep by navigating the byzantine process of sorting and filing the mandated payments (or refunds). Taxtech, a subcategory of Fintech, has been around for quite some time. Think TurboTax and other providers that aim to simplify the painful process. Today, the market may be poised for another round of innovation in the tax sector as concepts like Open Banking simplify the process further. In light of the coming tax deadline for US residents (April 18th), CI connected with Adams Conrad, a Principal at QED Investors – the top Fintech VC.
Conrad previously worked at Quovo, which was acquired by Plaid (Open Banking). QED recently participated in the funding round of april – a Taxtech firm that is emblematic of this new round of tech-infused tax services. Conrad shared his thoughts and expectations for Taxtech going forward. Our conversation is below.
Taxtech – is this a new vertical within the Fintech realm? Does this go beyond TurboTax and H&R Block?
Adams Conrad: Taxes are one of the largest inflows or outflows of cash in a consumer’s financial life. Some of the most consequential financial decisions consumers make are tax related. Leveraging technology to provide better insights and advice as it relates to tax is not new, but we’re on the precipice of a wave of innovation in this space, both in the U.S. and globally. When we look across the Fintech ecosystem, few areas have a thinner margin of error than tax. Accuracy is sine qua non and complexity is astronomical; making this space difficult to build in. However, the opportunity for impact and upside is tremendous.
What are some of the leading Taxtech firms, and what services do they provide? Which companies have QED backed?
Adams Conrad: QED has invested in April. April enables users to file their taxes while using products they already know and trust – such as Acorns and Mercury Financial. Filing taxes unlocks insights. These insights enable action. April has built a Tax Engine from scratch. In taxes, accuracy is non-negotiable. By building the Tax Engine, they control the entire experience and are able to adapt quickly to ever-evolving state and federal tax laws. We’re excited by the capabilities April could unlock across the Fintech ecosystem.
Imagine applications that tap into whole household insights when giving advice or issuing loans. Imagine users optimizing their withholdings, increasing their net take-home pay by up to $200 per paycheck. Imagine folks tracking their taxes on a monthly basis – rather than an annual scramble and surprise experience. April enables all of this.
QED has also invested in Atomic. Atomic enables anyone to launch and offer investment products to their users. Atomic’s APIs enable Tax Loss Harvesting, a critical part of any investing strategy. Over time, they could offer additional tax-oriented strategies to help investors optimize for post-tax returns.
Zamp, Column Tax, and Reconcile are all building in the tax space in the U.S. VeloTax is another exciting business building tax solutions in Brazil and across LatAm.
Explain the “holistic and financial planning approach” you have previously referenced.
Adams Conrad: To give great advice, one must understand the whole picture. This is true generically but even more so in financial services. We call these “whole household insights.” To share a few examples:
- If I were to recommend buying a stock, I need to know if you have owned it in the past 30 days or else that transaction would be a wash sale. In recommending a muni-bond I’d want to know about where you live and where you work.
- If I were to recommend debt consolidation, I need to know about existing and recent debt lines. I might also care about things like jobs, children and homes to have a comprehensive view of cash flows, assets, and liabilities.
- If I were to recommend adjusting your tax withholding, I’d need to see last year’s return to understand everything income to children. Tax withholding is particularly interesting – April’s insights could enable banks and Fintech applications to help increase the average user’s net take-home pay by ~$100 per paycheck.
By definition, one’s whole picture is captured when one files their taxes. Unlocking this data will unleash a wave of innovation, enabling more holistic and financial planning that could shape the fabric of the U.S. economy.
Should these services be standalone? Or should they be integrated into the sphere of a digital bank or super app-type platform? If not now, is this the future?
Adams Conrad: I am a big believer that an interconnected financial system is best for everyone. The best financial products I’ve used are those that understand me, my family, and our finances. During my time working at Quovo and Plaid, I learned how powerful financial data can be when unlocked. My time at these companies also taught me how hard it is to surface whole household insights.
April is the first business I have seen that truly unlocks whole household insights. We believe these insights will enable step-function growth in financial products, ranging from loans to investment advice and everything in between.
One of the biggest reasons to outsource tax filing is the accountant is the one answering the questions when an IRS agent knocks at the door. Is this part of the Taxtech package? What about flagging? Certain filings catch the eyes of IRS software – even though they may be mundane items. Is this part of the services available?
Adams Conrad: There is a good bit of nuance here, and it’d probably be best to focus on a use case within “Tax-tech.” The answer to this one is going to vary meaningfully, depending on the specifics of a given scenario.
Across “Tax-tech,” we’d expect to see a distribution of offerings – similar to what we’ve seen across the Wealthtech ecosystem. Some will offer tech-only solutions focused on the mass market. Some will address more complex solutions with a “human in the loop” approach.
Regarding April, they are an Authorized IRS E-File Provider.
What about AI [artificial intelligence] incorporation?
Adams Conrad: April found that there are over 1,100 trillion (1,100,000,000,000,000) different combinations for how taxes can be filed. That level of complexity is well beyond what is comprehendible by the human brain. Further, tax data is somewhat unique in financial services that it is well-structured and organized, making this area ripe for opportunities to incorporate AI.
There have been multiple providers for crypto tax services. Is crypto accounting now included in most Taxtech providers?
Adams Conrad: The opportunity is so massive and the problem so complex, I believe we’ll continue to see folks specialize in certain areas of tax. I’d love to see folks focusing on specific segments of the population, supporting everything from crypto investors to international workers & travelers to gig workers to day traders. The nuances for these folks are real and dedicated solutions are needed.