Tax Season is Over

The ides of April are behind us. The gust of wind that stirred the hair on the back of your neck yesterday was the collective sigh of relief from all the tax filers sending in their tax returns just ahead of the deadline. Following that was a minor breeze coming from the paid tax preparers who are standing down after frantic activity of the last few weeks. Tax season is over.

When I signed on with H & R Block to do taxes last year, I figured that getting customers was the easiest part of the business. After all, the only service with a comparable level of built-in demand is the funeral home industry. Taxes are inevitable for everybody, right?

Well, taxes may be inevitable, but paying someone else to do them for you is not. H & R Block reported that through March 15, the number of returns prepared were down 6.2% versus the same period a year ago. The news was even worse at Jackson Hewitt, the second largest tax preparation chain. They are forecasting a drop of 12% for the number of returns prepared for the 2009 tax season.

USA Today ran a story on this with the headline “Downturn has taxpayers filing solo.” The implication is that the recession has driven more tax filers to using at home software for their taxes to save money.

I think trying to tie this trend to the current recession is a lot of hogwash. More people are filing taxes using home computers because it is cheaper and easier. That is an attractive proposition all the time, whether there is a recession or not.

When I prepare someone’s taxes at an H & R Block office, I have to be paid (not bloody much pay, but money does change hands). Also, rent on the bricks and mortar office continues all year round, even though tax season only lasts three months. HRB maintains the computers the paid preparers work on as well.

With the home software, the cost of producing another copy of the program is a tiny fraction of those costs. If you use the on-line version of the tax software, even those costs are eliminated. It’s no surprise that the price of home preparation kicks the crap out of the price of a paid preparer. And you can do your taxes any time, day or night, in your underwear, should you so desire.

As home computers with high-speed internet connections have become ubiquitous, more and more people are choosing the less expensive, more convenient home tax prep over paid services. The new model of computers and internet is hollowing out the market for tax preparers. This is the same process that killed the travel agent business. With the exception of cruise specialists, there are no more travel agents, and there used to be at least one in every small town.

Is tax preparation going to the same route to extinction?

Probably not. The difference is that not everyone flies on the airlines, but everyone has to file a tax return. They also have to die, but that’s a different story.

Even though tax law is getting more complicated, doing your taxes yourself is getting easier as the software gets better, particularly if your taxes aren’t particularly complicated. This means that for paid tax services, the middle of the market is getting carved out.

Two groups are left over: early season filers and late season filers. The early season filers tend to be lower income. They are either computer illiterate, or they want access to the financial products that tax prep firms can offer (refund anticipation loans). The late season filers will be the people with complicated taxes (farms, partnerships, business owners). The late filers will need more tax expertise and judgement applied than they can get from a computer program.

The total market for tax preparation services will continue to shrink. But even if they close offices, the services will still have to cover a lot of overhead. I will predict that even as the industry shrinks, the prices charged will continue to increase. Of course, raising prices will accelerate customers switching to the do it yourself model.

I may do taxes with H & R Block again next year. But I wouldn’t buy their stock as a long term investment.