Tax Preparers Say They’ll Still Be Needed After ‘Simplification’

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By Laura Davison

President Donald Trump says H&R Block Inc. probably won’t like his tax plan because it will make filing with the IRS so simple. Tax return preparers say they’re not too worried about it.

“I see a switch of people wanting advice with all this change,” David Prokupek, Jackson Hewitt co-chief executive officer, told Bloomberg BNA. “For a lot of people, this is their biggest financial transaction each year. They want to know they are doing it right.”

House Republicans leading the tax overhaul efforts say their goal is to make the tax code simpler and fairer—which in theory would allow middle- and low-income earners to do their own taxes more easily. The plan will need to get through Congress, where Democrats will be pushing for expansion of the earned income and child tax credits. And the White House is pushing for tax breaks for dependent care.

Revisions to the code aren’t likely to drastically change the demand for tax return preparation companies. Though simplification could cause more consumers to opt for online services, rather than in-person preparers where margins are lower and Intuit Inc.'s TurboTax has a larger market share than H&R Block and Jackson Hewitt.

The plan touted by House Ways and Means Committee Chairman Kevin Brady (R-Texas) collapses the individual side of the tax code into three brackets and streamlines most of the credits and deductions, promising a simplified reporting process that can be filed using a postcard without help from tax return preparation companies.

Trump said Feb. 15 that “H&R Block probably won’t be too happy” with the simplicity of the plan he will release.

Big tax changes will likely mean that more, not fewer, customers seek paid help, Prokupek said. Even if taxes are simpler, new processes and expanded tax credits mean low- and middle-income filers will still want help, he said.

Simplification Outlook

Brady has been showing off a “postcard” tax form with 14 lines. For comparison, the Form 1040, U.S. Individual Income Tax Return, has 79, although the streamlined Form 1040EZ, for people without dependents and complex factors, only has 14 lines.

“The postcard is probably pretty unrealistic,” Mark Cussen, a financial counselor based in Leavenworth, Kan., said in a Feb. 13 interview. “If you use the short form, you’re almost filing on a postcard. But if you itemize or you are self-employed, that’s unlikely unless there are drastic changes to the tax code.”

Brady’s plan eliminates most deductions, except those for mortgage interest and charitable contributions. The proposal also retains only a few credits: the child credit, the earned income tax credit and higher education credit.

H&R Block Inc. spent more than $3.2 million in lobbying last year on budget and tax issues, an increase of 50 percent from recent years, according to the Center for Responsive Politics. H&R Block and Intuit have previously lobbied the federal government to prevent a “return-free” filing system intended to make it easier for taxpayers to submit their information.

The Trump administration and Ways and Means, meanwhile, are in talks about how to integrate child- and elder-care credits. Trump has said he will release a tax proposal outline in the coming weeks that could include more specifics.

Most credits require calculations to determine the size of the tax break. Many filers are wary of doing the math themselves out of fear they won’t get the maximum refund they’re entitled to or claim a refund that’s too high, which could trigger an audit.

“It would be foolish, frankly, to go all the way to the” postcard, H&R Block CEO Bill Cobb told CNN Money this month. “There are so many nuances to the tax code. I think there are ways that you have to step your way to more simplification.”

H&R Block declined to comment for this story.

Digital Divide

Not everyone shares the optimism of tax return preparation companies. Companies offering in-person preparation help like H&R Block could see business decline more than online software providers if consumers find that their taxes are easier to do, Mark Palmer, a financial analyst at BTIG LLC, told Bloomberg BNA.

“Tax reform represents a threat to H&R Block,” he said.

The more Congress simplifies the tax code and reduces the need to make complex calculations, the more H&R Block’s customers will do taxes themselves or switch to online programs like TurboTax, Palmer said.

“There’s not that many things H&R Block can do” to pivot its business, he said. Intuit’s TurboTax has a much larger market share than H&R Block for online preparation, and H&R Block’s push to offer premium services for higher-income individuals is still in its initial phase, he said.

As a whole, the tax return preparation industry grew about 3.3 percent a year from 2011 to 2016, according to research firm IBISWorld. But H&R Block shares have fallen nearly 40 percent in the past year, tied to poor 2016 tax season results. Intuit has risen nearly 25 percent in the same period.

Stable Business

Some companies see a strong boost from a broad economic impact of tax reform, regardless of simplification. In 2016, 58 percent of taxpayers used a paid professional, according to IRS data. That number has remained steady over the past few decades, and it could stay the same or even grow if tax simplification expands the economy as proponents say it would. One estimate from the Tax Foundation says economic growth could be as much as 9 percent a year.

“Tax simplification reform is in everyone’s interest,” Bernie McKay, senior vice president of corporate policy for Intuit, told Bloomberg BNA in an e-mail. “It will ultimately help grow our economy and make our system of voluntary tax compliance more successful, efficient and effective.”

An expanded economy would translate to lower unemployment and less underemployment, adherents say. Jackson Hewitt’s Prokupek estimates there could be 10 million to 15 million more tax returns from full- and part-time employed individuals in the coming years.

The Tax Foundation is less optimistic on jobs growth, projecting about 1.7 million more full-time jobs as a result of the tax proposal.

With so much growth and change, Prokupek said, prospects for the tax return prep business are good. “All of this change is going to touch nearly every client,” he said. “Certainly for average Americans, they want to know that they aren’t leaving one penny on the table.”

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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