The Death of Professional Tax Preparation

This past week Jeff and I discussed the future of the tax profession. Jeff was very concerned as I laid out where I think the industry is headed, mostly for job security reasons. The conversation started as I updated the stats for the past tax season ended October 15th, the extension due date, and the new reporting requirements and costs the IRS has imposed on tax professionals.

H&R Block is closing over 300 offices in 2010 due to fewer tax returns lost to online filing and the increased costs imposed by Revenue. Additional requirements will be rolled out over the next several years further reducing the number of tax professionals that wish to remain in the industry.

To better understand why I think the industry is headed in the direction it is requires a step back in time.

30 Years of Tax Prep History

As every child needs to hear how things were when mom and dad were growing up, so to should you hear how things were when I entered the tax profession. It all started in 1982. I worked for my dad in his agriculture repair related business. My dear old dad was/is a great salesman, but a terrible bookkeeper. He hated taxes, payroll reporting, and bookkeeping with a passion. Therefore, after a 12 hour work day in the silo room I was required to fulfill my additional office duties. It was tough back then with a major recession dug in deep in 1982. The family business was in its infancy after generations spent as dairy farmers.

Money was tight so my duties were great, my income weak. The only way to turn a few extra dollars was to moonlight preparing taxes. So I did: for employees of the family business, suppliers, and a few neighbors. I charged $20 for most returns. In 1982 this was big money for a country boy working the family business circuit. And so it goes.

I hated working in agricultural repair with a passion. My eyes were open for any way out. In 1987 I met my bride; in 1988 we married. I quit the family business and spent 9 months working as a janitor, keeping my side gig preparing taxes in 1987. Once we married, I dumped the job and went both feet into tax preparation. I had 48 small clients as I took the plunge.

Forty-eight clients paying $20 each is not enough to start a family. I needed a hitch to jump-start the tax business. In 1988 electronic filing was just starting to become a big thing. The IRS wanted more people to file electronically and encouraged taxpayers to efile and jawboned tax preparers to offer the service. Most firms charged $15 to efile a tax return. I researched every tax software program I could which included all the major players and an armload of minor players. Drake Software allowed me to efile for only $1 a return; therefore, I offered free electronic filing, the first in my area.

The IRS loved the idea and promoted firms that provided free efiling. I put a business card sized ad in the local paper and went from 48 clients to 379 in one year. I had a real business that paid some of the bills now. I say this because I charged a very low price to build my client list. My gross revenue in 1988 was just under $10,000. When I look back I sometimes question my sanity.

In 1989 I continued to offer free efiling and expanded my promotional efforts to include flyers to the nearest 2,000 homes. My bride and I hand delivered flyers evenings over several days. More clients graced my services. I remodeled the basement of my home and hired more staff. By the mid 1990's I moved into my current commercial location and prepared 1500+ individual tax returns plus businesses.

Over the next decade and a half I transformed the company from a predominately individual tax preparation house to a stronger business services firm. Business tax returns now make up over 30% of the work we do with accompanying payroll, bookkeeping, consulting, and audit services.

Back to the Present

Looking back to how I started in the 1980's is nostalgic, but no longer a viable business plan. When I placed an ad in the local paper I competed with several pages of ads from other tax preparers'. Today, no one puts an ad in the newspaper. The local shoppers are gone, the newspaper read by few. The local newspaper has not had a tax preparation ad for years. Back then an ad brought in new clients: today, nobody notices.

Running flyers to the nearest 2000 homes might still work today. Bringing in crowds with the promise of free efiling is history. Everyone offers free efiling today.

If I were starting out today I would not make it. Most of the folks that started a tax prep business back then have failed by now. Several national firms sucked up a lot of tax prep work and now they are failing too. The national firms have lost ground for several years.

H&R Block's bread and butter was refund anticipation loans (RAL). The fees were large and covered the large prep fees they charged. This year the IRS will no longer provide a debt indicator to electronic filers. This means the banks have no way of knowing if the IRS will pay the refund, hence the loan. Anticipating massive fraud, the banks are refusing to offer RALs. As of this writing, H&R Block still does not have a bank to underwrite their RAL business. If this remains unresolved, Block will take a major hit to earnings. They will lose clients.

Tax Prep & Accounting Services, Inc. is lucky. We never relied on RALs. Instead, I focused on business returns. Businesses do need professional tax services and probably always will. (I better hope so if I plan on working this industry till retirement age.)

The average age of accountants is approaching retirement age. Around 80% will be retirement age within 10 years. Still, I would not recommend a career in accounting or tax preparation. The hours are long and stressful while the accountant's paycheck is under pressure. The future is uncertain for the industry.

The small guy is gone. I am one of the last survivors. The big guys are gobbling up little guys at a furious pace. If you enjoy working for a big firm or in government, then consider the accounting field; if you want your own community practice, think long and hard before taking the plunge.

The Future

The future is always clear after we get there. The national tax prep chains will continue their decline as will small firms like Tax Prep & Accounting Services, Inc. My business model will replace lost individual returns with more business services, consulting, and audits. As more folks prepare their own return they still need help with audits and other snarly tax issues.

The easy tax prep work is gone. What is left will require experienced professionals. Small firms will continue for a while, especially in small towns where the big guys don't have pull... yet.

One of the H&R Block offices closing is down the road from me. I guess I win this round. For now. The winds of change blow hard and I am not immune.

If you prepare your own return, consider using my online service. The program is run by Drake Software, a professional tax program used by over 30,000 tax offices. If you get an IRS letter or audit, let us to help you resolve the issue. Or at least read up on it.

If all else fails I can go into the shredding business. I know a lot of firms that need paper turned into fluff for security purposes.