H&R Block: A Taxing Fall from Grace

The challenge to keep pace in a digital DIY world.


Tuesday, April 18th is the next Tax Day in the United States. America has a storied hate-hate relationship with taxes. Over time, our tax code has only become increasingly esoteric. It doesn’t help that the government seems to view this complexity as a point of pride – the IRS website features an ironic quote from Albert Einstein, the world-famous Nobel Prize-winning theoretical physicist: “The hardest thing in the world to understand is the income tax.”[1]

H&R Block, a $5-billion market cap, Missouri-based provider of consumer tax preparation services, has benefited from this issue of tax opacity for decades. Most people fear what they do not understand, and tax return filing falls squarely within that category. This, in part, explains how H&R block has successfully built and maintained its market-leading position in assisted tax prep: in fiscal 2016, the company prepared approximately 1 in every 7 United States tax returns, and provided over 23 million returns globally.[2] The company has also established a formidable retail footprint, with a physical office location within 5 miles of most Americans.[3] Despite this, many investors remain skeptical of the long-term viability of H&R Block’s core business model, due to the digital threat of do-it-yourself (DIY) tax preparation providers.

In many respects, the value most customers receive from H&R Block is peace of mind. The issue is that the cost required ($150 – $300+) for this assurance is not commensurate with the benefits of paying for in-person tax preparation services. The hidden truth is that the overwhelming majority of tax returns are actually quite straightforward, and consumer behavior is shifting as more people realize this fact. Customers have begun prioritizing flexibility and expediency, and the mix has shifted away from assisted prep towards DIY. The biggest threat to H&R Block is TurboTax – a less expensive, DIY software-as-a-service (SaaS) solution provided by Intuit. While TurboTax and H&R Block each offer different products, they are both competing for the same customer – individuals who are seeking assistance filing their taxes. Intuit, the parent company of TurboTax, has estimated that the entire DIY category has gained about two percentage points of market share from assisted tax preparation as of February 2016.[4] Given its clean user interface, integrated customer support capabilities, and pay-for-use flexibility with respect to additional services from tax professionals, TurboTax customers typically have positive experiences, saving time and money in the process. The company has no retail footprint.

In some respects, the consumer has become increasingly comfortable with software services such as TurboTax because the government itself is digitizing as well. E&Y reported that government agencies all over the world are under pressure to become more efficient – the U.S. has employed data analytics for compliance risk and audit selection purposes and is increasingly reliant on employing “digital platforms to facilitate real-time or near real-time collection and assessment of data”.[5]

As the trend towards assisted digital tax preparation continues, H&R block is struggling to navigate its transition. The company stated that it handled 5.8% fewer U.S. tax returns in the most recent tax season and planned to restructure its operations, including laying off near 13% of its workforce.[6] To keep up with Intuit, H&R Block has made a concerted effort to grow revenue and awareness of its DIY digital products. All signs indicate that DIY is still very much a WIP. The company has estimated that the market is split 55% / 45% for assisted / DIY users, up from a 70% / 30% split in 2008.[7] Even though most Americans receive a tax refund, sentiment remains overwhelmingly negative with respect to the friction involved in the tax preparation process. Adobe has conducted research which suggests that full digitization of the tax-prep process – from assembling documents to filing to writing the payment check – would help improve most taxpayers’ perception of the overall process.[8] It may be time for H&R Block to re-consider its brick-and-mortar assisted prep strategy.

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[1] IRS, “Tax Quotes,” https://www.irs.gov/uac/tax-quotes, accessed November 2016.

[2] H&R Block, “Corporate Overview,” http://investors.hrblock.com/phoenix.zhtml?c=76888&p=irol-homeprofile, accessed November 2016.

[3] Ibid.

[4] Bloomberg, “Turbo Tax Is Killing It This Filing Season,” http://www.bloomberg.com/news/articles/2016-02-26/turbotax-is-killing-it-this-filing-season, accessed November 2016.

[5] EY, “Tax Administration is Going Digital,” http://www.ey.com/Publication/vwLUAssets/EY-tax-administration-is-going-digital/$FILE/EY-tax-administration-is-going-digital.pdf, accessed November 2016.

[6] WSJ, “H&R Block Sees Losses Widen in Latest Quarter,” http://www.wsj.com/articles/h-r-block-sees-loss-widen-in-latest-quarter-1472593521, accessed November 2016.

[7] H&R Block, “2Q 2016 Investor Call Transcript,” http://investors.hrblock.com/phoenix.zhtml?c=76888&p=irol-calendarpast, accessed November 2016.

[8] Adobe Digital Insights, “Full Digitization Would Make Filing Less Taxing For Most Americans,” http://www.cmo.com/adobe-digital-insights/articles/2015/4/6/adi-financial-services-companies-that-fully-digitize-tax-preparation-will-win.html#gs.MKNr0gw, accessed November 2016.


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Student comments on H&R Block: A Taxing Fall from Grace

  1. Yes! As a customer of Turbo Tax I can lend my personal experience to the notion that H&R block is under threat. Not only is Turbo Tax positioned better from a product offering position, but they can also operate more efficiently since they don’t have to use revenues to pay for real estate. These 2 things give Turbo Tax a clear competitive advantage to H&R block. It will be curious to see how H&R handles the digital threat going forward.

  2. Interesting post, Joey! I personally use the semi-DIY online H&R Block Software for many of the reasons you list above. (I imagine the true DIY is to actually fill our the tax forms by hand and complete all calculations manually.) I am a bit skeptical of the idea that H&RB can go fully digital for the following reasons: (1) the physical stores in my mind are the company adapting itself to consumer habits, which, as we have learned in marketing, are very hard to change, (2) while there is an constant drumbeat in the private sector towards automation and ease of use, one should not assume the same progress with the government as their incentives are entirely different, and (3) when we consider the game theory of H&RB, I would imagine that any serious challenges to its physical store model would be met by lobbying from H&RB to complicate the tax code enough to necessitate those locations again.

    Great post. I hadn’t thought of this in the context of digital transformation previously.

  3. Responding to Nathan’s comment above, while perhaps not going fully digital, I would venture that H&RB should develop a TurboTax-like online platform to rival Intuit while also maintaining the presence of its brick-and-mortar locations. By virtue of not being purely digital, H&RB could market the benefits of (1) convenience of an online platform for those who prefer this option and (2) the personalized experience of in-store services to accommodate unique needs (or an unwillingness to use the online platform). The issue I see with (2) is that as the population moves to the digital space, brick-and-mortar stores may stop generating revenue (though the increased “touchpoint” and visibility in high traffic areas may help push consumers to the website). That said, if 55% of users are still “assisted”, H&RB could use its store presence to convince its existing customers to use the H&RB online portal vs. shifting to TurboTax. Hopefully the government would recognize the benefits of an online platform, though I agree the lobbying risk is always there. Joey – great thought-provoking post.

  4. Interesting post! Can’t imagine such a market leader in personal tax still lagging behind in digitization. I totally don’t understand why they would hire so many people and open physical branches everywhere to provide such a standardized service. For services that are so standardized and rule-based, software is certainly the best solution in terms of performance and cost. Another thing I don’t understand about this business is that after people use this service for once, why don’t they do it themselves the next year following the previous template? I assume their tax situations don’t change much after 1 year. If so I would imagine services like this to experience high customer churn rate.

  5. I would be curious to see the operating margins from H&RB and Turbo-tax. I would assume in such a seasonal business as tax-preparation, a SaaS platform has a very strong advantage in that it can easily scale with the seasonality of the industry. H&RB, on the other hand, is left holding leases for expensive real estate storefronts that don’t see much use outside of the three months prior to tax season. I imagine H&RB could generate higher margin by moving toward the SaaS model, but as the blog stated may lose market share in the segment of the population that wants a brick and mortar solution at tax time.

  6. Like other posters (and probably many of our generation), I use TurboTax as well because of its convenience and price. That said, I have wondered if walking in to a brick and mortar H&RB, speaking with a human there, and using their services would be more beneficial. Ultimately, I decided to stay with TurboTax. While the brick and mortar stores are expensive and likely eat into the firm’s margins, the physical presence not only serves many customers who prefer it, but also serves as year-round marketing vehicles. Turbo-tax on the other hand pushes marketing only around tax season.

    If H&RB wants to capture market share from TurboTax with its Saas model, I challenge it to develop tools that are substantially better than Turbo-Tax and directly market against them.

  7. Perhaps it’s laziness or a lack of intelligence*, but I just don’t trust myself doing my taxes alone, which is why I have always prefered to pay someone to help prepare my filing. As this accounting fee, for what appears to be 6 hours of work within TurboTax, continues to increase I have begun to consider the potential benefits of DIY through on online application. I think this is a terrific example of technology entering markets with huge rents that were traditionally protected and disrupting the traditional players. Great post and I echo Nathan’s thoughts that it isn’t something I had thought about before!!

    * Revision from the editor: Alex is both

  8. I absolutely agree! Having used both TurboTax and a CPA to prepare my taxes, I can attest to your claim that TurboTax gets the job done for a large portion of tax payers, although the company likely needs to better market that its service can handle even complex sources of income taxes with ease. I am highly optimistic that SaaS offerings like TurboTax can free up a large portion of human capital currently deployed for consumer income tax preparation–there has to be a better use of these talents, in particular if a $100 software program can do it just as well!

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