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.”
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. The company has also established a formidable retail footprint, with a physical office location within 5 miles of most Americans. 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. 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”.
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. 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. 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. It may be time for H&R Block to re-consider its brick-and-mortar assisted prep strategy.
 H&R Block, “Corporate Overview,” http://investors.hrblock.com/phoenix.zhtml?c=76888&p=irol-homeprofile, accessed November 2016.
 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.
 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.
 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.
 H&R Block, “2Q 2016 Investor Call Transcript,” http://investors.hrblock.com/phoenix.zhtml?c=76888&p=irol-calendarpast, accessed November 2016.
 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.