Can H&R Block Beat TurboTax's Online Appeal?

There you are, sitting in your favorite recliner, wearing your hardly stylish, yet comfy sweatpants. Your laptop is fired up—wireless connection at full strength, classical music from your digital library playing softly. At your side: a comforting cup of tea and your beloved cat Fluffy. After double-checking the final numbers on your 2005 1040A tax form, you imagine for a moment how you might spend the $350 refund you're pretty sure will be directly deposited into your bank account two weeks later. Maybe a day of beauty at the spa. Or that new gas grill you've been drooling over. "Life is good," you think as you press "send" (an entire day before your tax return is officially due!). Seconds later, your information lands safely in the hands (or servers) of the Internal Revenue Service. Who said tax prep had to be stressful?

OK, that idyllic scenario is probably a stretch. But for much of the fast-growing population of computer-owning taxpayers, the filing process is becoming streamlined and cheaper. This year, Americans in record numbers are abandoning an annual ritual that often goes something like this: gather relevant papers, drive to a storefront accountant, wait in a crowded room until an accountant is available, sit in an austere office watching accountant type numbers into a computer, realize you forgot an important receipt, quietly vow to re-file knowing full well you probably won't and, finally, pay your $150 for the trouble and leave, relieved that the process is over for another year. And though there's no cure-all for anxiety over dealing with the IRS, people with uncomplicated tax returns are increasingly simplifying the process by e-filing from home. This year alone, online filing has increased by 17 percent, a "record pace," according to the Internal Revenue Service. Of the approximately 130 million tax returns filed last year, about 30 million of those were completed by do-it-yourselfers using computer software. About 20 million of those used TurboTax, the increasingly ubiquitous program from Intuit, the software giant also responsible for the popular QuickBooks and Quicken accounting programs. This year, the company expects a 12-15 percent increase in its business. That's bad news for storefront tax preparation franchises like H&R Block and Jackson Hewitt Tax Service, who don't want to lose their share of the $20 billion per year U.S. tax prep business. "The majority of our new customers are people who went to a professional [tax preparer] last year where you bring the data, someone types that into a piece of software and then you get a bill for a couple of hundred bucks," says Brad Henske, senior vice president for Intuit's TurboTax software division. "With TurboTax, for between $10 and $40, people can see what's really going on with their taxes, and from the comfort of their own home." To be sure, H&R Block remains the tax-time giant, handling the majority, or 20 percent of all returns done by professional tax preparers. But the company, with its thousands of green-signed storefronts, expects to lose market share this tax season, the fourth year in a row. Adding to H&R's troubles is a spate of embarrassing and highly publicized legal problems that have surfaced over the past year. The company was caught red-faced when it announced it owed the IRS as much as $32 million in back taxes, a result of filing errors, and had to restate its earnings. Then, California Attorney General Bill Lockyer sued H&R Block over its "instant refund" program, which he claims amounts to nothing more than prohibitively high-interest loans. Finally, New York Attorney General Eliot Spitzer in February took the company to task for pushing money-losing retirement accounts to low-income customers. H&R Block has denied any wrongdoing. Meantime, the company is pushing its own do-it-yourself computer program, TaxCut. Launched nearly a decade ago, H&R Block has invested in improving the program in the last few years by hiring prominent software executives and acquiring a software startup (TaxNet). This tax season, H&R Block is offering what it calls "worry-free audit support" to all TaxCut users, who pay between $9.95 and $49.99 for the software—depending on the complexity of their return. Under the program, if any return gets audited, H&R will assign one of its tax experts to guide the client through the process and even send an accountant to meetings with the IRS, should a full-blown audit ensue. With thousands of tax specialists employed at its storefront offices, "We're in a unique position to offer this. That's the beauty of H&R Block, compared with anybody else," says H&R Block spokesperson Denise Sposato, adding that those with incomes below $100,000 a year have a one in 107 chance of being audited. Still, analysts say TaxCut has a formidable competitor in TurboTax. Although this year H&R Block's "digital return volume" is up by almost 300,000 filers, according to Michael Millman of Millman Research Associates, its storefront client volume is down about 400,000—representing a significant loss for the company in part because "a digital return generates only about half the profit of a retail return," Millman estimates. Indeed, H&R Block is taking pains to both highlight its computer product and defend itself against what it claims are unfair marketing plays by TurboTax. The two companies have filed suits and countersuits against each other in Federal District Court in Kansas City over, among other things, Turbo Tax's advertising claims and the number of returns H&R Block says it prepares each year. The litigation is pending. For its part, TurboTax this year has launched several programs specifically intended to lure storefront customers away from H&R Block, capitalize on consumers' increasing comfort with technology, and address a common concern among would-be computer filers: that doing their own taxes will mean costly mistakes. The company is now testing what it calls TurboTax Personal Pro. For $99, program users fill out their tax forms online, but can at anytime access an accountant who will address individual questions directly via an Internet chat. Once the tax return information has been submitted to TurboTax, the customer can then consult over the phone with a live tax professional who will then file the paperwork electronically. "Customers just fundamentally want someone to tell them 'It's OK,'"says Henske, adding that the program, which was only used by a few hundred people this year, will be widely expanded next tax season. Also new this year is a TurboTax for eBay sellers. Launched in March, the online program seeks to help the more than two million full and part-time eBay sellers navigate the potentially tricky proposition of filing taxes for a small business. All from their recliners, naturally. Editor's note: The story originally reported that H&R Block expects a 20 percent increase in its business in 2006.