New rules seen boosting large US tax preparers

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Top US tax preparers, facing a weak season as many taxpayers have lost their jobs, may get a shot in the arm from proposed rules to regulate tax preparation.

The companies are also trying to expand their online presence, but their efforts face stiff competition from well-entrenched players like Intuit's TurboTax.

The Internal Revenue Service aims to introduce mandatory registration, competency tests and continual training of staff to regulate a fragmented industry, but the new rules could burden smaller companies with higher costs.

Independent certified public accountant Gail Rosen, who runs her own tax preparation firm, said higher costs to comply with the rules will force smaller players to either sell their practices or merge with bigger firms.

The proposed regulations come as a silver lining for large preparers such as H&R Block Inc, Jackson Hewitt Tax Service Inc and privately held Liberty Tax Service, who were trying to find out ways to curb the revenue slide triggered by the drop in tax filings in 2010 tax season.

Though the new rules would take three to four years to be completely implemented, larger preparers might see some material benefit this year as the IRS starts monitoring tax preparers more closely to make its presence felt, Wedbush Morgan Securities analyst Gil Luria said.

Macquarie Research analyst Bill Carcache said H&R Block may not have to pay a material price to meet regulatory requirements, as it already has well-trained staff that might be sufficient to meet the new norms.

H&R Block and Liberty Tax are also expected to gain from the woes of the No. 2 US tax preparer Jackson Hewitt, which is facing funding issues related to its financial products business.

"If Jackson Hewitt does not solve its refund anticipation loans funding issues, it is going to have a negative impact on the company and on the stock," analyst Kartik Mehta of NorthCoast Research said. "I think it is going to have a positive impact for H&R Block, clearly."

Going online

So far, companies such as H&R Block and Jackson Hewitt have relied more on their high-margin storefront operations to drive growth. However, growing emphasis on online tax preparation due to its cost-effective nature is changing the landscape for these companies.

Their biggest challenge is to grab market share from Intuit, the dominant player with nearly 79% share of the online market.

"Intuit's product has been continuously improved and fine-tuned over many years to be as accommodating and convenient, and easy for customers as possible." analyst Luria said. "So, the ease of use for Intuit's product is usually the big differentiator."

Although H&R Block has the "H&R Block At Home" software and Liberty Tax has e-Smart online tax preparation tool, these products are yet to gain popularity over TurboTax.

Also, their move to beef up digital offerings could crimp margins because of the intense competition in that space.

H&R Block might try to grow its digital business, but analyst Bill Carcache said the company would lose about USD 200 per return prepared in retail locations and gain significantly lower fees through online and software products.

"At the end of the day there's a potential cannibalizing effect there," he said.