The Story Of The Largest Income Tax Preparer In The Usa Accounting Essay


The story of the largest income tax preparer in the United States can trace its roots back to one man with a pamphlet [1] ; after reading about the changes business owners would confront in coming years, Henry Bloch began developing a business plan that would provide tax planning, financial accounting, and temporary labor to small business owners. Even with the addition of an additional Bloch brother, Richard, and start up capital, the company was struggling to make a profit off of time-consuming tax work. Rather than discard this segment of their business, the brothers offered to do any tax return for a set five-dollar fee [2] . In conjunction with the new, low fee, the Bloch brothers ran an advertisement in the local newspaper and became an immediate success. Having established a successful business in the Kansas City area, the brothers believed that they were ready to expand into other parts of the country, however neither brother felt inclined to move. Hence, the Bloch's sold their first franchise to two New York CPAs for $10,000 plus additional royalties [3] . With the expansion of their business, the brothers decided to simplify the spelling of the company name, changing the "Bloch" to the more phonetically comprehensible "Block."

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        Since it's 1955 founding H&R Block has continued expanding both geographically and horizontally into new business ventures. While the majority of expansion was throughout the United States, the company maintains a strong presence in Canada as well as the United Kingdom and Australia. There are currently 12,500 domestic H&R Block tax offices, as compared to only 1,400 abroad [4] . H&R Block collaborated with the IRS to assist in the implementation of electronic filing; currently the company offers a variety of software packages (ranging from free to $50) that not only assist with the tax return, but also offer customer support through H&R Block tax preparation specialists [5] .

        With the multitude of ways H&R Block provides taxpayers to file returns, it is unsurprising that there is no average customer. The H&R Block behemoth is challenged to acquire new clients, while marinating the old, in the highly competitive and specialized field of tax preparation. H&R Block is contending with other brick and mortar firms (ranging from 1-2 individuals to the multi-national giants that dominate the accounting world) as well as a plethora of other software providers, some of which are offered for free through government sponsored programs [6] .  In 2010 the average cost to have your taxes prepared, and filed by an employee of H&R Block was $187 [7] , which for many people was too much. The recent economic turmoil has lead to fewer clients looking for one-on-one assistance for their taxes, as such H&R Block revealed a plan for a restructure of their support organizations; this includes the closure of 400 offices and the termination of 400 employees. Even before these planned reductions, the company had a market capitalization around $4.7 billion [8] .

        The nature of H&R Block's business is extremely price sensitive, during the economic recession of the last five years, H&R Block has preformed well below the S&P 500 [9] . However, they have also been profitable during that time, in 2009 H&R Block was reporting revenues of $3.87 billion and gross profit of $1.41 billion [10] . Overall the company was operating with a 12.45% profit margin.

External Analysis

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        As previously stated, the environment that H&R Block operates in is extremely vulnerable to a number of different factors; namely the economy and the multitude of competitors and substitutes for the products and services that H&R Block provides. The number of returns prepared by H&R Block fell by 1 million in 2010, which was worse than the .7 million decline in preparations that occurred in 2009. In their financial statements, the company stated that this decrease was due in large part to increased unemployment among their target demographic [11] . H&R Block, along with every other tax service, must be prepared to face substantial litigation costs that arise with the Internal Revenue Service. Tangent to these legal battles is the threat to the firm's reputation, if the company is constantly entangled in legal battles they will no longer be viewed as offering a quality service.

Tax preparation services must also cope with the fact that their work is highly seasonal, yet the employees must receive extensive training and education in order to have a command of the complex, heavily regulated tax code. Like many other firms H&R Block must be able to increase their labor force during the first quarter of the year, only to let these same people go after the last tax deadline. To handle this hiring process, H&R Block provides a tax course [12] , which allows those new to the field to an opportunity to learn the basics of tax return preparation. While attendance at these courses is not a guarantee of later employment with the company, H&R Block does use these classes as a way to recruit potential new employees to staff it's many locations. However, due to the extremely difficult nature of the tax code, it is unrealistic to expect students to master the material to the extent required to actually prepare returns [13] .

H&R Block has no standard customer, but typically works with middle to lower income families. These customers are price sensitive, and rarely loyal to their form of tax preparation. The advent to electronic filing has expanded the number of individuals who file their own return. Due to the fairly homogeneous market, those who purchase software often base their decisions solely on price. H&R Block may have strong brand recognition, and the largest tax preparation in the United States, but they have nothing to ensure that customers will choose them for tax work due to the relatively low barriers to entry within the market. Becoming a Certified Public Accountant requires a college degree followed by a series of grueling tests, becoming a CPA who specializes in tax requires even more hours and an ability to catalogue the detailed and shifting tax code. Once completed, the CPA is free to perform tax return preparation making this industry extremely easy to enter and exit.

Competition may take many forms for H&R Block, but there are certain firms that pose a greater risk than others. Based in New Jersey, Jackson Hewitt is the second largest tax preparation service with 724 offices and 6,600 franchises [14] . Roughly a quarter of these offices are located within other stores [15] , such as Wal-Mart, which allow the company to reach their target demographic without maintaining their own offices. The company emphasizes electronic filing, and distributes it's own tax preparation software [16] . Like H&R Block Jackson Hewitt offers a tax preparation course; the course is divided into three levels, placement within the course depends on the individuals experience or completion of the prior level. Jackson Hewitt is currently trying to recover market share lost in a 2007 scandal wherein 127 offices were implicated in a scheme claiming over $70 million in fraudulent deductions [17] .

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Although it's market share doesn't compare to that of H&R Block, Liberty Tax is a tax preparation franchise that is poised to overtake it's much larger rivals. John Hewitt, co-founder of Jackson Hewitt, founded Liberty Tax when the company acquired a Canadian tax preparation service. With 3,000 franchises in North America, Liberty Tax is the fastest growing tax preparation service in the history of the industry [18] . The company takes a somewhat atypical approach to business; their mission statement encourages employees to strive for improvement, but also to have fun while doing so. Therefore it is unsurprising that Liberty Tax regularly sends an employee to the streets dressed as the Statue of Liberty to wave at passersby. Like it's larger rivals, Liberty Tax hires highly trained and experienced employees; however, they differentiate themselves in that they emphasize staff diversity [19] . In 2010 there was speculation that H&R Block would attempt to acquire the upstart, at the time Liberty Tax was valued between $300 million and $400 million [20] .

H&R Block must always be wary of their direct competitors an increasingly concerned with individuals who use at home tax preparation software. For around $50, individuals can file their own returns after completing a series of questions prompted by the software. Turbo Tax is currently the industry leader; information can be uploaded directly from Quicken accounts to expedite the process. Software is available in five different versions and ranked by the difficulty of the tax implications involved. This variety allows customers to purchase software tailored to their individual needs without having to pay for unwanted features [21] . The relative ease of producing downloadable software allows Turbo Tax to cheaply produce multiple versions without many of the risks typically associated with manufacturing such as obsolescence or overstock. In order to stay competitive in the market H&R Block acquired Tax Cut software (now called H&R Block At Home), which grants customers access to H&R Block employees for any questions they still might have. Customers may also purchase audit protection, wherein H&R Block will assist individuals being audited in their dealings with the IRS [22] . The cost savings of using software, as opposed to an accountant, averages out to around $150 [23] , however it is important that individuals maintain thorough records of their transactions.

Internal Analysis

               Block's rough past few years have led to a shift in its business focus and related policies. The gist of their new outlook can be summed up with their mission statement:  "To be the most trusted, state-of-the-art tax preparation experience at a great price for everyone" [24] . Since Russ Smyth took the helm as CEO in 2008 he has led Block in retuning focus to their core competency: tax advice. Under him, Block exited the financial products market where its attempts to offer services such as mortgages and investment plans was performing very poorly. In the same vein Block is working to strengthen its standing in the digital tax preparation mark and market itself to a more affluent consumer base, specifically trying to raise its average customer's income from the current $39,000 to $50,000 [25] .

           Block's network of 12,500 domestic and 1,400 international retail tax preparation locations is simultaneously one of its greatest strengths and weakness [26] . Tax season only lasts a few months of the year, so determining what to do with their real estate and employees in the interim months has been a challenge. At the same time this extensive network creates excellent brand recognition and enables Block's focus on solid face-to-face customer service. During tax season, Block employs 15,00 seasonal workers, which are concentrated in satellite offices to actual brick and mortar stores, such as kiosks and small offices in locations such as Walmart. These tax pros are employed from independent CPAs to smaller auditors in other companies who have the time and are looking for supplemental insurance during the year. This supplemental work force does not require additional training for the most part, simply guidance on following Block policies regarding specific issues that deal solely with company information.

           Recently, Block has been working with Kansas City-based health insurance provider Blue Cross and Blue Shield to prepare for the new health-care reform legislation. Block believes this partnership with health-care providers could lead to a new use for their retail locations during the off season. The health-care reform bill will lead to many small and medium sized businesses across the country seeking consultation on what their legal requirements and opportunities are [27] . If Block can cultivate partnerships with major health-care providers and position itself as a knowledgeable advisor on health-care issues it could blossom in to an excellent revenue stream to bolster their tax advice services.

           Going hand in hand with the woes Block experiences regarding its retail holdings are their incredible appetite for seasonal workers to meet the demand around tax season. However, they have managed to leverage this in to a strength through their fall Income Tax Course. They offer the course each fall at their retail stores in preparation for tax season. Individuals wanting to learn the basics of personal tax law and filing procedures can attend for a fee around $100, depending on location. After the course those who performed well were offered a temporary position for the upcoming tax season [28] . This method provides two sizeable advantages by offsetting the cost of training to the potential employee and allowing Block to pick and choose those who show the most aptitude for the material. Many of their seasonal employees return from previous seasons or are professional accountants looking for supplemental income by working evenings or weekends during the tax season. By crafting their hiring system such, Block has turned what might be a weakness in another company in to a competitive advantage.

            Although its future seems to be in jeopardy, Block's agreement with HSBC Bank to finance refund anticipation loans, called RALs, is a strong competitive advantage currently. In 2010 approximately 2.1 million clients took advantage of Block's RAL program, amounting to $140 million in fees or around 5% of their total revenue [29] . A new IRS policy does not allow banks to see whether there are any claims against a tax refund are causing tension between Block and HSBC and they are currently in litigation over the contract, although analysts predict they will still be able to offer HSBC backed RALs for the 2011 tax season [30] .

The major weakness in Block's tax advising endeavors is their showing in the digital sphere. Independent reviewers rate H&R Block at Home quality as lower than competitor's offerings [31] and they are continuing to lose market share in this area [32] . However, they are taking measures to remedy this situation. In addition to continued internal development, Block announced it would be purchasing 2SS Holdings Inc, the owner of TaxACT, another popular online tax preparation suite. TaxACT had 5 million customers in the 2010 tax season, compared to Block's 5.9 million [33] . If Block is able to adequately integrate the new company and maintain its customers, it will leave them in a much better position in the growing online sector.

Competition Comparison  

We have already established the fact that H&R Block is the industry leader in tax preparation. Although they are the leader it does not mean that they are not observation of the competition. Jackson Hewitt and Liberty tax are their main competitors for individual tax preparation. H&R Block hold a significant market share but Jackson Hewitt and Liberty Tax continue to battle over second place. H&R Block has 12,500 domestic locations and 1,400 locations abroad. Jackson Hewitt has 724 offices and 6,600 franchises while Liberty Tax lags behind Jackson with 3,000 franchises. A key success factor for this industry is the ability for customers to walk in off the street and get there taxes done for a nominal fee. The fact that H&R Block has twice the locations of its closest competitor is no doubt a key factor in there market dominance.

Revenue for H&R Block over the last twelve months 3.87 billion while Jackson Hewitt's is 213.14 million. HRB's net income is 490.38 million over the last twelve months while JTX's while -269.61 million. H&R Blocks is doing significantly better. This is reflected in the price of the their stock compared to H&R Block's. Jackson Hewitt's stockis selling at .77 a share with an earnings per share of -9.41. H&R Blocks stock is selling at 13.02 a share with an earning per share of 1.46.

Not only does H&R Block have to be observant over direct competition they also have to keep an eye out for substitutes. One threat to H&R block is the online tax preparation Turbo Tax. You can either buy the Turbo Tax software or go to their website and do it yourself. This is a serious threat to H&R block due to the fact that it is a cheap alternative for tax.

To compete with Turbo Tax H&R Block has responded by extending their product line of tax preparation with the TaxCut income tax preparation software. The name is of the software is H&R Block At Home. This costs anywhere form $20 for the basic &45 for the Deluxe package to $60 dollars for the Premium package to &75 for the business package. Turbo Tax software costs $58 for Deluxe, $86 for Premier, and $90 for Business package. These are the prices on [34] .

They responded with to the Turbo Tax online with their recent acquisition of  TaxACT, which is a privately owned online tax preparation service. They publicly announced this decision October 13th, 2010.  The five million customers TaxACT served last year are now going to be H&R Block customers. TaxACT like turbo tax offers federal tax preparation free of charge with the possibilities of upgrade to a higher package that offers more support and more options. Turbo Tax offers upgrades also.  Like Turbo Tax though customers will still have to pay for the filing of state taxes which will be around $15 dollars [35] .

With the addition to the online service H&R Block is planning on this not taking away from the customers of their in office tax preparations. They think that they will be serving a different "younger" market that has more simplistic needs then the customers who go into the stores. After all they will not make as much money on these customers as they will on the in store customers [36] .

TaxAct has performed rather well in the past. From 2006 to 2010 they had growth of 22% compound annual growth. At the end of 2010 fiscal year they had generated approximately $70 million dollars. As long as the acquisition is completed by the end of 2010 then TaxAct should add approximately $.05 to the earning per share for the fiscal year 2011 for H&R Block [37] .

A project that Block has recently put into action is its own banking system for the company as well as customers who need additional help from Block. While not advertised directly via TV adds like tax services, this "bank" allows customers to borrow, maintain a regular checking account, as well as buy a line of credit. What makes the scenario of these baking services unique compared to other companies and services, is that Block has the ability to collect default payments from customers who file their taxes with the company. In our interview with V. Rockford from Block, he shared that while the service is available to anyone who seeks it to supplement their income or as a regular checking service, Block does not promote it to everyone because they do not want most of their business to go to this project. H&R Block is known for tax services, and as strategic control, they want to make sure their edge is in this field. This is simply a supplemental field used primarily for Block focused projects to have capital.

The Block Culture and Workers

Senior Internal Auditor Vincent Rockford was interviewed to discover what working for Block is like at World Headquarters, located in Kansas City, MO. Since the opening of its doors in 2007, the new Block HQ has seen many shifts in employee numbers, as Block has navigated its was through recent troubles. The information provided in our interview deals with the culture of Block, and how this has affected it as a company, as well as implementation for future goals. Rockford shared that in Block, while tax season may be one of the busiest times for all workers, the company stresses keeping a relaxed atmosphere, for the customers in the smaller stores, as well as for all workers. This is turn translates to the experience that the customers get, which gives Block a competitive edge over other providers. Overall it is know that Block has operated within an ethical code that has been updated recently. All workers are required to submit written acknowledgement that they have read the "Block Code of Conduct" and understand what it asks of them at all levels of employment, as well as how they should interact with others. In light of recent accounting scandals such as ENRON in 2001, H&R Block wants all employees to feel comfortable bringing attention to situations that could not only be detrimental to other employees, but also to the company as a whole. Each employee has access to a "Whistle-blower Hotline" where they can speak with someone anonymously, and report any violations of the ethical code laid out by upper management.

One detriment that Block might face is that while the company atmosphere is not harsh in any ways, it does not promote the utmost respect for management, or even the workers themselves. Rockford revealed that while management is working with the employees on a continual basis, making sure they are known, they do not always hold themselves to the standards they hold workers, which leads to some discontent between workers and management. He shared that there have been many instances of workers being fired for speaking badly of management, and even of management being fired for mistreatment and favoritism of working departments. This is incredibly detrimental to Block because if the workers don't have respect for management, they won't do their jobs and see no incentive to be productive and hold the ethical code to the standards it sets.

Recommendations for Strategy

H&R Block is allowing itself to be victimized by the industry it operates in; it requires a flexible and well-educated labor force to staff its many offices, and yet their training course (a significant source of recruitment) is ineffective. Tax preparation requires two seemingly divergent ideas; firstly employees must have extensive training and continue to receive training in order to maintain mastery of the tax code. Secondly many employees must contend with the fact that they are seasonal workers and consequently that their pay won't be comparable to other accounting firms. In order to attract employees H&R Block runs a training program from which it can identify potential workers; however the program needs to be updated. According to the account of one attendee, the instructor was unfamiliar with basic aspects of corporate policy, posted answers without any actual teaching, and encouraged group test taking. Our interview with V. Rockford revealed that for a senior internal auditor, training mostly consisted of building procedure, as well as company policy and small details, not specifically on how to perform the job well and to Block standards. Employees are simply expected to know what they are going to be doing before their first day of work, so training sessions come across as worthless to most of the employees.

The article goes on to illustrate how the grades in the class were meaningless, as correct answers were provided to any assignment before grading. While some students are capable of learning by working towards a known answer, it is clear that this form of instruction involves no actual teaching. If the final answer is truly the only issue, the instructors should be trained to withhold the correct answers until students have had adequate time to develop their own solutions. In addition if grades are going to be assigned in these courses, they should be based on the student's actual knowledge rather than the student's ability to ask the instructor or other students for answers. A highly trained work force will ensure that will reduce the amount of errors on tax returns, which will in turn reduce expensive litigation costs.

H&R Block has lost 1.7 million customers in the last two years. They claim that this is because much of the middle class has been unemployed during the recession. Currently they are in not only in the United States but also Canada, United Kingdom, and Australia.  To offset the loss of clientele in the United States H&R Block should expand in other countries. Not only do they have the option to continue opening new offices in countries where they already have a presence, but they could also expand into new markets. Due to the complexity of international tax codes, H&R Block may want to partner with existing firms in the countries they intended to expand into. Doing so will provide them with valuable insights into the industry, as well as distribute the risk associated with the business venture. While it is riskier, expansion into new countries may be a more strategic choice for H&R Block than continuing with their expansion in North America. Jackson Hewitt and Liberty Tax can easily continue to expand into Canada, whereas they would have a harder time entering entirely new markets.

Finally, Block has to work on internal issues in order to be successful in their industry, and with customer interaction being the key component of their business, it is important that full respect be achieved among all levels within the company. Our interview revealed that while ethics are held within the business, the company management and workers do not have respect for one another on many levels, and thus this translates down to poor performance within the company in areas that require information to be communicated effectively. Training needs to emphasized not only in areas of policy, but also in human relations and management within the company. Achieving this level of respect will not only further ethical behavior of workers, but keep management connected to workers and communication ties strong.

H&R Block has dominated the tax preparation industry for the last fifty years, but the availability of cheaper substitutes to their services has deeply affected their profits. In order to stay competitive in the industry, they will have to make some changes to their operations.