Firms Respond to Competitive Tax Services Environment

Gaining new clients in the increasingly competitive tax preparation services business has meant a change in business strategy for many CPA firms and pressure for companies like H&R Block and Jackson Hewitt. Jackson Hewitt has expanded in H&R Block’s market, which has traditionally served lower and middle income taxpayers in community store fronts, the San Francisco Business Times reports. And both companies face competition for middle income clients from tax preparation software like Intuit’s TurboTax.


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“Who we serve reflects where we are in the community,” says Kathy Burlinson, H&R Block spokeswoman, noting that depending on their location they will serve the needs of the working poor, who often file for the earned-income tax credit, while in more affluent areas they assist middle-income clients.

Established CPA firms target small business owners and middle income individuals who are real estate investors or file more complex returns, the Business Times says. “We see more people investing in real estate and starting small businesses, and they’re the ones that need the tax experts,” Diane Kennedy, head of the accounting firm D. Kennedy & Associates, told the Business Times. Middle income clients facing the alternative minimum tax also turn to CPA firms for help.

Tax accountants serving the rich may offer insurance, investment and other financial planning services. Others focus on clients from a particular industry. Professionals who target this segment of the market may meet with clients quarterly, or even more frequently. “We hate to hear a client say “I did such and such’” because then it might be too late,” Michael Fitzhugh, a CPA and principal in the wealth management firm Kochis Fitz told the Business Times.

“Our relationship with clients is not a one-touch-a-year experience, but is ongoing and multi generational,” said Lawrence Wood, a partner with Smith Lange & Phillips, a San Francisco CPA firm that also serves wealthy clients.

Adding to the competitive pressures for many firms is the tax return outsourcing trend. But Kennedy finds a bright side for the profession in outsourcing because the more routine work goes overseas, leaving the more challenging work for US professionals, the Business Times reports. It also requires accountants to develop new communication and interpersonal skills, a key advantage in competing with firms that outsource.

Individual taxpayers are turning to e-filing as a natural outgrowth of using tax preparation software, the Associated Press reports, with the Internal Revenue Service’s free-file option giving taxpayers, with incomes of less than $50,000, access to 20 different software packages on their Web site,, another source of competition. Last year there was an 11 percent increase in e-filed 1040s, according to IRS spokeswoman Nora Butler.

Businesses with more than $10 million in assets will be required to e-file in 2006, many with the help of tax professionals. Increasing numbers of businesses currently e-filing their 1120s are using e-filing for W-2’s, 1099s and forms 940 and 941, the AP reports.

E-filing is faster and more accurate than a paper return, and refunds are processed more quickly but there are some pitfalls, according to Knight Ridder Tribune News Service. Taxpayers do not file directly with the Internal Revenue Service (IRS) but use software packages from established companies like RIA and CCH, or any of the companies listed on the IRS free file site. But filing directly through the IRS is like letting the IRS do your taxes for you. “It’s a little bit like the fox guarding the henhouse,” says Tim Hugo, director of Free File Alliance.

Consumer advocates say that using the software sites on raises issues of privacy and security, Knight Ridder says. In addition, the software companies pitch products to the user, including the controversial Refund Anticipation Loans, expensive, short-term loans offered by third parties.

IRS officials say that companies in the free-file program must prove they have third-party security and privacy certifications, and free-file firms must abide by consumer protection rules under their agreement with the IRS.

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