Accounting Today - October 2011

Chopping off the old Block

Recently, a former colleague whom I had worked with during an overlong apprenticeship at a local daily newspaper announced that he was taking on a second career after nearly a quarter century of toiling in some form of media or another. After whining for years how much he was paying his accountant to prepare his taxes and pointing out how his journalist’s compensation package didn’t exactly rival Rupert Murdoch’s, he somehow envisioned a second act as a paid tax preparer moonlighting for a large franchise which shall remain anonymous. Sort of like the occupational version of a mid-life crisis, sans the Harley or the super-charged Camaro.

Far be it from me to be the proverbial dorsal ;n at the shipwreck, but I did my best to show him that a franchise preparer was never going to be on the same pay grade as, say, a tax partner at a Big Four ;rm. Besides, the preparer landscape is far di;erent from what it was even ;ve years ago, and not necessarily for the better.

For one, the preparer market will be more di;cult for non-professionals. A franchise preparer in, say, 2005, would not be squarely in the net of the Internal Revenue Service’s sweeping preparer registration mandate, which requires, among other things, applying for a Preparer Tax Identi;cation Number. In addition, if you don’t happen to be a CPA, attorney or enrolled agent, you’re required to pass a competency exam and suitability check, all of which are expected to start this fall, and complete 15 hours of CPE beginning in 2012.

For another, tax prep revenues are down. As an example, of the 16 ;rms that comprise the Top Tax Firms as part of our Top 100 Firms report, 12 reported revenue declines from the prior year. One of the notable exceptions was Liberty Tax Service, which was up more than 20 percent, and recently ;led for an IPO.

Conversely, Jackson Hewitt, which in August won court approval to exit bankruptcy with a revamped balance sheet, is still reeling from years of problems and customer complaints with its refund anticipation loan business, which culminated with banking regulators ordering its primary RAL provider, Santa Barbara Bank & Trust, to exit the RAL business. In fact, the company’s unsecured creditor body is top-heavy with plainti;s in class-action lawsuits that challenged Jackson Hewitt’s practices in o;ering RALs.

Halfway across the country, H&R Block — which, incidentally, prepared 24. 5 million returns last year, for those keeping score at home — made headlines when its board agreed to let its McGladrey & Pullen unit buy back RSM McGladrey Inc. for $610 million, re-uniting the assurance, tax and consulting practices under an integrated McGladrey & Pullen partnership structure. However, generating a far lower headline pro;le was the fact that Block reported a widened ;rst-quarter loss of $173.4 million — magni-;ed by the after-tax charge for the RSM sale — compared to red ink of $127.6 million in the year-ago ;rst quarter, or the fact that both systemwide revenues and pro;ts have been sliding since 2009.

;e RSM deal fueled rumblings that Block itself may soon be placed on the, well, block, as a possible target for a large ;nancial services ;rm or even an IT conglomerate.

I don’t know if I can see a venture capital concern or even a Microsoft, for example, breathlessly awaiting to enter a largely franchised and unfamiliar market like tax prep and sweeping up Block.

But as much as I’m loath to admit it, I’ve been wrong before.

I also cautioned my friend to hold o; on that Harley — at least for a little while.

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