Not many people get the warm fuzzies when discussing the Internal Revenue Service, but national tax-prep service H&R Block (NYSE:HRB) is swooning over the taxing agency, defending its honor after an appeals court smacked down the IRS's ability to regulate independent tax preparers.
Upholding the district court ruling in Loving v. Internal Revenue Service that the agency exceeded its authority, the appeals court said "the IRS's statutory authority ... cannot be stretched so broadly as to encompass authority to regulate tax-return preparers."
Death and taxes
It's understandable why H&R Block would want independent tax-prep services regulated, as this would mean more business for it. According to the Justice Department, almost half of the 142 million returns filed in 2011 used a paid preparer. But with tax fraud supposedly on the rise, it moved to regulate unlicensed preparers, requiring up to 700,000 of them to meet testing and education requirements.
Three firms -- H&R Block, Jackson Hewitt, and JTH Holding (NASDAQ:TAX)(better known by its Liberty Tax Service operations) -- control a third of the $9.4 billion tax-return business and supported the regulation. Intuit (NASDAQ:INTU) was another prominent supporter, whose TurboTax software is the biggest and best known self-prep tax service, generating $1.5 billion in revenues in 2013, or 36% of its total.
Opposing the power grab by the IRS was the libertarian Institute for Justice, which noted the tax agency relied on an obscure Civil War-era rule governing the representatives of Civil War soldiers who sought compensation for dead horses.
Taxation without representation
H&R Block needs the regulations to eliminate as much of the competition as possible. While H&R Block is the leader in face-to-face tax prep, business is stagnating in other segments. In the software space, where 20% of all filers use Intuit's service, while only 5.5% use H&R Block's. In addition, others like Blucora's (NASDAQ:BCOR) TaxACT are growing their market share by double-digit percentages.
Yet the number of people using these services has plateaued. Block saw IRS returns fall 1% last year, while Intuit said there was a surprising lack of growth in return preparation, with software prep taking half the rate from manual prep it anticipated it would.
Fortunately for Block it had friends in high places to help tilt the playing field in its direction. Its former CEO, Mark Ernst, was appointed deputy commission of the IRS by President Obama and oversaw the drafting of the favorable regulations to his former company. No wonder then why H&R Block lashed out at the court ruling, saying it was "a blow to honest taxpayers." Perhaps, but it's also a victory for taxpayers to choose for themselves who they want to prepare their returns -- or, as the Institute for Justice put it, a blow to economic regulations that "were classic economic protectionism."
The power to tax is the power to destroy
Albert Einstein once remarked, "The hardest thing in the world to understand is the income tax". Having a competent preparer is certainly worthwhile to ensure you pay only the amount of tax due, and no more. As an old Morgan Stanley ad said, "You must pay taxes. But there's no law that says you gotta leave a tip."
Taxes may be as much a part of our lives as death, but having a range of choices available to confront them is important. Whether it's a face-to-face service like H&R Block, software help by Intuit, or a mom-and-pop tax-prep service, the appeals court decision is something we can all love as the new tax filing season begins in earnest.
A taxing decision
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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.