Most investors understand the key tenets of the recently passed Inflation Reduction Act. The legislation is beneficial for the renewable energy industry and the electric vehicle market. The bill also facilitates lower prescription-drug costs, while also expanding the IRS's capacity to enforce tax laws. Although it's been modestly criticized, most people can live with it, knowing many of its goals are ultimately for the best.
However, there is one group that may have quite a bit to complain about with the Inflation Reduction Act -- owners of H&R Block (HRB 2.57%) and Intuit (INTU 0.29%) stock. Although it's gone mostly unmentioned, the bill calls for -- and funds -- the exploration of an online federal tax-filing platform that has the potential to replace H&R Block and Intuit's for-pay tax-filing software. Both companies rely heavily on this business.
The winds of change are blowing
It's too soon to break out in a nervous sweat. The legislation only provides $15 million to the Internal Revenue Service (IRS) to study the idea and gives the IRS nine months to get back to Congress regarding what it finds. Then, being a government operation, it could take years to implement any actual changes in how consumers and corporations file their taxes.
Nevertheless, this funding and mission are just the latest chapter in a long-standing effort to make such an online option available. Paying taxes is a legal requirement anyway, and many other developed countries' tax-collection agencies already offer such an option. So this looks to be the eventual shape of things to come in the United States as well.
Yes, many taxpayers already qualify to file their taxes online for free. Indeed, the nearly three-fourths of U.S. households that earn less than $73,000 per year are eligible to use the IRS Free File option. According to a 2020 study performed by the U.S. Government Accountability Office, however, only about 3% of taxpayers choose to do so. It's either an indictment of the platform's difficulty to use, a lack of awareness of it, or both. Either way, it's a tepid utilization rate that, if improved, could make IRS agents' jobs considerably easier, rendering them more cost-effective employees.
Translation: Don't be surprised if the $15 million worth of research into the idea advances the premise at least a little further down the road, pushing Intuit and H&R Block back as a result.
What's at stake
The impact of a federal adoption of a free, online tax-filing system could prove devastating to both companies. Intuit is in slightly less jeopardy. While TurboTax makes up the lion's share of its consumer segment, this division only accounts for about one-third of the company's typical top line. Nearly half of its sales are driven by its QuickBooks accounting software used by small businesses and self-employed individuals.
Still, one-third of any company's business is nothing to sneeze at.
H&R Block's situation is more dire. While only a little less than one-tenth of last fiscal year's revenue came from consumers and small businesses using H&R Block's online tax-preparation software, 60% of its top line was driven by assisted tax-filing services. If the IRS not only builds a functional online tax-filing platform but makes it user-friendly enough for all to utilize, the need for H&R Block's personally assisted preparation services could be seriously reduced.
Keep your finger on the pulse of this movement
As was noted, it's too soon to panic. The sort of overhaul being proposed could take years to bring about if it's put in place at all. H&R Block as well as Intuit have successfully staved off implementation of the idea for years and may well continue to do so. The echoes of previous non-compete agreements the IRS forged with for-profit, tax-preparation software companies are still ringing, although the agreements are no longer legally in effect.
Even that piece of the puzzle is changing now. Massachusetts Sen. Elizabeth Warren is publicly pressing Intuit for answers to questions about alleged efforts to obscure free-to-use tax filing options. Minnesota Sens. Amy Klobuchar and Tina Smith along with Warren recently introduced legislation (outside of the Inflation Reduction Act) that would mandate the creation of an online tax-filing site that would be free for all U.S. taxpayers. Meanwhile, although the IRS's non-compete clause is technically no longer in effect, the Government Accountability Office is now recommending the agency specifically make a point of telling online tax-preparation players that it will be developing a free alternative for all taxpayers.
Read between the lines. This movement may have developed more momentum than Intuit and H&R Block can fight off. If that ends up being the case, both stocks become very tough to stick with.