People who got a taste of do-it-yourself tax tools this year because of the coronavirus pandemic may continue turning to those services in the future, forcing companies to adapt to what may become the new normal.
The current filing season is unique in several ways: it comes in the middle of a global pandemic and is three months longer than usual. That has sped up what market analysts have been increasingly seeing in recent years: more Americans are doing their taxes themselves, rather than going through the effort of meeting in person with a tax preparer.
A significant number of individuals who are using DIY services for the first time this year are likely to continue with that method, even after social distancing requirements and stay-home orders are lifted, according to analysts. If that prediction holds, the shift will benefit companies like Intuit Inc., the maker of TurboTax, over companies like H&R Block Inc., which relies heavily on in-person, assisted tax preparation.
“This gives it even more of a boost—that people are sort of forced to use DIY or work on their own,” said Andrew Silverman, a Bloomberg Intelligence tax policy analyst.
Last year, about 1.2% of filers who were using tax professionals to prepare their returns shifted to DIY preparation—doubling the prior year’s migration rate, according to data compiled by Scott A. Schneeberger, managing director of equity research at Oppenheimer & Co. Inc.
So far this year, the shift is about 5% based on the IRS’s filing statistics, though the actual number is probably closer to 3% because the DIY figures include individuals who normally wouldn’t file tax returns but did so in 2020 to get access to Covid-19 relief payments, according to Schneeberger.
“Bottom line is we’ve seen an acceleration this year in do-it-yourself thus far,” he said. “We think that’s how the season will end,” he said.
Adjusting For Virus
H&R Block, which operates thousands of offices across the U.S., said in a June earnings call that at one point it had to close 20% of its office network as a result of nationwide lockdown orders. The closures are a problem for a company that made nearly $2 billion on assisted tax preparation in fiscal year 2019. That’s seven times the amount it made on DIY services in the same year, according to its latest annual report.
The virus forced H&R Block to make changes to its operating model this year and rely more on its DIY and virtual-assistance service offerings, such as Tax Pro Go. But the in-person business has picked up again as states ease their lockdown orders, according to the company.
“Our tax offices are very busy right now, and we have extended our hours to accommodate the demand,” the company told Bloomberg Tax, adding that it’s encouraging last-minute filers to make appointments.
H&R Block’s revenues from both DIY and assisted tax preparation fell in fiscal year 2020, which ended April 30. However, the drop is partly due to the current tax season being extended to July 15, which will push some of that revenue into fiscal year 2021.
The company has downplayed any suggestions that the virus will lead to a mass migration away from assisted tax preparation to DIY, saying it expects any gains to moderate by the time the tax season ends.
Some consumers “made a different choice this year because they had to,” Jeffrey J. Jones, H&R Block’s president and CEO, said on the recent earnings call. “They expect a return to their prior method next year in large numbers,” he said, referring to a survey the company conducting of about 10,000 consumers.
Capitalizing on Virtual
Tax prep company Jackson Hewitt Tax Service Inc. expects the pandemic to have a lasting impact on the way individuals prepare their returns, seeing an opportunity for the company to capitalize on its virtual assistance offerings.
Jackson Hewitt, like H&R Block, has thousands of storefronts and relies heavily on assisted preparation.
Mark Steber, the company’s senior vice president and chief tax officer, said even before the pandemic the company was putting more resources toward virtual products, such as those that allow taxpayers to still get professional help but online rather than in-person.
“Millennials don’t want the same retail experience that a lot of traditional taxpayers do,” he said. The company accelerated and “supersized” those efforts because of the virus, he added.
Jackson Hewitt plans to continue enhancing and increasing its virtual offerings going forward, according to Steber. Even if the pandemic ends, demand for those products is here to stay, he said.
While Silverman anticipates a long-term shift to more DIY preparation, he was doubtful virtual tax assistance would have the same staying power once the pandemic ends.
“I think people just don’t like the process of having to talk to somebody over a screen as opposed to going and talking to them in person,” he said, based on gains companies have seen in that area so far.
Executives at Intuit in a May earnings call framed the pandemic as an opportunity for shifting more customers to do-it-yourself tax preparation.
Intuit, a tax software company, currently dominates DIY tax preparation with 55% market share, according to a recent Bloomberg Intelligence report. In addition to its TurboTax product, the company offers the hybrid service TurboTax Live, which allows customers to connect with tax professionals online if they have questions while preparing their returns or want someone to review the final product.
One of the biggest hurdles for people to shift to DIY is confidence, Silverman said. Individuals may decide to stick with the method in the future after trying it this filing season, especially since it comes with a much smaller price tag.
On average, it costs more than $200 to use H&R Block’s in-office assisted tax preparation services, Schneeberger said. In comparison, it costs around $40 to $60 for DIY services at H&R Block and Intuit, he said.
Ashley McMahon, a spokeswoman for Intuit, said the company will have more to say about revenue from this tax season and the number of filers using TurboTax in future earnings announcements.
The company’s CEO Sasan Goodarzi struck an optimistic note in the May call, saying “there’s just simply a tailwind of more and more folks wanting to be able to do their taxes themselves.” But he shied away from making broad predictions about future trends.