New York - Americans are increasingly turning to financial software to do their own taxes. That's great news for TurboTax maker Intuit, but it's a lot less encouraging for H&R Block and other professional tax preparation companies.
The total number of self-prepared returns filed this tax season is up 3.3% compared to last year, according to figures from the Internal Revenue Service through early April. Meanwhile, the number of returns filed by accountants and other tax professionals fell 1% over the same period.
The growth in DIY tax returns is "encouraging" for Intuit, said JP Morgan Securities analyst Sterling Auty in a report this month. It's a trend that has accelerated within the past few years.
So it's no wonder that shares of Intuit are up nearly 250% in the past five years, while H&R Block has fallen more than 6% over the same time frame. Intuit has trounced the broader market as well: The S&P 500 has gained about 56% since April 2014.
The rise in popularity of tax software like TurboTax has clearly hurt H&R Block and its network of more than 10,000 tax preparation professionals. Sure, H&R Block has DIY software, too. But that business pulls in a tiny fraction of sales.
DIY tax preparation in the United States accounted for less than 5% of H&R Block's total revenue in the first nine months of this fiscal year. Assisted tax preparation for US customers generated more than 40% of the company's sales.
Intuit, on the other hand, generates about 30% of its overall revenue from DIY consumer software like TurboTax. (The company also owns QuickBooks, a line of small business software, as well as Mint, the personal finance app.)
"The DIY tax business has been growing much faster than assisted tax preparation," said Michael Millman, an analyst who follows both Intuit and H&R Block for Millman Research Associates. "It's going to be hard for H&R Block to catch Intuit and TurboTax."
Tax reform hasn't helped H&R Block, either.
H&R Block CEO Jeffrey Jones said in March that the company expects that more Americans will now be able to take the standard deduction.
Simpler tax preparation is not necessarily great news for H&R Block and its network of professionals. But Jones said that the changes to the way taxes are filed are why the company is trying to emphasize the software it provides for personal use.
"I never want to pretend like we have our head in the sand, and that there isn't some migration happening, which is why we're investing like we are in building out our DIY business," he told analysts on a call to discuss the company's earnings.
Intuit CEO Sasan Goodarzi, meanwhile, recently called tax simplification "really good for consumers" during a February earnings conference call.
Making matters worse for H&R Block, Intuit has introduced new products that target people who still want some tax assistance. The company launched TurboTax Live, which lets people chat online with certified public accountants, in November 2017.
Analysts also favor Intuit's outlook. The company's earnings are expected to grow 15% annually over the next few years. H&R Block's projected growth rate is 10%.
Lack of competition from the US government
One competitor neither company will likely have to worry about anytime soon: the US government.
That's because there is bipartisan support in Congress for a new bill dubbed the Taxpayer First Act, which would prohibit the IRS from creating its own online tax preparation software.
The bill is controversial. The nonprofit journalism website ProPublica has pointed out that both Intuit and H&R Block have lobbied Congress extensively to keep the IRS from setting up its own free tax filing system.
Asked about the bill, an H&R Block spokesperson told CNN Business that the company is "committed" to "providing help and inspiring confidence in our clients and communities everywhere."
"We regularly engage with policymakers on matters that would benefit taxpayers, including the Taxpayer First Act, which would improve and modernize IRS service," the spokesperson said in an email.
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