Who’s better when it comes to filing taxes: H&R Block or an accountant? If you’re an accountant like me, my answer may surprise you.
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The 2,200-person tax preparation giant grosses more than $3 billion a year and is worth about $5 billion. During the last quarter of H&R Block’s fiscal 2015 year the company earned more than $731 million. And, although the company has had its challenges this year, analysts are expecting to see similar results for 2016 when they release earnings Thursday after market close. H&R Block has figured out how to make lots of money from both preparing tax returns and investing its (and its clients’) cash. Many accountants consider them to be the enemy. But they’re not.
According to the IRS there were more than 147 million individual tax returns filed in 2014 and 68.5% claimed the standard deduction instead of itemizing. The IRS issued refunds to more than 112 million taxpayers. But here’s what’s surprising: about 45% of taxpayers did not use a paid tax preparation service. And yet, the IRS says it received close to 70 million requests for taxpayer assistance!
When almost 70 million people have questions that tells you something: it’s still not so simple doing your taxes. People really shouldn’t be doing their own taxes. Sure, there are plenty of resources to go to if there are questions. And there’s good tax software available for those do-it-yourselfers. But H&R Block charges, on average, about $150 to prepare the typical individual tax return. This seems like a no brainer. The headaches of making a mistake far outweighs the money you’ll save doing it yourself.
So if I recommend using a tax preparer, why not use a CPA? I’m a CPA. And yet my advice nine times out of ten is to use H&R Block. It’s the best option for most individuals, and an even better option for most CPAs. Why?
Most of our clients file simple individual returns. More than two-thirds take the standard deduction. If you’re a wage-earner or even a freelancer your return is extremely easy to prepare. I’m not saying that the people at H&R Block are geniuses or gurus (they’re not). But they’re certainly trained to fill out a typical individual tax form. They have internal systems to check for errors. And they’re all setup to easily e-file those returns for quick refunds (side note: getting a refund is not a good thing – it means you gave too much money to the IRS during the year and they’re returning it to you without any interest). They do this all fast and without risk of the kind of errors an over-worked, individual CPA might make, and certainly less than you would make doing it yourself. And trust me - you don’t want to make any errors unless you enjoy being buried in IRS correspondence for years to come.
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H&R Block earns millions of dollars a year because they’ve achieved economies of scale. The typical CPA can’t do this. He’s charging $150 per hour and it never just takes an hour to do the return when you take into consideration the planning, data gathering, preparation, review, filing and paperwork involved. So unless he can charge his client more he’s going to lose money – or at best, not make very much. And for most typical tax return filers, the average CPA won’t be able to offer any value-added advice on top of what H&R Block will provide. There really aren’t a lot of tax-saving options for the typical wage-earner who doesn’t itemize short of putting away as much money as possible for retirement. Tax return preparation for the masses is not a profitable a use of a CPA’s time.
This is a lesson not just for CPAs but for any business owner providing a professional service to consumers. Sure, you can bill out your time per hour. But there are only so many hours in a week. So unless you scale you’ll never make any real money. Go ahead, let H&R Block take care of the masses. They’re already setup to do it. You don’t have the resources to make money off them. Instead, focus on the ones who need a higher level of attention and service that only you can provide and that’s worth your hourly rate. And you won’t be distracted by a bunch of unprofitable busy work. The small service firms I know who do this find themselves using their time more effectively, and profitably.