Tax Preparers Brace for a Shakeout

New IRS rules are expected to generate a wave of consolidation in the tax-preparation industry

By Richard Rubin

John Hewitt expects the fragmented tax-preparation industry he's worked in for four decades to undergo a wave of consolidation because of new government regulations. IRS rules that take effect this year require tax-return preparers to register with the government. Eventually the preparers must pass a competency exam and take continuing education courses.

While smaller businesses may have trouble complying, existing corporate training programs at the major chains already comply with the new rules or can be easily adapted. Hewitt estimates that within a decade the big three players will have 50 percent of the paid tax-preparation market, up from about 25 percent today, even as they compete with software programs such as Intuit's (INTU) TurboTax. "It gives us a competitive advantage, and it pushes out the moms and pops," says Hewitt, who started Jackson Hewitt Tax Service (JTX) of Parsippany, N.J., and is now CEO of Liberty Tax Service, a closely held company based in Virginia Beach, Va. H&R Block, based in Kansas City, Mo., dominates the market, with 20.1 million tax returns filed in 2010.

Kathy Pickering, executive director of the Tax Institute, H&R Block's tax policy arm, says the company's internal training already exceeds IRS requirements. First-year tax professionals get 84 hours of training, and everyone else gets 24 hours of education annually, she says. The IRS will require registered preparers to take 15 hours of continuing education per year.

The tax-prep chains and trade associations continue to lobby the IRS on details related to implementation and enforcement of the new rules. "What's going to be very difficult for the IRS is to identify those who are skirting the system," Pickering says. Both she and Hewitt say they want the IRS to extend the testing to people who prepare tax returns for free through the IRS or nonprofit groups.

The American Institute of Certified Public Accountants won relaxed testing rules for non-CPAs at accounting firms. Now it's trying to ensure that IRS descriptions of the program don't lead taxpayers to view "registered return preparers" and CPAs as equivalent. Edward S. Karl, the group's vice-president for taxation, is less certain than Hewitt about the industry's future under new rules. "If it chases away the fraudulent, that's great for everybody. To the extent that it chases away people who are reasonably competent, that may be more problematic."

The analyst's take: Total market share for the two largest tax-return preparers, H&R Block and Jackson Hewitt, eroded by about 9 percent during the past four years as do-it-yourself online tax software gained ground. (TurboTax, for example, grew by about 121 percent during the period.) IRS rules may slow the decline by forcing out mom-and-pop preparers.