Jackson Hewitt CEO talks about the tax prep market

The Seeking Alpha website has a fascinating transcript of Jackson-Hewitt recent conference phone call discussing their firm's performance with investors.

Here's Harry Buckley, CEO of Jackson-Hewitt, speaking to investors and prospective investors in his firm in a call earlier this month:

Another issue of note is our inability to compete and file a high percentage of tax returns when we have control of the client in our office. For a variety of reasons that we must get our hands around, a large number of clients who enter our offices begin a transaction and then do not complete a return, or complete a return and then don't have us electronically file it. This is what we call holes and voids and it is a significant problem that needs to be rectified....

In looking at the entire industry, if we look at the number of returns that were filed last year, and certainly we were down over 500,000 and Block was down over 600,000, and yet the total returns filed electronically were only down 27,000. I think it's indicative from that that there is a growing market out there for independents.

My observations:

Interesting to note that the market share of the big two has fallen in the past year.

Mr. Buckley's use of language reveals an interesting view of his firm's relationship to clients. In the excerpt above, he used the phrase: "when we have control of the client in our office." The investors were apparently not bothered by his use of such language. I wonder how Jackson-Hewitt clients would feel if they heard the company CEO talking about them that way?

Unlike Mr. Buckley, as a VITA site coordinator, I have never viewed our site as having "control of our clients" when they come in to our site.

They seek our assistance, and we provide it as long as their return fits within the scope of our training and certification, and as long as they are willing and able to provide us with all the documents and information we need to prepare an accurate return. Occasionally, we do not feel comfortable doing a particular return, either because it is too complex, or because the client is unwilling or unable to provide all the information needed for an accurate return. We are quite willing to turn away such business, and try to screen it out on the phone ahead of time, whenever possible.

For example, a few taxpayers who own modest two-family homes occasionally turn up at our VITA site. They live in one apartment and rent out the other one. VITA training and certification, even at the "Advanced" level, does not include Schedule E for rental income, probably because of the complexities of depreciation rules. So we tell those taxpayers that we will be unable to do their return and they need to consult a tax professional with greater expertise than we can offer.

Another example is that a few clients ask us to prepare their return before they have received all their W-2's in the mail. We have to tell them that we can't do their return until they have all their documents. Most of our taxpayers understand this requirement, and they wait patiently until they have all the documents needed.

A very few of them complain that other tax preparers are willing to file returns in January with just a "final paystub." We tell them that we are IRS-trained and certified, and we operate strictly within the law. If the taxpayer doesn't want to comply with the law, it's his prerogative to go elsewhere--and face the consequences.

Because we are a volunteer site providing free tax assistance, we are able to prioritize QUALITY over quantity. We have plenty of taxpayers who are willing to provide us with all the information needed for an accurate return, so we have no problem with turning away the occasional taxpayer who doesn't want to provide the information we believe we need for an accurate return.

Of course, commercial tax preparers do need to worry about quantity as well as quality, and it's hard for commercial tax preparers who try to "play it by the book" to lose business to those who don't.

A commercial tax preparer who turns away business from taxpayers who want to file before they receive their W-2's is going to lose business (and profits) to unscrupulous preparers.

Here's more from Mr. Buckley's conference call to investors on that issue, specifically addressing the "pay-stub filing" issue.

Sloan Bohlen - Goldman Sachs

On the tighter IRS standards, could you wager a guess as to what impact that might have on what kind of pay-stub filing we saw last year and how that could be incrementally beneficial this year?

Harry W. Buckley

I don't think they will address that. It has been brought to their attention. Last year during tax season it was brought to the IRS's attention. They did close down a few. But the numbers are just so high out there for them to take an active stance and go after them, tax season would be over.