Online Tax Filing Firms in Battle of Goliath vs. Goliath

With the deadline for filing U.S. tax returns barely a month away, Intuit and H&R Block have shown no sign of abandoning their dominant status in the online tax preparation and filing sector.

However, despite battling to a certain extent for control of the same consumers in a specialized market, each of the Internet tax powerhouses has also been able to carve out a giant niche for itself.

"Each company is using different strategies because they each have different target audiences," Yankee Group vice president of Internet strategies Kevin Noonan told the E-Commerce Times.

Intuit's TurboTax has an enormous market share, but is essentially for the less sophisticated, less tax-savvy customer -- someone who wants to save money and does not have a complex enough return to require to a tax firm. But with millions of 1040EZ filers out there, that may be enough.

H&R Block, meanwhile, is leveraging its brick-and-mortar status to draw tax filers toward its vast array of complementary financial services, such as long-term tax planning. Block has also used its brand to partner with major players such as Yahoo! and Microsoft (Nasdaq: MSFT), which discontinued its TaxSaver software program earlier this year.

H&R Block's target audience appears to be biting. As of January 31st, H&R Block had filed 3.3 million federal returns electronically, representing a 27.5 percent increase over the prior year. For the first time in the company's history, H&R Block's U.S. tax operations reported a profit outside of the fourth quarter.

Turbo Power

Although the leader this year is yet to be decided, TurboTax clearly had the upperhand in 2000. More than 70 percent of federal returns e-filed by consumers were filed by TurboTax users.

According to Intuit, TurboTax for the Web is on pace this year to double its customer base, to about 3 million. Last tax season, 1.4 million federal tax returns were prepared and filed using TurboTax for the Web.

Ante Up

In a bold move to boost profits, Intuit increased its Web prices by 50 percent this year, and early results show both that revenue and unit volumes are way up, the company said.

TurboTax for the Web costs US$6.95 for federal 1040EZ returns filed by April 1st and $9.95 after. All other 1040 returns are $14.95 before April 1st and $19.95 thereafter.

Even with the increased prices, Intuit said that by February 14th, it had already more than doubled the number of online returns completed as of the same time last year.

Intuit has also added a Live Tax Advice service and an "Automated Tax Return" feature, which automatically incorporates W2s and 1099s into an electronic filing, assuming those documents were filed electronically by the employer or contractor.

New Kid On The Block

Both H&R Block's Kiplinger TaxCut Deluxe desktop software and its online service are more expensive and comprehensive -- and less intuitive than the software and services offered by Intuit's TurboTax.

However, for an additional $29.95, an H&R Block tax professional will review a customer's online return. The company will also answer tax questions for $19.95 per question during the online filing process.

"H&R Block has the brick advantage, which really helps," Noonan said. "They're using other financial tools and strategies to make consumers feel more comfortable, not just about their taxes, but their whole financial picture. They're looking at [using the Web service] to draw people to their offline offices as well."

Still, one should not become too beguiled by the numbers being posted by H&R Block and Intuit. The online filing market still has a long way to go to capture the trust of the American public.

Trust Issues

H&R Block and Intuit have been hampered by reliability and security issues, and the vast majority of e-filers remain tax preparers, rather than the consumer tax payers themselves.

Both companies said this week they are experiencing U.S Internal Revenue Service (IRS) rejection rates of around 20 percent for their e-filed returns.

Moreover, last week a federal judge in Richmond, Virigina came down hard on H&R Block over its Rapid Refund program, which the court deemed misleading because its advertised instant "refund" is really a loan.

"Security is the number one issue here," said Noonan. "Tax preparers are the most personal relationship people have. You still have a consumer acceptance issue in terms of both privacy and security, as well as reliability of the programs and consumer trust of their accuracy."