Guides through the swamp

PAYING tax always hurts. But America's tax code seems designed to make it hurt as much as possible. It contains 3.8m words, and was changed 579 times in 2010 alone. Taxpayers must wade through a swamp of gobbledygook: tax compliance consumes 6.1 billion man-hours annually, according to the Internal Revenue Service (IRS). That's the equivalent of 3m people working full-time, year-round—more than the entire federal workforce. Each year, Joe Taxpayer must sign a thick return that he cannot plausibly understand. And woe betide him if any of its contents should turn out to be inaccurate.

The obvious solution would be to simplify the tax code. The IRS's National Taxpayer Advocate begs Congress every year to do exactly this. But it never will, so most taxpayers hire a guide.

Tax advisers and preparers benefit handsomely from politicians' addiction to loopholes and unclear English. Of the 140m individuals and families who file tax returns each year in America, 60% pay someone else to fill out forms for them. Another 29% buy tax-preparation software, either to install on their computers, or more often these days, online. However, this comfortable industry, with its mass of captive customers, is due for a shake-up, thanks to digital technology and regulatory change.

Most assisted returns are done by small “mom-and-pop” tax preparers. Only one firm is a household name: H&R Block, which does about a sixth of assisted returns and earned profits of $406m on sales of $3.8 billion last year. For many, its green-square logo is synonymous with the tax season. (The deadline this year is April 17th, so hurry up.)

H&R Block dominates the face-to-face tax-preparation business but not the digital one. The leader there is Intuit's TurboTax software, which is used by about 20% of tax filers. Block's software is used by only 5.5%. Eager to catch up, Block is pushing its digital offerings hard. With some success: its software sales are growing by double-digits each year, says Jason Houseworth, the firm's head of digital products.

This year, Block has allowed filers of the 1040EZ, the simplest kind of tax return, to download an iPhone or Android smartphone app and file both federal and state taxes at no cost. (A smartphone's camera can even automatically enter the numbers from the W2 form that tell a taxpayer what he earned last year and how much tax he has already paid.) The idea behind the free app and filing, says Mr Houseworth, is to test the waters. It might also be to promote the brand to younger and more sophisticated consumers. TurboTax launched a mobile product last year.

The digital battle will be tough for Block, but it is likely to grab a bigger share of the face-to-face business. Two regulatory changes threaten to crush its small, local competitors.

The first change is the decline in “refund anticipation loans”. Many poorer workers have too much tax deducted from their paycheques over the course of the year. So they tend to file almost as soon as the next calendar year begins, anticipating a refund from the IRS. For years, tax preparers (both H&R Block and the mom-and-pop shops) offered loans against this money, earning themselves a tidy revenue stream. But increased federal scrutiny of such loans has caused several banks to quit their partnerships with the tax preparers. The loss is a modest one for Block. For many of the little guys, it may be enough to cause them to look for more profitable work elsewhere, says Thomas Allen of Morgan Stanley, an investment bank.

The second regulatory change is even more likely to push mom and pop into another line of work. Last year, the IRS issued a rule requiring most tax preparers (those who are not certified public accountants, lawyers or otherwise exempted) to take a test certifying their skills, and thereafter, 15 hours of “continuing education” annually.

H&R Block supported the change; it already has in-house training programmes. The small fry are furious; some have sued the IRS. One plaintiff, Sabina Loving, says she cannot continue filing taxes for residents of her poor Chicago neighbourhood. Another, 80-year-old Elmer Kilian of Eagle, Wisconsin, says he will have to take down his (actual wooden) shingle and retire.

Protecting you from mom and pop

The big boys say the new rule will protect taxpayers from incompetence. Mistakes are indeed common, but Dan Alban of the Institute for Justice, a libertarian outfit which is supporting the plaintiffs, says that the real problem is not dozy small tax preparers but the complexity of the tax code itself. The big-brand preparers make lots of mistakes, too, according to the Government Accountability Office, an official watchdog. So do IRS staff: a 2003 study found they flubbed most of the questions of investigators posing as taxpayers.

The IRS, bless its pocket calculators, has neither the manpower to cope with its workload nor the authority to simplify the tax code. This is bad news for mom and pop. Scott Schneeberger, an analyst at Oppenheimer, a research and investment firm, guesses that as many as a fifth of the 100,000 independent preparers may quit the industry between 2011 and 2012. That means more customers with little alternative to the green-square logo. Unless they want to risk a fight with the IRS.