Trump vs. H&R Block

The same is true in the weeks leading up to mid-October, the deadline for taxpayers who filed for extensions. From her office in Santa Barbara, Calif., in early October, she tells one client that he had made too much money last year to contribute to his Roth IRA. Another confesses to her that the way he depreciated some business equipment in previous years was all wrong, and he wonders if he could just fix it on his taxes sometime in the future. She laughs and tells him no—and that it needs to be corrected as soon as possible.

It’s a busy pace, and MacMillan doesn’t see any of it changing anytime soon—even as Republicans in Congress push a tax-reform plan they tout as a revolutionary step in simplifying the tax code. Speaker of the House Paul Ryan says the plan represents “radical simplification.” The president said on October 11 that his tax plan would make the code so simple that “H&R Block will not like Donald Trump very much.” MacMillan reports zero concern for her job security, echoing the tax-preparation industry as a whole.

“Even with all the changes they’re talking about, it’s still going to be really complex,” she says.

The Republican tax plan, a nine-page manifesto released in late September, is being billed as a “unified framework,” supported by the White House, Senate, and House of Representatives. There are many parts to it, including significant cuts to business taxes and reductions in the individual rates. It would eliminate most itemized deductions and kill the estate tax and the alternative minimum tax. It includes a number of features aimed at the middle class, such as increasing tax credits for children and the standard deduction.

Politically, the effort represents a make-or-break chance for Republicans to prove they can govern, following their repeated failures to agree on health care. Leaders are advertising the push for tax reform as a fulfillment of longtime conservative goals, such as reducing the power of the Internal Revenue Service, spurring economic growth, and, yes, making filing your taxes simpler. The plan claims eliminating deductions and increasing the standard deduction will make taxes easier for more people and allow “the vast majority of individuals and families to file their taxes on a form as simple as a postcard.”

Yet tax preparers, who would presumably suffer if taxpayers no longer seek professional advice, aren’t worried. MacMillan expects to prepare about 150 tax returns this year in the spring and fall—the typical tax form she files has one federal form plus eight schedules and one state form with three schedules. She doesn’t see that changing. Her outlook suggests that the Republican tax overhaul might be less sweeping than our elected leaders suggest.

We all know that our taxes are too complicated. The IRS estimates that the average individual taxpayer spends 13 hours and $210 each year doing his taxes. The complexity only grows each year as Congress adds regulations to help working families or small businesses, to increase fairness, or just to raise money. At nearly 11,000 pages and four-million words, the U.S. tax code is seven times as long as War and Peace. The instructions for the IRS’s 1040 form and associated schedules run 241 pages.

The chief sources of complexity will not disappear under the Republican plan. Deductions for mortgage interest and charitable giving will remain. Child tax credits will expand. People with rental income, capital gains, and side businesses will still report those details. There will still be rules governing saving for retirement and paying for education. Leaving alone these provisions and others is a nod to the reality that the tax code contains many popular provisions.

“Simplicity isn’t the only guiding principle here,” says Edward S. Karl, vice president of taxation with the American Institute of Certified Public Accountants. “The principles of good tax policy will often collide, and you have to balance them as best you can.”

Tax professionals don’t believe that tax simplification is really going to make taxes that much simpler for most people. Even taxpayers whose financial lives lack complexity might see little difference. Republicans say that nearly doubling the standard deduction will eliminate complexity for many families. But two-thirds of U.S. households already take the standard deduction.

Tax preparation is a big business. Roughly a third of Americans rely on tax software to prepare their returns. Less than 10 percent do them by hand. The remaining 60 percent or so hire a tax preparer.

H&R Block files about 12 million returns a year for U.S. taxpayers. Asked about the effect of tax reform on the company in an August earnings call, interim chief executive Thomas A. Gerke told analysts the tax code “could be simpler, but there’s no scenario where it will be simple.” He added: “Any time there’s change, change equals uncertainty, uncertainty equals a desire for certainty that they’re maximizing the refund, .  .  . taking advantage of a new credit or any change in the way the tax law works. So that can often and will materialize in desire for assistance.” Investors seem unfazed about the prospects for the company’s financial ruin, too: H&R Block’s stock is up nearly 30 percent since March.

Intuit, which sells the tax preparation software TurboTax, is hoping to attract some of the 60 percent of people who pay tax preparers. Its chief executive, Brad D. Smith, told analysts this month: “Tax reform that we are big proponents of, that would be good for the country and good for our business, would be massive tax simplification. .  .  . If there is massive tax simplification, our hypothesis is it will drive a lot of people into the software category.”

If there is any effect of tax reform on tax preparers, it is likely to be with people whose returns are the least complex, says Caleb Newquist, founding editor of Going Concern, a news website for accountants. For example, people who draw a salary, have no kids, no investments, and rent an apartment might now be able to handle their own returns.

“Returns where the IRS already has all the information and it’s an approval process, those are the ones at most risk,” he says. Those filers now tend to go to large companies with inexpensive tax preparers. Accountants, on the other hand, tend to handle more complex returns, Newquist says, and that should continue regardless of tax reform: “There is no CPA worth their salt that is worried about being out on the street.”

“Pretty much what I hear from big firms, small firms, partners, and tax gurus is that usually, when they try to simplify it, it just seems that much more complex,” says Rita Keller, a CPA management consultant in Dayton, Ohio. H&R Block’s Gerke said something similar: “Every time we get into one of these reform processes, we can’t resist adding to it as well.” Keller says whatever tax plan emerges will represent an opportunity for accountants to work more closely with clients to understand the new law and to recommend money-saving changes.

Of course, any effect on tax preparers depends on a bill actually passing Congress. Republican leaders spent months developing a tax-reform outline. Now, they’re trying to reach consensus on a wide array of thorny issues, including the deficit, the estate tax, and the deduction for state and local taxes—and deliver a bill to President Trump’s desk by the end of the year. That effort isn’t turning out to be so simple, either.

Tony Mecia is a senior writer at THE WEEKLY STANDARD.