The pros who prepare tax returns aren't feeling itchy over simplification
The words ``tax simplification'' don't hit tax preparers the same way they do the rest of us. So one would expect President Reagan's recent tax proposal to create panic in the corridors of H & R Block.
But the tax-preparing company isn't concerned. ``I just don't see where [the proposal] simplifies tax preparation,'' says Thomas Bloch, president of tax operations at H & R Block, which uses the ``k'' to avoid mispronunciation.
In fact, the President's changes in the tax code may initially be a boon for tax preparers. ``The more confusion [over the tax code], the better for our business,'' says Robert Murray, president of Tax Man, which has 30 offices in New England.
In the long run, the President's proposal or some variant of it would cost tax preparers the low end of the business by making more people eligible for the short form (and more likely to figure their own taxes). But demographics (and a healthy economy) giveth what ``simplification'' taketh away: As more baby-boomers come into long-form affluence and buy houses and other investments, more will file the complicated returns and seek the advice of tax counselors.
Tax preparation is one of those industries that like to be buffeted by the winds of change. Each time Congress and the White House tinker with the system, which has been fairly often in recent years, the tax preparation business gets a lift.
The National Association of Tax Practitioners estimates there are 1.5 million people involved in tax preparation (including lobbyists and publishers of tax literature). People pay $1.2 billion to $1.6 billion to have the task done for them, the association estimates. In 1983, 37.2 million people used tax preparers, according to the Internal Revenue Service.
But the business is mature, with the number of professionally prepared returns growing at less than 2 percent a year for the last five years, and preparers can ill afford to have even the low end lobbed off. The President's tax proposal would do that in several ways.
Eliminating deductions for state and local taxes, for example, would mean fewer people would itemize, which could lead them to figure their own taxes. Eliminating deductions for interest payments on second homes and capping deductions for other interest payments at $5,000 would also mean more people would use the short form. And if the personal exemption is increased from $1,040 to $2,000, fewer people would itemize; some would stop filling out the tax form altogether, since they would fall below the minimum filing requirement.
``Each time they increase the standard deduction,'' says Mr. Murray at Tax Man, ``you lose 2 to 3 percent of people needing to file'' any form at all.
Actually, the shift from simple to complex returns has been happening for a decade or so. According to Murray, half of Tax Man's clients could have filled out the short form 12 years ago; today, only 25 percent of its customers are eligible for the short form. Tom Bloch has seen the same trend, and today only 23.5 percent of Block's prepared returns are short forms.
This could cost tax preparers a profitable part of their business, because they charge a minimum amount, no matter how simple the taxes are. In fact, more than 600,000 people filing the 11-line Form 1040EZ went to preparers in 1983, according to the IRS. But that group will not disappear altogether, says Paul Hadlock at the Bureau of Labor Statistics. ``Some people are afraid to sign on the bottom line, whether the taxes are simpler to figure out or not,'' he says.
What concerns tax preparers more than the current proposal is the President's ``return-free system.'' In that system, which would be voluntary and is thought by some analysts to be 20 years away, the IRS would figure your taxes for you with information from third parties. It would get information about your wages from your employer; your bank would detail what you paid, say, in mortgage payments or car loans, and other financial institutions would tell it how much you received in dividend or interest income. The IRS would figure your tax bill or refund and send you the form to sign.
Even if such a system does come to pass, Murray doubts it will hurt tax preparers. ``Would you trust the guy who's taking $1,500 from you in taxes? You're still going to have to prepare your taxes as a check.''
H & R Block began planning for a leveling of its main business years ago by diversifying. Two of its three subsidiaries -- Compuserve, a telecommunications and computer company, and Personnel Pool of America, a temporary home-health and clerical-worker agency -- are growing faster than the tax business, according to Arthur Bullock, an analyst at Paine, Webber. Block Management, which rents office space and support services for lawyers, is losing money, but is poised for growth, Mr. Bullock says.
Which doesn't mean Block will be getting out of its staple business. After all, tax preparation is as inevitable as, well, taxes.