The Justice Department has filed an antitrust lawsuit to prevent H&R Block from acquiring the company that develops the tax software TaxAct.

The department said Monday that the proposed deal would substantially lessen competition in the growing U.S. digital do-it-yourself tax preparation software market, resulting in higher prices and reduced innovation and quality for products that are used annually by millions of American taxpayers.

The Department of Justice’s Antitrust Division filed its lawsuit in U.S. District Court in Washington, D.C., to prevent H&R Block from acquiring 2SS Holdings Inc., an entity within TA IX L.P. and the maker of TaxAct.

Between 35 and 40 million taxpayers use digital software products, either on the provider’s website or uploaded onto the taxpayers’ computers, to prepare and file their federal and state income taxes.  Currently, three companies account for 90 percent of all sales of digital do-it-yourself tax preparation products, and the acquisition would combine H&R Block and TaxAct, respectively the second- and third-largest providers of digital do-it-yourself tax preparation products, the department said.  

“The combination of H&R Block and TaxAct would likely lead to millions of American taxpayers paying higher prices for digital do-it-yourself tax preparation products,” Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division, said in a statement.  “In addition, TaxAct has aggressively competed in the digital do-it-yourself tax preparation market with innovations such as free federal filing. If this merger is allowed to proceed, that type of innovation will be lost.”  

On Oct. 13, 2010, H&R Block agreed to purchase 2SS Holdings in a transaction valued at $287.5 million (see H&R Block to Acquire TaxAct for $287.5M).

According to the department’s complaint, H&R Block’s acquisition of 2SS Holdings would eliminate a company that has aggressively competed with H&R Block and disrupted the U.S. digital do-it-yourself tax preparation market through low pricing and product innovation. 

By ending the head-to-head competition between TaxAct and H&R Block, American taxpayers would be left with only two major digital do-it-yourself tax preparation providers. This would lead to higher prices, lower quality and reduced innovation, according to the Justice Department.

In addition, by taking control of the TaxAct business, which has been a maverick in the market, it would be easier for H&R Block to coordinate on prices, quality, and other business decisions with the other remaining industry leader, Intuit, which makes personal finance programs such as Quicken and TurboTax, the department said.

In response to the lawsuit, H&R Block said it would explore all of its legal options. "The Department of Justice today made a determination to stifle smart business growth," said H&R Block's president and CEO William C. Cobb in a statement. “We’re especially disappointed with this decision knowing that the DOJ rejected guarantees that we would not raise TaxAct's prices. Contrary to the DOJ's position, the synergies and enhanced functionalities realized from this merger would create a more competitive landscape for tax preparation. We continue to believe this merger makes sense, is pro-competitive and will greatly benefit consumers," said Cobb.

The Justice Department complaint includes statements from H&R Block presentations and emails, such as one stating that a primary benefit for H&R Block in acquiring TaxAct is “elimination of competitor.”   In discussing the potential acquisition of TaxAct, one of the “strategic opportunities” of the acquisition is to “acquire TaxAct and eliminate the brand to regain control of industry pricing and further price erosion.”
The rationale for launching H&R Block’s free online product was “to match competitor offerings and stem online share loss to Intuit and TaxAct,” and “retail volume at Staples [is] at risk due to introduction of TaxAct [r]etail software on combined display.”

The department also alleges that by eliminating TaxAct, a significant, disruptive and aggressive competitor, the acquisition would likely substantially lessen competition between H&R Block and Intuit by facilitating coordination between them. H&R Block would likely degrade TaxAct’s free product and H&R Block and Intuit would increase the prices for their paid products.  An internal H&R Block email said, “The other possible strategic consideration is that Intuit and HRB together would have 84% of the digital market and we both obviously have great incentive to keep this channel profitable.”

H&R Block, based in Kansas City, Mo., with its H&R Block At Home products, is the second largest provider of digital do-it-yourself tax preparation products. In its fiscal year 2010, ending April 30, 2010, H&R Block prepared more than 23 million tax returns worldwide and earned revenues of more than $3.8 billion. Its digital do-it-yourself tax preparation product was used in 2010 by more than 5.9 million customers to prepare and file their federal and state income tax returns.

2SS Holdings, named after 2nd Story Software, the maker of the TaxAct digital do-it-yourself tax preparation products, is a Delaware corporation headquartered in Cedar Rapids, Iowa. 2SS Holdings is the third-largest digital do-it-yourself tax preparation product provider in the United States, and the second-largest provider of such products online through the Internet. TaxAct products were used in 2010 by more than 5 million customers to prepare and file their federal and state income tax returns.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access