Liberty Tax Service chief executive and founder John Hewitt is a veteran of more than 35 tax seasons, having gotten his start at tax prep giant H&R Block and moved up the company's management ranks to eventually become a regional director in 1980 and oversee over 2,000 preparers in 250 offices.

From Block, Hewitt became an initial investor in Jackson Hewitt Tax Service, a company built on the notion of applying technology to tax preparation while still delivering quality customer service. Hewitt left Jackson Hewitt in 1997, shortly after the public company was sold for $483 million. The six-office start of the company had grown into a franchising chain operating 1,345 offices.

Still fired by an entrepreneurial spirit, Hewitt launched Liberty Tax Service later that same year to focus solely on tax services. First opening locations in Canada, Hewitt was free to compete with Jackson Hewitt in 2000 and soon began offering franchise locations in the United States. The company is now the fastest growing income tax service, with over 1,700 offices in the United States and Canada.

Hewitt stopped by WebCPA's offices in early March, and we checked in with him again after April 17 to see how Liberty had fared this filing season.

So, how'd tax season shake out for you?

Excellent. Our sales revenues were up 44 percent, and in terms of completed returns, we were up 20 percent. The combined increases were also due in part to pricing increases at maturing locations. ... In terms of dollars, we were right on target for the season. We'd expected to do a little bit of a higher volume in terms of returns, but at the end of the season, it's the dollars that are the most important.

That's better than the growth data Jackson Hewitt and H&R Block had been releasing about their own tax season results in late February.

We've always beaten them in percentages. That's easy when you're small. Last year, we had a bigger raw number increase than both Block and Jackson Hewitt; this year, Jackson's going to beat us in raw number return. Their pay-stub lending was really aggressive ... I think [Block chief executive] Mark Ernst said it didn't expect its reputable competitors to offer the pay-stub lending ... It's based on a projection of their income. They invited their product customers in, and as a result of word of mouth, they got new customers in on Jan. 1 and 2. And the first week of the season was a peak week for them, getting people in and lending them money off their pay stubs.

Next year, is that tactic something you'll consider?

We'll have to consider it. It probably took about 5 percent of our business. And we're going to do about 900,000 returns this year. So 40,000 to 50,000 returns. And I'd estimate it cost Block three or four times that ... I expect Block is going to lose another half a million returns or more, Jackson is going to grow by another 350,000 returns and we're going to grow by another 150,000 returns or more.

What is the typical practitioner at LTS doing in the off-season?

Most of the people who join us, they come from three walks of life - either they're accountants, most of them CPAs, that's about a third of the people who join us. Another third, they're tax preparers who work for Jackson Hewitt or Liberty. And another third is people who say, "What's the matter with working really hard for three, three-and-a-half months of the year and making $60, $70 or $80,000 a year?" Or, having a couple of offices and making $100 or $150,000. They come from all walks of life.

Because this business is seasonal, it lends itself to that and keeping your job. Total start-up costs are only about $50,000. And you only have to work hard for about three months. So a lot of people keep their jobs while doing this; in fact, two-thirds of our people keep their jobs when coming into this business. And eventually, after three or four years, they get rid of their job and come into this fulltime.

Are you looking into outsourcing at all, in terms of another company using your people?

There is the possibility of some things. We've been talking to Intuit for several years, because they, obviously, do millions of returns and get many, many questions when consumers are going through their tax software. And they offer technical support, but in technology, not in taxes. What they've done is they've licensed thousands of practitioners around the country to answer questions. And you can go into a free cube, or into a paid cube, where you pay $20. So we've negotiated with them about taking over the whole thing and offering one consistent thing. ... Instead of having the change and that back-and-forth and getting different qualities, and possibly different answers, just having one organization. So there are some modest capabilities, or possibilities.

And also, we have our own Web site for the first time, where we offer paid preparation, and that will grow over the years. Not only are we beginning to offer on that the capability of getting an answer the same as you can with Intuit, but we're also testing an online chat that we're testing for the first time. ... We've always offered chats and discussion boards for our franchisees, internally; this is for someone that'd be using an online product.

Free File usage was down 20 percent this filing season. Do you have any guess why?

There's one reason for sure: They lowered the ceiling to $50,000 in income. That would have some impact; I'm frankly surprised it's had that much impact. What each of the firms does, and Block and Intuit have more than 50 percent of that market, they try to sell them into a paid product. Intuit's converted some, some significant amount of their free customers, into their paid site to various product offers. A lot of them, they call it Free File, but a lot of them end up paying anyway because they get a bank product or a state return. It sounds free, but they're really paying 40 bucks to use that service.

Are you concerned about poor publicity from the GAO's recent report citing problems with the work of chain tax preparers?

Actually, the night before the report came out, we were part of a story on NBC News, where they'd send in an intern to us, Block and Hewitt, to be a mystery shopper. And both Block and Hewitt were guilty of committing fraud. ... As far as the GAO report goes, we've always felt there should be more education requirements in this industry and we've worked on developing our own certification program because we want to be a leader on this. ... California and Oregon already have some requirements in place and an effort to improve training is an important step to police this industry. Actually, the IRS asked us to provide them with our report outlining the training programs we have in place, for new franchisee owners, for their staff, for more advanced preparers -- which we were more than happy to do.

Do you have any take on Block's problems with New York Attorney General Spitzer?

I think that the product is a poor product. I think what Block has done is to set minimum sales quotas for their preparers. "Your job is to get 'X' number of mortgage referrals," or " 'X' number of express IRAs." And in doing that, that might force the preparers to sometimes make mistakes and offer the product to the wrong people. ... That's one of the reasons Liberty doesn't get into those kinds of products. I've always thought that putting the field of investment planning with tax preparation is fraught with danger. In a bad stock market, no investment advisor is going to look good. And if I put my customer in with whomever, "You contact her, she'll take good care of you, she'll put you in...," if that [customer's] account is losing money, it doesn't matter that the stock market's down, they're going to blame someone and they're going to blame that advisor and they're going to blame me for putting them in [that situation]. I can be the best tax preparer in the world, but I'm going to suffer if the stock market goes down. ... We've just stayed away from it.

With Sarbanes-Oxley making sure corporate governance stays at the forefront of people's minds, to you expect to see more regulations on tax preparers, in terms of what services they can and can't offer?

I expect there to be more regulation of tax preparers, and I think that's a good thing. But as far what other products they can offer, remember, years ago, attorneys couldn't offer financial planning services and CPAs couldn't either. That was fought out for years, and now they can in many states. So, when I think of setting standards for tax preparers, I don't consider it to be a threat in terms of what they offer. ... The IRS has certain stipulations that, for example, if you're going to offer another product to a customer, you have to get his permission at the time, you can't just solicit another product to him. You need to get a disclaimer once you've done the return. Which is the way I think it should be. ... [More regulations for preparers] won't affect us in any negative way -- we don't believe in selling other products, I believe in focusing on taxes -- except for this: It could force companies selling other products to copy me and be focused. My playing field would be tougher.

Does Liberty Tax offer RALs?

We do. You can't compete in the first half of the season without offering RALs. We're the lowest percentage in the industry. Jackson Hewitt is 35 percent, Block is 27 percent, we're less than 17 percent. ... We don't encourage them and we don't do the instant RAL, though Jackson Hewitt is trying to drag us into it with this pay stub thing. It's tough to watch your business walk down the street and see your franchisee suffer. It was a tough early January for us, to see that happen.

What sort of marketing tactics do you use?

We call it guerrilla or neighborhood marketing - people dressed up as the Statue of Liberty or Uncle Sams out in front of the offices. Or in the neighborhoods, business-to-business selling. That is really effective; as a smaller company, that's why I think we still grew by more tax returns last year than Block or Hewitt. Some people are just attracted to neighborhood marketing, a waving Statue of Liberty or their kid getting handed a foam crown at the town's local parade.

What next, now that April 17 is behind you?

Now's actually our busiest time of year. Last year, we got about a net 350 franchisees on board [in both the United States and Canada], and the year before, it was about 300. We're looking at closer to 400 coming on board this year. We have to find them, convince them we're the right business for them, train them and help them pick out a location and set up their office, and somewhere in there, get them down to Virginia Beach for a week of training at our headquarters. Getting 400 sites online is a pretty big task. ... Of the 9,000 available territories, we've awarded about a quarter of them. ... We're at a stage now where a lot of people already own contiguous locations or are looking to expand into more than one territory. The format is great, because there's a lot of built-in growth over the next few years.

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