John Hewitt, the president, CEO and chairman of Liberty Tax Service, is anticipating increased business for preparers this tax season thanks to the Affordable Care Act and the boost in employment from the increasingly robust jobs market.
Hewitt founded Liberty Tax Service in 1996 after leaving Jackson Hewitt, another major tax prep chain that he co-founded back in 1982. He built them into the second and third largest tax prep chains in the country, right behind H&R Block, where he worked his way up from tax preparer to regional director.
Hewitt believes the ACA will make this one of the best tax seasons ever for preparers as more taxpayers come to professionals to have their taxes done.
“It’s the biggest tax change since 1986,” he told Accounting Today in an interview Thursday. “Tax change is one of the three primary drivers to people choosing to come in and get assisted preparation, and so it’s going to drive people from the capability of doing their own return into seeking assistance. In addition to that, more people are going to file, and also tax preparation fees in general are going to go up because of the additional complexity, and in this industry we charge on the complexity. So three major impacts: more people will file, a higher percentage of people will seek assistance, and thirdly the industry will get higher fees because of the increased complexity.”
On top of that, the increase in the employment numbers over the past year is likely to induce more taxpayers to seek help from preparers. “More people were put to work in 2014 than any year in the 21st century so that’s going to drive more people to file their return,” said Hewitt. “We think that about 3 million more people are going to file this year.” He anticipates over 60 percent of them will go to a tax preparer.
Next year will see a further influx of new taxpayers as President Obama’s executive action on immigration reform will prompt more undocumented immigrants to catch up on their back taxes to qualify for the amnesty, Hewitt predicts.
“One of the requirements to get amnesty is you have to prove that you’ve lived in the United States and you have to file tax returns,” he said. “So immediately there will be another 5 million people filing tax returns, and a larger than normal majority of them will seek assisted tax preparation, so it’s great for our industry and our company.”
Hewitt doesn’t anticipate that President Obama’s recent executive action will have a big impact until next year, though.
“I don’t think it’s going to have a major impact until you can file your paperwork to get this amnesty,” he said. “And that paperwork doesn’t look like it’s going to be available from the government for a couple of months. So I think the major impact is going to be in 2016, not 2015.”
Spanish Language Service
However, Liberty Tax Service is already getting ready for the pickup in demand, opening a Spanish-language branded tax prep service known as Siempre Tax+ for the first time this season. The new brand will also enable the company to better service the expanding Spanish-speaking market.
“The Hispanic opportunity is huge for a number of reasons,” said Hewitt. “Number one is they’re just not well understood by the Anglo community and so companies like ourselves and Jackson Hewitt and Block have struggled to be one size fits all for all nationalities and all languages. It’s been difficult and it’s the fastest-growing part of our population.”
Hewitt’s goal is to expand Siempre Tax+ to around 3,000 or 4,000 offices. In its first year, Liberty has about 60 Siempre locations. While it may seem it has a long way to go before it reaches Hewitt’s goal, it helps to have perspective.
“When you think about the other national chains, H&R Block was founded with one store in its first year,” said Hewitt. “I founded Jackson Hewitt with 11 stores in its first year, and when I founded Liberty, they had five in its first year. So if you think about it, Liberty has over 4,000, but started with five. Jackson Hewitt has almost 7,000 and they started with 11, and Block with over 10,000 started with one. So it’s a big start for a new brand.”
He believes immigration reform will have a major impact on growing the market for tax prep services.
“There are about 145 or 150 million people who file a return and 5 or 6 million more people are going to file so it’s a 3 to 4 percent increase in the number of filers,” said Hewitt. “It’s the second biggest thing that’s happened in this industry since electronic filing in the ’80s, so the two biggest tailwinds or benefits for taxpayers in decades in 26 years both happened recently, with Obamacare and immigration reform.”
Obamacare is widely expected to be a major hurdle for many taxpayers and preparers as they cope with new forms and requirements that could force some taxpayers to give back the subsidies they received in the form of premium tax credits for buying health insurance from the exchanges if they made a mistake in estimating their income.
So far, Hewitt said Liberty Tax hasn’t experienced those kinds of problems. “That’s yet to be seen because the forms are just coming out now,” he said. “We’ve already prepared a couple of hundred thousand tax returns and anecdotally it hasn’t been a problem yet. I’ll say this: whenever a taxpayer owes way more money than they thought or gets a refund way less than they thought, they have an issue with it, but we haven’t seen any significant signs of that yet this season.”
Liberty has been giving its tax preparers specialized training to familiarize them with the provisions of the Affordable Care Act and even encouraging franchisees to help customers get health insurance.
“We’re doing something different from both Block and Jackson Hewitt,” said Hewitt. “We went to our franchisees and said we want both you and/or your employees to get insurance licenses so you can help them make the decision and actually get them coverage and provide better service. You’ll be able to better answer their questions. You’ll be able to get them coverage and so we have over 1,300 licensed agents in our offices. In addition to that, for the first time in my 46-year career, we had over 1,000 of our offices open on November 15 when the enrollment period [for health coverage] started, instead of waiting for January to open.”
Liberty has also been expanding from tax prep into online accounting software with the launch last August of Liberty Accounting. The service is powered by Kashoo’s cloud-based accounting software, allowing Liberty Tax franchisees to offer bookkeeping services to small business customers.
“Our customers can use our online accounting package and that information goes right into our software,” said Hewitt. “We’re not rolling out extensive bookkeeping services or offering a side business. What we are doing is offering an opportunity if our customer wants to keep track yearly of their tax deductible expenses or income, and it rolls right into our software.”
Another way that Liberty is trying to help its franchisees expand is with a revolving credit facility. The company recently extended the terms of its revolving credit facility from $143 million to $204 million.
“We use that money to lend to franchisees to grow,” said Hewitt. “We have almost 2,000 franchisees, and it allows us to lend money to the best ones to help them expand. Since the recession in 2008, lending for small business has dried up dramatically. We’ve been able to lend money to our franchisees for a short period. Most of it is lent just from November to January, and they start paying us back during the tax seasons. It gives us an opportunity to grow our offices more quickly.”
The franchisees are likely to need some extra help this tax season in dealing with customer inquiries since the IRS is not going to have as many resources to deal with questions from taxpayers due to budget cuts. The IRS is encouraging taxpayers to go online to IRS.gov to find answers to their tax questions since wait times for phone callers are expected to be even longer than usual this tax season.
The IRS has even reduced the number of hours on its e-help desk for tax professionals (see IRS Cuts Back Help Desk Hours for Tax Pros). Treasury Secretary Jacob Lew recently met with Hewitt and other CEOs at the major tax prep companies to talk about what to expect this tax season.
“I was flattered to be called in last week for a meeting with just a couple of the other top CEOs in the industry and the Treasury Secretary,” said Hewitt. “Of course the IRS reports to the Treasury and they’re real concerned because, as I think the IRS commissioner said in a speech about six weeks ago, that instead of being able to handle 70 percent of the calls where you’d get to talk to a human being last year, we’re going to be closer to 50 [percent] this year. So they’re working with industry to help them solve that problem. But I feel bad for the IRS that they have more work to do with Obamacare and all the other initiatives, and their budget keeps getting cut. They have to be distressed over there about their ability to do all the things that they wanted to do, including answer taxpayers’ questions.”
Ultimately, more taxpayers will probably need to visit tax professionals this year to seek assistance, and that will be a good thing for Liberty and its competitors.
“I think they’ll turn more and more to tax preparers to assist the taxpayers,” said Hewitt. “It’s actually a benefit to the tax preparers in getting a higher percentage of people to seek assistance.”
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