(Bloomberg) The annual battle of tax preparers is nasty, brutish, and short. TurboTax, which dominates online filing, and H&R Block Inc., with 10,000 U.S. locations, have three months to win over taxpayers before this year's April 18 deadline.

Sparing no expense in their Hobbesian struggle, TurboTax hired Academy Award winner Anthony Hopkins as an unlikely Super Bowl pitchman, and H&R Block vowed to reward customers with $32 million, $1,000 at a time.

Squeezed between the two giants is TaxAct, a 150-employee company based in Cedar Rapids, Iowa, that handled 5.5 million U.S. filers’ tax returns last year. The country's third-largest online tax-prep firm, TaxAct was started by the former employees of another online tax business that was scooped up and then shut down by TurboTax’s parent company, Intuit Inc. TaxAct has nevertheless survived and thrived, thanks in part to one secret weapon: It’s cheap.

By charging as little as a third of what TurboTax charges, TaxAct was able to consistently expand its customer base, letting word of mouth make up for a puny marketing budget. Two decades after its predecessor was shut down by TurboTax, it has positioned itself as the scrappy, growing alternative to its colossal cousins.

Those salad days may be over. TurboTax made a surprise move to undercut TaxAct’s claim to be the best deal in tax prep: For simple tax situations, such as filing a 1040EZ or 1040A form, TurboTax launched its “Absolute Zero” campaign, charging nothing at all for both federal and state returns.

TaxAct already had a free federal return for basic taxpayers, but TurboTax’s thrust forced it to also drop its fee for state returns.

The extra competition for the lower end of the market didn’t seem to hurt TaxAct’s financial results last year; sales rose 13 percent. But with its ubiquitous ad campaign, TurboTax helped stall the company's uptake of new customers. This could hurt future results: Today's free tax filers (often young people with simple tax situations) are tomorrow's paying customers.

“It’s kind of hard to go any lower than free,” said JoAnn Kintzel, TaxAct president.

To make matters worse, TaxAct is unlikely to get much help in the fight against TurboTax from its current parent, a conglomerate named Blucora Inc., which bought it for almost $288 million in 2012. Blucora's stock has dropped by half since October.

TaxAct co-founder Lance Dunn said his tax prep firm was started “on a shoe string” by four veterans of the software product Personal Tax Edge, developed by another Iowa-based software company, Parsons Technology (before it was sold to Intuit). TaxAct launched with a basic “free” product, aimed at recapturing former Personal Tax Edge customers.

“That was really the wedge we were able to put into the market to get people to look” at TaxAct, Dunn said. But it had a disadvantage: “There’s a stigma associated with a free product,” he explained, and that increases pressure to make sure the product is “flawless.”

TaxAct’s definition of “free” has changed over the years. Early on, TaxAct was truly free only if you printed out forms and mailed them in yourself. Electronic filing cost extra. Its “deluxe” software cost $10, Dunn said, far less than the established players charged. Now, TaxAct is bigger and more profitable, with $57 million in operating profits on $118 million in revenue last year. Despite those figures, Dunn contended that Tax Act is “always the underdog.”

TaxAct can still claim largely to be the cheapest option, especially for taxpayers with complex tax returns. The major players don’t make it easy to compare prices, however: Before doing your taxes, it can be difficult to know what category you will fall into, and you often need to click around to discover extra charges, such as the fee for a state return. Their prices also tend to rise as the filing deadline approaches.

TaxAct's pricing, meanwhile, is relatively straightforward. Its main product–covering almost all taxpayers, including investors and homeowners–is $30. That’s $15 for a federal return and $15 for a state return. Customers can lock in the lowest prices by starting their return early in the tax season, even if they don't finish until April.

Beyond its free product, TurboTax’s next cheapest option is $72 for federal and state returns. That won’t work for taxpayers with investments, who are charged $92 for both returns. (H&R Block’s free product can be used by a wider range of taxpayers than the free options offered by TurboTax and TaxAct, but it charges $10 for an online state return. For investors, online H&R Block federal and state returns now cost $72.)

TaxAct still offers a clear price advantage for advanced taxpayers. Its sales pitch is bolstered by TurboTax’s recent decision to charge even more for premium products, including a re-categorization of high-end options that angered some customers last year. The TaxAct brand appeals to more confident filers who don’t need the “security blanket of knowing it’s a brand name,” said Gil Luria, an analyst with Wedbush Securities Inc.

During the last decade, about 60 percent of Americans have gone to an in-person tax preparer, and about 40 percent have done their own taxes, according to Oppenheimer analyst Scott Schneeberger. In recent years, the number of do-it-yourselfers has risen, though, thanks in part to TurboTax’s aggressive marketing to people with simple tax situations. TurboTax had 32 million customers last year, up 7 percent from the year before. H&R Block helped prepare about 20 million U.S. tax returns last year, roughly the same as the year before. However, in-person preparation, the majority of its business, fell 4.4 percent, while returns prepared via online and desktop software rose 8.1 percent, to 6.9 million.

“That lower end of the market has gotten much more competitive,” said Intuit spokeswoman Julie Miller. The “Absolute Zero” option is positioning TurboTax to hold onto taxpayers as they age and their financial issues get more complex, she said. “There are barriers to switching.”

At that point, when things get more complicated, TurboTax can charge more. It's “the premium product in the market,” Miller said, with a constant stream of new and improved features. This year, for example, TurboTax started offering one-way video chat, which lets customers use their mobile devices to see and ask questions of employees.

TaxAct, by contrast, keeps costs low by adding new features gradually. “It’s making sure we’re spending money on the things that make a difference,” Kintzel said. “You’re not going to be able to do everything you want to do.”

Matching its claim to underdog status is TaxAct's physical location. Almost all of its 150 employees work in a modest, two- story office building on the north side of Cedar Rapids, where small teams of engineers and accountants sit closely together developing each year’s software version.

TaxAct is trying to ramp up its advertising efforts, Kintzel said, to better match its rivals. Last year, the company signed up as a sponsor of NASCAR driver Danica Patrick.

But TaxAct is limited by its business model, said Dunn, the firm's co-founder. “If we charged more, we could advertise more,'' he explains.

As TaxAct wrestles with the competition, its parent company is having troubles of its own. In October, Blucora announced it was paying $580 million for HD Vest Financial Services, a Texas- based network of tax and financial planning advisers. It saw HD Vest as a good fit with TaxAct—better than Blucora's collection of online search and e-commerce platforms. Blucora said it plans to sell off those legacy Internet businesses, including a pre-Google Inc. search engine called Infospace.

“Our transition to a technology-enabled financial solutions company is underway, and I’m confident in the new Blucora,” said Chief Executive Officer Bill Ruckelshaus, who has announced he will leave as part of the company's transformation, in a statement. “I believe investors will embrace our story over time.”

That may be, but in the immediate term, they didn't. Blucora’s stock price was halved, bringing its market capitalization to $256 million. That leaves TaxAct backed by a parent company that has one-hundredth the market value of Intuit, TurboTax’s 7,700-employee parent based in Mountain View, Calif.

Dunn said he isn't fazed, pointing to TaxAct's innate advantages. In Iowa, costs are lower and the company relies on loyal, experienced employees who have been through more than a dozen tax seasons. “There’s not another technology company across the street” stealing away talent, he said.

Dunn jokes that geography gives TaxAct a further advantage over TurboTax. “Have you ever been to Iowa in January, February and March?” he asked. “Wouldn’t you rather be inside, doing tax software?”

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