Tax Preparation Service Review

Tax-prep services come under reviewer fire

It's relatively easy to find reviews and critiques of tax preparation services, because there are only three major players -- H&R Block, Jackson Hewitt and Liberty Tax Service -- and all three offer pretty much the same menu of services. We were especially impressed by current articles from Consumer Reports about storefront tax preparers, as well as ongoing coverage of this industry by Consumer Action, Consumer Affairs and The Consumerist. We also consulted articles by financial publications (SmartMoney, MarketWatch), general-interest magazines (The Nation, New York Magazine) and various other sources such as About.com and the Greater Philadelphia Urban Affairs Coalition.

Experts say tax-preparation services can be a decent alternative to using tax software, filing your taxes online using the IRS Free File Program or doing your taxes yourself on a printed-out 1040 form. There isn't a single profile of the kind of person who opts for the services of H&R Block or Jackson Hewitt, but generally these are folks who a) are willing to pay $100-$200 for the luxury of not doing their taxes themselves, or b) want to file early (say in January or February) and get hold of their refunds quickly in the form of "refund-anticipation loans." Basically, experts say, if you have a steady job, few dependents and a 1040EZ, you can save yourself some money by doing your taxes yourself, but a tax preparer may come in handy if you have multiple streams of income, home-office expenses or other complications.

One possible middle ground is to prepare your taxes yourself and take them to a tax preparer to double-check them. H&R Block's Second Look review (*est. $29) provides a review of your return; advice on what to do next if any changes seem needed; and a guarantee to pay penalties, interest repayment and audit assistance if H&R Block makes an error in the preparation of your tax return or calculation of taxes owed. Although H&R Block pledges to "stand behind you" if you are audited, the words "stand behind you" are said to mean in this case that "H&R Block will explain your audit notice and advise you as to documentation you should provide to the auditing authority."

In any event, experts say, the earlier you go to a tax-preparation chain, the better. These offices tend to be swamped in late March or early April, so you're more likely to be assigned an inexperienced preparer. Also, you should keep in mind that a large percentage (about 33 percent in the case of H&R Block) of tax preparation stores are franchised, rather than company-owned. What this means is that the parent company holds the franchise to a certain minimal level of service, but other than that can exert only a minimum level of control. It may not be a coincidence, for example, that the 125 Jackson Hewitt franchises that landed in hot water with the IRS for tax fraud were franchises wholly or partly controlled by the same person, rather than company owned.

Unfortunately, with the exception of random comments on Internet bulletin boards praising either H&R Block or Jackson Hewitt, most of the sources we consulted are critical of big-chain tax preparation services. Here are the three biggest complaints from financial experts and customers of these chains:

1) The majority of tax returns are so simple that most people don't need to spend $150 or $200 on a trip to H&R Block or Jackson Hewitt. If you earn less than $55,000--like many of the people who patronize these chains--you can file for free online, using the IRS Free File Program, or invest $50 in a good piece of tax preparation software that will guide you through the appropriate steps.

2) Because of increased demand during tax season--from January through April--big chains like H&R Block and Jackson Hewitt hire seasonal employees, many of whom do not have any special qualifications for filling out tax returns. If you're a first-time user of one of these chains, you may be assigned a preparer who knows only a little more about taxes than you do (though, from the comments we've read online, repeat customers have more luck).

3) Most controversially, tax-preparation chains like H&R Block and Jackson Hewitt make a lot of their profits by selling additional financial services. A big chunk of revenue comes from "refund anticipation loans." For example, if you're owed a $2,000 refund, the tax preparation service will "loan" you the money immediately, rather than making you wait six or eight weeks for a check from the government. Unfortunately, as discussed in more detail below, these loans come loaded with hidden fees and high interest rates.

With these points in mind, why do so many people (about 25 percent of filers nationwide) continue to use tax-preparation chains? Brand recognition is a big factor. The name H&R Block is virtually synonymous with tax preparation, and many people are content to pay $150 for the hassle of not doing their taxes themselves. Lately, though, it seems that more and more customers are going to services like H&R Block and Jackson Hewitt because they want to get their tax refunds as fast as possible and are willing to pay the costs associated with refund anticipation loans.