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The official numbers from the Internal Revenue Service aren't available yet for the 2010 tax season. But the indications are that the drop in the number of returns filed is going to be dramatically steeper than the drop from 2007 to 2008 and the further decline that was projected for this year. At least that's the statement made this week when H&R Block CEO Russ Smyth discussed the company's financial results for its December quarter.

"We believe total IRS filings are down somewhere between 4 to 5 percent through February," Smyth told analysts. However, that sharp a drop was partly due to the severe weather in February and should improve Smyth said the Block projects that the decline will be around 2.5 percent to 3.5 percent, compared to its original projects of a 1 percent to 2 percent drop. Taxpayers who have lost jobs simply aren't filing this season or have seen income drop enough they don't need to file.

This is a year of dramatic change and the drops Smyth discussed follow the turmoil in the RAL market place which left competitor Jackson Hewitt able to get funding for only 50 percent of its loans. Block estimates that RAL volume is down 20 to 25 percent although that has been partially offset by a 10-to-15-percent rise in the volume of assisted refund transfers.

So what does this all mean for the paid preparers? For the CPAs, who handle business filings and higher-income clients, the impact probably won't be as severe and tax law changes should help support fees by making research and returns more complex. Smyth also noted that Block's market includes a higher proportion of low-income clients, a category whose unemployment rate is much higher than the roughly 10 percent national average, a group not represented heavily in the CPA market.

The RAL market will probably remain under pressure next year, something a lot of CPAs won't be upset about, given their distaste for what they see as exorbitant fees charged for the loans. Certainly, there are questions about whether the forced exit of Santa Barbara Savings & Loan from the RAL business might be followed by regulators pressuring other lenders out of the business because of the impact of such loans on required performance ratios.

Retail chains are being hurt by the switch to do-it-yourself filing, taxpayers turning to desktop software or online filing. And that trend is likely to continue to take a toll on store-front preparation, although the retail chains are responding with their own digital offerings.

One bright spot that Smyth foresees is the impact of IRS regulation of tax preparers, although that’s going to take some time to kick in. He didn’t elaborate in his remarks, but he probably believes that regulation would force some low-end competitors out of the market.

I keep getting the feeling that CPAs shouldn’t feel too confident that these changes won’t impact them. It would seem likely that money-losing business clients might also go the DIY route. But it’s more likely that online filing is going to cut into the market for preparing the professional return. And it’s hard not to get the feeling that the chains are going to look for ways to get into services now offered by fuller-service organizations. Businesses scrounging for revenue have a way of looking at other markets.

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