1Mby1M Deal Radar 2010: The Income Tax School, Virginia

Peoples Income Tax (PIT) was founded in 1987 by Chuck MCabe, who had the idea of creating a national tax franchise after an almost twenty-year career with H&R Block. His vision was to create an upscale mass market tax service that could compete with H&R Block on quality and certified public accountant (CPA) firms on price. He was committed to using technology including computer tax preparation and e-filing. Today, PIT is divided into two entities, one for tax preparation and another, The Income Tax School, for educating tax professionals.

McCabe, the Virginia-based company’s president and CEO, dropped out of high school in tenth grade. At eighteen, he was on his own and caring for three of his siblings as his mother had been institutionalized and his father killed in a car accident. He was working as a freight brakeman and conductor for the Pennsylvania Railroad and took the H&R Block income tax course. The company had just reacquired the major franchise for the NYC metropolitan area and embarked on rapid expansion. McCabe moved up through the ranks and at 26 was promoted to regional director. He later oversaw franchises in Virginia and Brazil.

After founding PIT (the tax preparation component), McCabe started People’s Income Tax School as a division of PIT and later licensed its tax school system branded as The Income Tax School (ITS) to independent tax firms in other states. By 2003, it had developed a rudimentary e-learning system. It now offers more than forty income tax courses and seminars, 150 tax school licensees and 3,000 active e-learning students annually. Prices for individual students purchasing a course on their own range from $199 for the online QuikStep 1040A (6 lessons, 18 hours) to $1,899 for a Chartered Tax Professional in California or Oregon (60 lessons, 180 hours). Courses for tax business owners needing to train employees are $499.

The IRS estimates that there are between 900,000 and 1.2 million unenrolled preparers who are paid a fee for their services. ITS targets these preparers, many of whom don’t know the underlying tax laws and could not pass an IRS test.

ITS believes it will also appeal to people seeking new careers as employees or as small business owners. New preparers will be required to pass the IRS test before they can register. Ideal candidates include unemployed workers seeking new careers, homemakers with young children, and early retirees who either can’t or prefer not to work year-round. Financial services professionals seeking to diversify are also prospects.

At the time of its founding, PIT had limited sophisticated competition other than H&R Block. It was an early mover in IRS electronic filing (e-file). Later, Jackson Hewitt and Liberty Tax began expanding in PIT’s market. H&R Block reacquired its Virginia franchise and also expanded aggressively. The IRS introduced Free File, Turbo Tax, and Tax Cut, enabling more individuals to prepare their own returns. Over ten years, PIT lost about 60% of its tax preparation market share. Meanwhile, it was diversifying into the education business with its tax school division to capitalize on the opportunity to fill a need among independent tax forms to adopt that best practice being used by all of the national tax firms.

The tax education business is helped by new IRS regulation that will require initial registration of all unenrolled preparers (those who are not CPAs, attorneys or IRS enrolled agents, or EAs) to initially register by the end of this year. Starting in 2011, they must complete fifteen hours of continuing professional education (CPE) annually, and starting in June 2011 they will have three years to pass a competency test in tax preparation.

The company aims to compete on the strength of its comprehensive basic courses. The National Tax Training School and national firms also have high-quality courses. However, the national firms limit access to their courses to their own employees and franchisees.

ITS’s textbooks for live tax course instruction are accompanied by instructor guides, which is unique except for the national tax firms. This gives ITS an advantage in selling to colleges and to firms that want to provide in-house training for tax preparers. The major tax software companies have tax schools to teach their customers taxes using their software. However, the software does so much of the calculations that the user doesn’t learn taxes. ITS teaches its students to prepare returns manually and does not introduce them to tax software until after they learn taxes. There are also Spanish versions of the company’s basic tax courses, which most competitors don’t have (H&R Block being an exception).

PIT’s beachhead was its e-commerce website. The company also has multiple distribution channels. First, it reaches prospective students through distribution partners. Gatlin Education Service markets ITS’s certified tax preparer (CTP) certificate program to their 1,000 U.S. college partners. The school also has direct agreements with colleges for individual courses, seminars, and bundles other than the CTP. At present, it is rolling out to community colleges nationwide. Its e-learning programs are also distributed through e-learning portals such as CPA Training Center and theelearningcenter.com. Its student texts and instructor guides are marketed to tax professionals through trade shows and are made available to colleges that wish to teach live classes using their own faculty. Further, the company has licensed its content on a royalty basis to publishers of self-study courses and has proposals pending to license content to national tax firms. Direct sales of e-learning courses to student is the most profitable at a gross margin of 80% after direct variable costs.

The ITS division was spun off as a separate legal entity on May 1, 2010. Both divisions are profitable, and total revenues are about $1.8 million.

But it has been a long road to profitability. The initial business was financed with funds McCabe derived from a settlement with his former employer at H&R Block. The company grew rapidly, but it was undercapitalized and its growth caught up with McCabe. By the end of the 1992 tax season, PIT was insolvent. There was another series of ups and downs, and the recession initially hit the company hard. But tax school e-learning revenue started to grow at the end of 2008 owing to the recession people seeking new career training. With the improved income statement from this revenue, the company was able to obtain a bank term loan and seasonal credit lines.

The exit strategy is acquisition by a strategic investor with the muscle to roll out the school. Ideally, that would happen sooner rather than later with McCabe continuing to run the business for the next five to seven years.

Recommended Reading
Deal Radar 2009: Cnergys
Deal Radar 2010: BlackLine Systems

This segment is a part in the series : 1Mby1M Deal Radar 2010