It’s Taxing to Challenge H&R; Block : Expansion: Jackson Hewitt prepared 311,000 returns last year but remains a distant second to the industry’s giant.

There’s a new kid trying to muscle in on H&R;’s block.

While still a distant second to the well-known Kansas City-based tax preparer, Jackson Hewitt Tax Service has been rapidly expanding its offices and increasing the number of returns it prepares each year.

John T. Hewitt, chief executive officer of parent Jackson Hewitt Inc., says he hopes to further close the gap between his firm and H&R; Block Inc. with a planned $10-million to $15-million public stock offering later this summer.

“This is an industry where there’s only been one,” Hewitt said in a recent interview. “There was a vacuum in the market. There was H&R; Block and no one else.”

A key to Jackson Hewitt’s growth is a computer program developed 12 years ago by Hewitt’s father, Daniel, to standardize the way tax preparers interview clients.

The Hewitts tried to sell the program to H&R; Block and other companies and after failing to do so decided to go into business for themselves.

Hewitt, his wife Linda and about a dozen investors bought into an existing business called Mel Jackson’s Tax Service in 1982, when it had six locations. They renamed the company and over the years grew into 600 offices, including franchises, in 27 states and the District of Columbia. Jackson Hewitt prepared 311,000 tax returns last year, about 100,000 more than in 1991.

Its expansion, however, hasn’t been without some growing pains.

Jackson Hewitt’s biggest break came in October, 1989, when it received a contract to open offices in Montgomery Ward department stores and almost overnight went from being a regional company to one with a nationwide presence.

But the company ended up closing about 70 concessions a few months later, resulting in a loss in earnings. “We bit off more than we could chew, although since then it’s turned out to be very good for us,” Hewitt said of the concessions deal.

The company moved into the black in 1990 and is expected to turn a modest profit for its fiscal year ended April 30, according to Hewitt.

Thomas M. Bloch, H&R; Block’s president and chief executive officer, says his company welcomes Jackson Hewitt’s competition.

“It helps keep us on our toes,” he said. “I think they’re doing their best job at developing a market position in this industry.”

But Paul Mackey, an industry analyst for Dean Witter Reynolds in New York, said, “In the mass market of tax preparation, there is no competition.”

Block remains by far the largest company specializing in preparing tax returns. It has 9,200 offices worldwide and prepared 15.6 million tax returns in 1992, up from 15 million the previous year. It expects the number of returns to increase by about 3% this year.

Mackey said the secret to Block’s success lies with its 60,000 seasonal part-timers.

“They’re very loyal,” he said. “About 85% of them come back each year. Taxes are a very personal thing. Block has a very high degree of personal service.”

But Hewitt argues that tax service is only as good as the tax preparer.

“Each preparer asks questions in his own way,” Hewitt said. “You’re limited by the expertise and caring of the preparer.”

His computer program, called Hewtax Software, takes a tax preparer through a series of questions on a computer screen.

While there’s a standard body of questions, the client’s answer to one question determines the next line of queries, he explained.

For a person who says he owns stock, for example, the program generates several related questions and fills in information about the stock at other appropriate places on the form. The program also allows information to be transferred directly to a state tax form if the customer is having that done as well.

The program was an attempt to “take the guesswork out,” Hewitt said. It saves 10% in payroll because, unlike some tax programs, information on the customer can be accessed for billing and other purposes.

The client’s program remains stored in the computer so that at least the basic name-and-address questions need only be confirmed the next year.

Block is very successful and has found its niche, Hewitt conceded. But, he said, “I think of us as a technologically superior H&R; Block.”