Tax preparation is a big business. Last year, about 35 million people paid to have their tax returns prepared. That is nearly 40 percent of all taxpayers.

However, the large pie is divided up so many ways that almost all professional tax preparers are very small, local operators who depend on reputation, not advertising, to bring in business.

Henry and Richard Bloch did the majority of the business, as one might expect. According to Henry's son Thomas, now president of tax operations at the 26-year old firm, H & R Block did 10 million returns last year.

Bloch estimated that about 20 million of the remaining 35 million returns done last year were most likely prepared by tax practitioners--the lawyers, accountants and "enrolled agents" who pass an Internal Revenue Service exam.

The tide of the tax season also brings in many free-lance operators because preparers don't have to be licensed. However, only a tax practitioner or a preparer who is given power-of-attorney by a taxpayer can represent that taxpayer at audit, according to IRS spokesman Wilson Fadley.

The business is a hard one to crack. Preparers work long nights for the three-month season and then have no business unless they have accounting or bookkeeping customers.

Those who do endure say they have depended on repeat business and reputation. H & R Block has an insurmountable edge in name recognition. "Most tax preparers in this area can't compete with that kind of advertising," David Pomerantz, president of Akutax, said. His firm is eight years old and handles about 3,000 returns a year, largely for the local preparer industry.

Like many other preparers, Pomerantz charges more than the nationwide firm, but stresses quality and personalized service. He said he does all his returns in the taxpayers' homes, because "that's where the records are." He said he charges about 20 percent more than Block.

Some do try to compete with Block's prices. Derrick Washington, office manager of Professional Tax Service, said his firm has similar prices. Currently, Block charges $19 for the service of preparing federal and state short forms.

But Washington added that the company would not go to an audit with a taxpayer unless there were a serious problem with the return.

Some put the shingle out only for the three-month tax season. Sid's Income Tax Service, run by Sidney Dewalt and his family, closes up shortly after April 15. But Dewalt says his customers can call on him if they have to face an audit. He does about 500 returns a year.

There are problems preparers face that are peculiar to the D.C. area.

The transient character of Washington means that preparers see a lot of taxpayers who have to pay tax in two states during different parts of the year. That is complicated, requiring deductions to be pro-rated on both state returns.

"That's one of the main reasons people would seek professional help," said Professional Tax's Washington. Other preparers estimated that part-year returns make up from five to 10 percent of their business.

The professionals rate the District return the worst in the area. "With the D.C. return, you start from scratch," said Fleet Senseman, president of Accounting Unlimited. The Virginia return uses totals from the federal return, as does a large part of the Maryland return, he said.

In the District, you have to fill out separate schedules for itemized deductions and the child care deduction is lower than the federal, so a separate schedule is needed to take that deduction.

In addition, "the formatting of the return makes it difficult even for someone who is experienced to whiz through it," Senseman said.

Washington area tax preparers are not anticipating a bonanza from people in search of the Reagan tax cut. The changes in the tax law are good for business, but most of the modifications don't take effect until next year, they say. One result of the Reagan tax cut, and the liberalized IRA spawned from it, is that people are thinking a lot more about tax planning, according to several preparers. "The biggest question I'm getting this year is 'do I invest in the IRA.' " Pomerantz said.

A cutback in free IRS return preparation service will probably not mean much business, either, Akutax's Pomerantz said. "I think that most of those people would go to Block." An IRS spokesman said "self help" or group return preparation is still available.

In fact, January business was very slow because of the terrible weather, even for H & R Block, Thomas Bloch said.

There are other places one can go to get free help. Strayer College, a local business school, is offering free income tax assistance at its Washington campus between 10 a.m. and 4 p.m. weekdays. The campus is at 601 13th St. NW. For more information, call Allen Katz, 783-4543, ext. 41.