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H&R Block Goofs on Its Own Taxes

February 25, 2006

H&R Block • Charges • Electronic Filing • Errors • "Free" Filing • Online • Refund Anticipation Loans • Option One Mortgage Corp. -- News • New York Stops H&R Block's Deceptive Sweepstakes Ads • California Sues H&R Block • H&R Block Sells Subprime Mortgage Unit • H&R Block Launching Its Bank • H&R Block Threatened Employees, Spitzer Charges • H&R Block Settles Tax Refund Loan Suit • H&R Block Readies New Bank as Business Soars • NY Accuses H&R Block of IRA Marketing Fraud • H&R Block Goofs on Its Own Taxes • Children's Defense Fund: Tax Refund Loans "Indefensible" • California Sues H&R Block Over Its "Instant Refund" Loans • H&R Block Doesn't Block Identity Theft • H&R Block Will Settle More Payday Loan Suits • Option One Agrees to Clean Up Its Lending Practices in PA • H&R Blocked: Consumer Groups Oppose Tax Giant's Proposed Bank • Tentative Settlement in Tax Loan Class Action • Class Action Challenges Electronic Filing Fee • Supreme Court Rejects Block Appeal in Class Action • Judge Upholds Racketeering Complaints Against H&R Block, Household • Court Clears Class-Action Suit • Tax Loans Victimize Consumers --- • All About HSBC

Tax preparation giant H&R Block has a little problem. It miscalculated its own state income taxes, understating its liabilities by $32 million as of April 30, 2005. The company has also had serious problems with its in-house computer network.

The Irvine, California-based company will need to restate its fiscal year 2004 and 2005 results, as well as its previously reported results for fiscal 2006, reducing its earnings for both years.

The snafu sent the company's stock price lower and gave it a black eye at the height of tax preparation season, although the actual financial impact is likely to be slight.

"While likely embarrassing for the nation’s leading tax preparation company, the restatement is fairly immaterial," wrote analyst Alexander Paris Jr. of Barrington Research Associates in a research note.

The admission came as the company reported its third quarter 2006 financial results. Because of a consumer class action lawsuit, net earnings were down from the third quarter of fiscal 2005, when Block had net earnings of $92.3 million, or $0.28 per share.

Block attributed the decline to an after-tax charge of $31.7 million, or $0.10 per share, from a legal settlement and legal costs arising from the $360 million settlement of a class action suit that accused it of gouging consumers who took out refund anticipation loans at interest rates frequently exceeding 100 percent.

The state of California filed a similar suit against H&R Block last week and Attorney General Bill Lockyer said damages could total "hundreds of millions" of dollars.

Technical Snafus

Besides bungling its own taxes, H&R Block had serious problems with its in-house computer network that cut into its business in January.

"Technology problems across the H&R Block network in early January impacted our ability to serve clients in those crucial early weeks," said Block Chairman Mark A. Ernst.

He said the problems had been corrected, but they impacted the company's ability to serve 250,000 clients who were trying to get an early start on their taxes.

Analysts speculated the internal technical troubles could reflect badly on the company's TaxCut software, to the benefit of its primary competitor, Intuit's TurboTax.

Other tax preparation chains, such as Jackson Hewitt Tax Service, could also see increased business.

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