H&R Block Owes More Taxes

H&R Block underestimated its own “state effective income tax rate” in previous quarters, all the way back to 2004, and has been found to owe another $32 million in back taxes. The company has cut its full-year 2006 earnings in response to this charge. Their share price fell yesterday 7.4 percent, to $23.32, according to Reuters.


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Fiscal third-quarter 2005 net earnings dropped 69 percent, to $28.8 million, from $92.3 million in the same quarter last year. In terms of cents per share, the drop was 9 cents versus 28 cents per share, according to Reuters. Their quarterly revenue was up 12 percent, to $1.2 billion.

The company is blaming “a slower start to the tax filing season than in previous years” and a new software distribution system initiated in January 2006 caused preparation problems in their offices leaving them unable to process taxes at times, according to Reuters. The company estimates that it lost 250,000 customers to rivals as a result. Legal settlement costs for their controversial early refund program also hurt their financial results.

Alexander Paris, analyst at Barrington Research in Chicago, told Reuters, “It wasn’t particularly material and its not particularly unusual. A lot of companies are going back and reviewing their controls because of Sarbanes-Oxley and finding tax errors. But for a company like H&R Block, it’s particularly embarrassing.” “It was definitely a disappointment,” finished Paris.

Mark Ernst, the company’s chief executive, said in a statement, “We’ve seen an industry-wide slower start to the tax filing season than in previous years. Early season operating challenges experienced in our tax business further hurt our January comparative results,” according to MarketWatch. A tough mortgage market was also cited as a reason for their poor results.

MarketWatch reports H&R Block was sued by California State Attorney General Bill Lockyer, regarding their “refund anticipation loan” program. His claim was that 15 state and federal laws were violated in their selling high-cost refund anticipation loans, mainly to poor families. Lockyer said the loans were portrayed as a “refund” and “instant money” in their advertisements.

Lockyer’s office said in a statement, “In reality, the refund is a loan, the cash is a check, and the check is for substantially less than the refund, after the loan fees and other charges are deducted,” according to MarketWatch. H&R Block responded, saying that Lockyer’s suit focuses on the cross-collection practices of the bank servicing the anticipation loans made to H&R Block’s clients. Also, federal laws governed Santa Barbara Bank & Trust, not California state law.

The Seattle Post-Intelligencer reports that federal regulators will need another month to review H&R Block’s request to start their own bank. The company wishes to be able to provide a less expensive banking alternative for their tax clients and other customers. Opponents say that the company could use the bank to expand the sale of tax refund loans and push below-prime loans into poor neighborhoods. H&R Block has responded, saying it does not plan to use the bank for below-prime loans or refund anticipation loans.

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