H&R Blockheads

For the millions of people who rely upon advice given by tax professionals, H&R Block's (NYSE: HRB  ) guarantee that it will stand behind its work is a welcome sign that they know what they're doing. Or so you would think. What then is a taxpayer supposed to think when the leading tax return prep company admits to understating its own taxes, thus causing a restatement of earnings going back as far as 2004?

Compounding the company's problem were software glitches that caused it to lose 250,000 customers to competitors like Jackson Hewitt (NYSE: JTX  ) , as well as legal problems stemming from its unsavory "refund anticipation loans" program. Ratcheting down guidance, the maker of the popular Tax Cut self-help tax prep program said earnings would only manage to hit a high of $1.85 a share, down from a previous expectation of $2.15 a share.

Brothers Block said it underestimated its state income tax liability by approximately $32 million; that would hit earnings by a total of $0.09 a share -- $0.07 in 2005 and $0.02 in 2004. However, since the company was still reviewing its control mechanisms, these were only preliminary figures that could very well change.

The software problems caused a delay in the company's tax prep season: The malfunction would look fixed one day, only to go down again the next. A lot of taxpayers like to get a jump on filing their returns before the April deadline, but the problems prevented H&R Block from servicing them and they eventually lost one quarter million. Some undoubtedly went to Jackson Hewitt, while others may have taken the self-help route and used TurboTax from Intuit (NYSE: INTU  ) to get their returns in on time.

Taxpayers' early-filing urges also led to Block's other headache, its refund loan program. The company gives taxpayers who are owed a refund a check for the refund amount upon filing. Thing is, Block subtracts not only the tax prep and filing fees from the refund, but also a processing fee which equates to a loan with an interest rate as high as 500% or more. California has sued the company over this practice, and it has already settled one lawsuit about the loans for $62 million last year, but it continues to offer the program because of the lucrative fees involved.

H&R Block reported earnings of $28.9 million, or $0.09 per share, down 68% from the year before, on an 11% increase in revenues of $1.16 billion. Analysts had been expecting $1.21 billion in sales and profits of $0.26 per share. But add in a slowing mortgage business, and the stock tumbled after hours. Yet the truth is, tax season is Block's bread-and-butter moneymaker and we are only just getting there as more people turn their attention to the April filing deadline.

In reality, the tax snafu is more of a public relations embarrassment than a commentary on Block's ability to compute John Q. Public's taxes. You expect a company preparing and certifying your tax liability to correctly calculate its own. While not fatal, it certainly makes them look like a bunch of blockheads.

Compute the damage with these related Fool articles:

Intuit is aMotley Fool Inside Valuerecommendation.

Fool contributor Rich Duprey does not only any stock mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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