H&R Chopping Block

When your specialty is tax preparation, it's never good when a whole slew of bad news comes out right around tax time. Word that New York Attorney General Eliot Spitzer is going after H&R Block (NYSE:HRB) for fraud could hardly be good news at any time, but this is mid-March, a month before the dreaded tax deadline. Even without Spitzer on its tail, H&R Block might be suffering some permanent blows to its public image.

Spitzer's $250 million suit alleges that H&R Block's retirement program sold a product, Express IRA, which encouraged consumers to put income-tax refund money into individual retirement accounts where low interest rates and high fees meant these customers were "virtually guaranteed to lose money." For the lion's share of the customers, many of whom are low-income, the fees far exceeded the interest they earned, considering the interest rates were often as low as 1% or less for the accounts.

H&R Block is defending the program, citing the United States' negative savings rate and claiming that it is helping these customers establish savings for retirement.

A Reuters article quoted H&R Block Chairman and CEO Mark Ernst as stating, "The vast majority of our clients are more worried about The Final Four (tournament) than they are about what Eliot Spitzer's doing." That seems to imply that the company has little regard -- or respect -- for its customers. I find it hard to imagine that this attitude will leave the company unscathed, particularly when it caters to consumers who trust it to treat them fairly.

This is just the tip of the iceberg; H&R Block has had a very bad run lately. About a month ago, the rather astounding news broke that it had flubbed its own taxes and would have to restate its financials back through 2004. That's not exactly a vote of confidence. Fool contributor Rich Duprey suggested that while it's a public relations debacle, it might not have been a fatal flaw, but I think it still makes the company look utterly incompetent. (The snafu even made it to Comedy Central's The Colbert Report.)

It's not like tax filers don't have options, either. Why waste your time going to a bricks-and-mortar H&R Block office when you can use Intuit's (NASDAQ:INTU) simple TurboTax software at home? H&R Block and other tax-preparation rivals may have their own, similar software, but TurboTax has been hard at work for years building a name in do-it-yourself tax filing. The IRS itself even competes with H&R Block, since it offers an electronic service that many people are eligible to use for free. And of course, there's also longtime rival Jackson Hewitt (NYSE:JTX) to contend with.

Not surprisingly, H&R Block's shares have crumbled to a 52-week low this week. The company is standing by its financial guidance for the coming year, though it's already admitting to slow customer traffic. With such serious breaches of trust undermining its public face -- making H&R Block appear not only shady and greedy, but at times, seriously inept -- I wouldn't recommend that investors consider a chip off this old block.

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Alyce Lomax does not own shares of any of the companies mentioned.