Archive for Saturday, February 25, 2006

Tax blunder could cost H&R Block this season

February 25, 2006


— H&R; Block Inc. getting its own income taxes wrong may sound like a gift to late-night television comedians.

But marketing and consumer behavior experts said it would not be a laughing matter if news that the nation's largest tax preparer under-reported its state income taxes last year by $32 million drives away potential tax customers, further weakening what already has started out as a difficult tax season for the company.

"For a firm like H&R; Block, credibility is of paramount importance," said James McAlexander, an Oregon State University marketing professor who has looked at how professional services providers appeal to consumers. "If the H&R; Block story becomes fodder for late-night television, where they become the butt of the joke, that could affect their credibility with prospective clients."

Shares of Kansas City, Mo.-based H&R; Block closed down $2.18, or 8.65 percent, to $23.01 Friday on the New York Stock Exchange, trading below the previous 52-week low of $23.01. The company on Thursday reported a 68 percent drop in third-quarter profits and executives told analysts that they were lowering their earnings expectations for the year.

The company also said it was restating earnings for 2005 and 2004 and the first two quarters of this year after discovering it had made a mistake in determining its state income tax rates.

Analysts didn't seem too concerned that the gaffe could persuade potential H&R; Block tax customers to take their business to independent accountants or competitors, like Parsippany, N.J.-based Jackson Hewitt Tax Service.

"Given what goes on with stocks, it's understandable for companies to have to go back sometimes and restate earnings," said Mike Millman, analyst with Soleil Securities/Millman Research. "What's important is operations."

On that front, Millman said he was far more concerned about H&R; Block's report that through the first month and a half of the U.S. tax season, the company had seen 4.1 percent fewer clients than a year ago. The company has attributed some of the loss to a series of technical glitches at the beginning of the year that drove an estimated 250,000 potential customers elsewhere.

"There are some questions about the future of the paid-preparer part of their business," said Millman, who doesn't own H&R; Block shares. "Whether (the decline in clients) was a bump in the road or a trend is unclear."

In truth, it's much more complicated to work up the tax burden of a company that took in $4.4 billion in revenue last year operating more than 11,000 tax offices across the country - in addition to providing mortgage lending, investment advice and business accounting services - than it is completing the return of an average individual taxpayer.


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