We Can't Get Our Taxes Right, But We'd Love to do Yours

Shares of H&R Block Inc. sank Friday after the nation's largest tax preparer said it was having problems with its own taxes and would have to restate earnings going back to 2004. "It's a little embarrassing if you think about it," an anonymous seasonal tax preparer said. "Here I am, working for a tax company that can't get its own taxes right."

H&R Block also said the costs of settling a number of class-action lawsuits and slower-than-expected business in its tax and mortgage arms caused its third-quarter profit to drop 68 percent and forced the company to lower annual revenue estimates. The company reported its earnings after financial markets closed on Thursday. H&R Block said it will restate earnings for fiscal years 2004 and 2005, as well as the first two quarters of fiscal 2006, to correct accounting errors it said led to the company understating its income tax liability last year by $32 million. "I sure hope that we bought our own 'Peace of Mind' option," a mid-level executive quipped. "That way if we messed up, we won't have to pay... oh wait, yes we will. I guess we're screwed," he said as he packed his personal belongings from his cubicle.

H&R Block announced Dec. 21 that it had agreed to pay $62.5 million to settle four class-action suits filed in West Virginia, Ohio, Alabama and Maryland, as well as to resolve claims pending in 22 other states and the District of Columbia. All the cases involved loans that allow customers to borrow against expected tax refunds. Consumer advocates say the loans take advantage of low-income customers who don't understand the steep fees charged for the service or their alternatives. California Attorney General Bill Lockyer last week filed another lawsuit against Block's loan program, with similar claims, and the company is scheduled to defend the program from federal racketeering charges in May. "Yeah, I guess those poor yokels were a little less dumb than we thought they were," stated a Block board member. "Oh well, I'm glad that I sold all of my stock last year. I'm rich bee-atch!"

The company's tax business saw quarterly revenues increase 3.2 percent to $548.5 million. But H&R Block said its retail offices have seen 4.1 percent fewer clients through the first month-and-a-half of the U.S. tax season, eking out a slight increase in revenue from a 6.1 percent increase in average fees per client. Company chairman and chief executive Mark Ernst said software problems during the first half of January likely prevented the company from serving an estimated 250,000 clients. "Yeah, not only are our books messed up, our computers aren't working right either. If I were you, I'd sell my stock in Block. I know I did," the well-tanned, Hawaiian-shirt wearing Ernst said as he boarded a plane to Rio.

"While we have recovered from these problems and have since then seen performance in line with our expectations for the year, those early weeks really sucked," he said, estimating it will reduce client traffic for the year by 2 percent. "That's a whole lot of clients that we won't be able to overcharge this year," he continued. "Not only that, but we can't sucker them with our shady 'Refund Anticipation Loans.'"

H&R Block, trying to ward off competitors such as Jackson Hewitt Tax Service and Liberty Tax Service, this year expanded the number of retail offices and department store kiosks by 9 percent to 12,165. Unless you live in Montana, you can't throw a rock without hitting a Block kiosk or office.

The company's mortgage business saw quarterly revenues decline 4 percent to $296.5 million, as rising interest rates have cut into margins. Ernst said the company has consolidated branch offices and regional call centers for its Option One subsidiary and will cut its work force by 600 positions, actions that will require a fourth-quarter charge of between $10 million and $12 million. "We'd rather not screw our workforce like this, but it was either lay off a few hundred measly employees, or shave a percent off of my annual bonus. I really didn't have a choice."

"The changes we're making will help ensure the long-term competitiveness of our mortgage businesses, and a beautiful retirement package for me," Ernst said in a written statement.

For the second time in six months, H&R Block said it will have to restate past earnings because of accounting problems. In the latest case, the company said it plans to reduce fiscal year 2005 earnings by 7 cents per share and reduce 2004 earnings by 2 cents. Officials said the mistakes had to do with estimating the company's state effective income tax rate. "That's right, we realized that we screwed up about six months ago, so we went back to fix things and we still didn't get it right. I wonder how many more times we can mess this up before our idiots -- ummm, I mean customers -- catch on that we really don't know what we're doing.

Chief Financial Officer Bill Trubeck said the company will likely request an extension to file its quarterly report with securities officials to give it more time to determine the full impact of restating earnings. "That way we'll have a little more time to sell off the company's few remaining assets before leaving the country for good."