H&R Block expects IRS policy change on taxpayer information to cut 5 cents from earnings

By Eileen Aj Connelly, AP
Thursday, September 30, 2010

H&R Block sees 5-cent hit from IRS policy change

NEW YORK — Changes in the way the Internal Revenue Service gives information about taxpayers to tax preparers will hurt H&R Block Inc.’s profit next year, CEO Alan Bennett told shareholders Thursday.

Speaking at the company’s annual meeting in Kansas City, Mo., Bennett predicted a 5-cent per share hit in the 2011 fiscal year from the IRS’s decision to stop providing preparers with a code called the “debt indicator.”

The federal agency said in August that next tax season it will no longer provide the code. It informed tax preparers whether their customer owed any back taxes, delinquent child support payments or certain other debts that would reduce the expected refund.

That information was used by preparers like Block to determine if the taxpayer qualified for a refund anticipation loan, sometimes called a “Rapid Refund.” These high-interest, short-term loans are typically used by low-income earners to get their tax returns faster. The IRS said with electronic filing and direct deposit, it can deliver refunds in 10 days, rendering the loans unnecessary.

But Bennett told shareholders the move won’t eliminate demand. Most of the customers who take the loans will only learn about the decision when they have their tax returns prepared and find they no longer qualify, he said. The CEO said the IRS move will make the financial products it offers to its customers more expensive because they will carry higher risk.

“The collateral damage is that the people they’re trying to protect have much worse alternatives,” Bennett said in an interview. “Underwriting will be more difficult and fewer people will qualify for loans.”

He predicted that more Block customers will choose refund anticipation checks, a product that takes a longer time to deliver cash to consumers.

Block is trying to convince the IRS to offer the information conveyed in the debt indicator directly to consumers. Bennett told The Associated Press that if that is available, the company might be able to find a way to use it to offer more loans.

The 5-cent estimate, Bennett said, reflects expectations that customer volume will not change. H&R Block prepared 23.2 million returns last tax season.

But Block has lost 2 million customers in the last two years, with nearly two-thirds of that loss coming from lower-income clients who had their returns prepared in January and February — many of whom also used a refund anticipation loan or other product to get their returns fast.

Part of the decline in 2010 reflected high unemployment and a 1.7 percent drop in the number of overall returns submitted to the IRS.

Block expects IRS filings to be down again this year. Bennett outlined strategies for improving customer service and other aspects of its retail offices to help stem customer losses.

He also touted the company’s Emerald prepaid card, which many customers use to receive their returns. Prepaid cards can be used like credit or debit cards, and are growing in popularity among consumers who don’t have bank accounts, despite criticism of the numerous fees that can be attached to their use.

Block’s Emerald card program is one of the most successful prepaid cards in the U.S., with about 2.5 million users last year. Bennett called it “an increasingly valuable asset.

“We believe we have opportunities to expand the card’s usage and related revenues,” he said.

Bennett also addressed concerns about the company’s former mortgage business, noting that speculation regarding widening losses has driven down Block shares in recent weeks. He said the company still has $188 million of its original reserve of $243 million to cover any mortgage losses, and has not seen any change in the level of problem mortgages or late payments.

“Of course it is always difficult to prove the absence of a negative,” he said. “But, the bottom line is that we believe our financial reserves here are adequate.”

Shareholders approved the company’s nomination of 10 board members for one-year terms.

H&R Block shares closed Thursday trading up 27 cents, or 2.1 percent, at $12.95.

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