H&R Block Flubs Its Own Taxes

Published February 24, 2006

| Reuters

H&R Block Inc. (HRB), which provides tax advice to millions of Americans, made an embarrassing confession on Thursday. It goofed on its own taxes.

The company, which is in the middle of its make-or-break season preparing other people's tax returns, said it had underestimated its own "state effective income tax rate" in previous quarters — meaning it owes another $32 million in back taxes.

As a result, H&R Block said it would restate previously reported earnings going all the way back to 2004.

"It wasn't particularly material," said Alexander Paris, an analyst at Barrington Research in Chicago. "And it's not particularly unusual. A lot of companies are going back and reviewing their controls because of Sarbanes-Oxley and finding tax errors. But for a company like H&R Block, it was particularly embarrassing."

The company also cut its forecast for full-year 2006 earnings, blaming, among other things, "a slower start to the tax filing season than in previous years."

But it acknowledged it compounded the problem by introducing a new technology that went haywire — and sent a quarter of a million customers to rivals.

H&R Block shares went sharply lower in extended trading after the company issued its earnings report — which was a disappointment in itself.

The Kansas City, Missouri-based company said fiscal third-quarter net earnings fell 69 percent to $28.8 million, or 9 cents a share, from $92.3 million, or 28 cents per share, during the comparable quarter last year. Revenues for the quarter rose 12 percent to $1.2 billion, the company said.

Analysts expected H&R Block to report earnings of 26 cents a share on sales of $1.19 billion.

"It was definitely a disappointment," Paris said.

The company said its poor performance in the fiscal third quarter resulted from legal settlement costs related to its controversial early refund program and from a smaller-than-expected seasonal surge in filings by U.S. taxpayers.

But in a conference call with investors, Mark Ernst, the company's chairman and chief executive, said the slow start was exacerbated by "self-inflicted wounds."

Ernst said software-related technology problems left the company unprepared for a surge in January filings by taxpayers expecting refunds and "created a hole out of which we're working to climb."

He said the problem "cost us 250,000 clients" that were "unable to be recovered."

The company said a new software distribution system introduced in January had caused its offices glitches that would be fixed for a day, then pop up again. It said the problems left some offices unable to process taxes.

That isn't the only hole H&R Block dug for itself. The tax-related goof and restatement will also drag down previously reported results for 2005 and 2004 by an estimated 9 cents a share, the company said.

H&R Block, which also provides home-loan and investment services, also cut its 2006 earnings forecast to a range of $1.65 to $1.85 a share, down from its previous range of $1.90 to $2.15 per share. It blamed the slow start to the tax season, as well as continued weakness in the mortgage market, for the reduced forecast.

H&R Block shares fell $1.87, or 7.4 percent, to $23.32 in after-hours trading on Inet.

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