H&R Block Underreports Own Corporate Taxes

Feb. 24, 2006 — -- Death and taxes are supposedly the only two certainties in life. Neither is a joking matter, except perhaps if you're the biggest tax-preparation firm in the country and you make a mistake on your own tax return. That's what H&R Block admitted to yesterday in its third-quarter financial report.

The mistake? A $32 million understatement of the company's state income tax liability in its tax reporting for fiscal years 2004 and 2005. Although an H&R Block spokesman told ABC News the mistake was a bookkeeping error and not any tax shortchanging, the impact on the company was immediate.

Shares of H&R Block fell Friday by nearly 9 percent as the company also reported a 68 percent drop in third-quarter profits and told analysts that it was lowering its earnings forecasts for the year.

So far, 2006 hasn't been a good year for the company. Through the first month and a half of this year's tax season, H&R Block has experienced a 4 percent drop in clients.

But at the moment H&R Block's bigger concern might be the writers for the late-night television comedy shows. James McAlexander, an Oregon State University marketing professor, said that image and credibility are everything to a big company. "H&R Block does not want to be the laughingstock of the country, but unfortunately for them they can't control what gets said on late-night TV," McAlexander said.

Will customers lose confidence in H&R Block's ability to prepare their taxes correctly? H&R Block certainly hopes not and points out that its own corporate tax return is significantly more complicated than those it prepares for its clients. Last year the company had revenues of $4.4 billion from more than 11,000 tax offices.

But the company does have another reason to worry about its future. Tax preparation has become something more people do online. H&R Block has its own software package called TaxCut, but the best seller is Intuit's TurboTax.

Down the road, H&R Block might not be able to sustain its office locations across the country. But for now, most observers believe H&R Block has been more embarrassed than wounded by its own self-inflicted error.