Filed Under: , ,
Tickers in this Article: HRB, JTX, WMT
Call it another example of the law of unintended consequences. Now that President Bush has signed into law his $168 billion economic stimulus package, about 116 million U.S. taxpayers can look forward to receiving tax credits of between $300 and $1,200 this year. But before they get their hands on that money, about one-in-five will wind up using the services of large tax preparation outfits like H&R Block (NYSE:HRB) and Jackson Hewitt (NYSE:JTX) to file their returns.

That should generate a nice little windfall for the tax preparers, who'll not only make a fee for doing the return, but also stand to get an additional return from the somewhat controversial practice of advancing loans to filers on the basis of the expected refund amount.

H&R Block Struggling To Get Back On Track
For H&R Block, this couldn't have come at a better time. The company has been struggling to get back on point following an ill considered foray into the business of subprime mortgage lending.

Last December it had to shut down its Option One subprime lending business after a deal to sell the struggling unit to Cerberus Capital Management fell through. That prompted the company to write down the business resulting in a fiscal 2008 second quarter pretax loss from discontinued operations of $551.2 million.

Now that activist investor and former SEC Chairman Richard Breeden has secured a couple seats on the H&R Block board, it's unlikely that the company will embark on another potentially damaging venture like Option One. For the time being it'll stick to the basic business of tax preparation. (To learn more about the ruthless quest for shareholder value, see Activist Hedge Funds.)

Controversial RALs
Sticking to the basics of the tax business can be quite rewarding. Lately one of the most profitable products provided by H&R Block and other tax preparers has been the refund anticipation loan (RAL), a loan offered on the value of a tax refund. During the last fiscal year H&R Block recorded $193.5 million in revenue related to its RAL program.

The practice of making these loans is not without some controversy. Various consumer advocacy critics have called the loans highly predatory in nature, targeting lower income filers with fees as high as $900 on loan amounts of just $2,100. H&R Block's tax preparation client base is skewed towards low-income households, serving roughly one-in-three households in the U.S. with income below $30,000 through tax prep offices located in many cases in retail outlets like Wal-Mart (NYSE:WMT).

Recently the IRS began asking for input on whether it should ban the sale of RALs by tax preparers. This prompted a quick sell-off in Block's and Jackson Hewitt's shares in January when the IRS announced its review. (For more on predatory lending, check out Subprime Lending: Helping Hand Or Underhanded?)

The Bottom Line
Despite this "shot over the bow" by the IRS on the RAL issue, Block and the other tax preparers probably won't resist the temptation to sell a bumper load of RALs this tax season as they take full advantage of the tsunami of refunds to be processed due to the economic stimulus package. That may not have been exactly what the good people in Congress had in mind when they rushed through the legislation, but parachuting checks to people in a last minute effort to stave off a recession always seemed like a half-baked exercise anyway.

comments powered by Disqus

Trading Center